The cryptocurrency industry has been going through its most significant bear market since 2020 (coindesk), with the worst wave continuing into 2022. In November 2021, bitcoin reached an all-time high of around $69,000; it currently trades at about $20,000. And only because it has just gained some ground. The cost lingered at that level for weeks. The same is true for Ethereum, which has fallen from a record high of roughly $5,000 to currently only be about $1,500. Even worse is the situation for NFTs and altcoins, which are primarily valued in cryptocurrencies.
USD 2.2 trillion. When 2022 began, it was the total market value of cryptocurrencies. The market cap is currently close to $1 trillion after a year.
There are new doubts about whether the entire crypto frenzy is indeed a bubble as a result of this protracted bear run. However, the unique difficulties faced by the sector do not call for a casual dismissal.
Examining all previous market declines is crucial to comprehending the current crypto downturn, with one beginning between 2020 and 2021 following a very strong 2019. One might argue that COVID-19 was the catalyst, but the ongoing ambiguity over the previous several months has raised the question of whether the crypto economy will be viable in the face of other international tragedies and important market factors.
Why the Dip?
The most recent drop in the cryptocurrency market has several causes, just like every significant dip before it. One problem is the high inflation rate, which the Federal Reserve has been unable to control despite raising interest rates. The most recent increase, from 3.9% to 3.9%, occurred on November 3. According to analysts, the rate might reach 5% by March 2023. Many individual investors who have come to view cryptocurrencies as a hedge against inflation are learning how closely cryptocurrencies' behaviour resembles that of conventional asset classes, particularly equities.
On the other hand, the recent escalation of the war between Russia and Ukraine added a sudden new dimension to the geopolitical unrest in Europe that has caused the market to become unstable. Beyond that, the fight has revealed how openly regulated cryptocurrencies are.
By developing bitcoin, Satoshi Nakamoto sought to seize control of the currency from authorities and established financial organisations. And yet, avoiding governmental prohibitions has been one of the most common uses of encryption.
All of that, however, has come to nothing for Russian cryptocurrency owners, as the EU's sanctions have made it difficult for them to conduct cryptocurrency transactions. Because of this, the public's confidence in cryptocurrencies has largely been damaged, which has decreased its value.
However, some key causes of the drop are not at all systemic. For example, events like as the collapse of the Terra and LUNA ecosystem and the closure of Three Arrows Capital (3AC) are directly related to waning investor trust in the cryptocurrency market.
In addition, the crypto market confronts certain more general difficulties that make assets very volatile even if it can seem like the sector is now mature. The straightforward explanation is that cryptocurrencies are built for price fluctuations since they are extremely speculative assets by nature. However, due to the enormous dangers they pose, cryptocurrencies are also subject to constant threats of (sometimes oddly harsh) laws, and the lack of general understanding, much alone consistency, continues to be a barrier to growth.
It is also noteworthy that whales do considerably affect market pricing. As a result, the broader market, and especially altcoins, have been affected by the fact that many whales have been selling their BTC this year. One of the wealthiest whales even unloaded a total of 78,484 BTC in July, which was worth a staggering $1,400,000,000 at the time.
Market Stability and Resilience
One glimmer of light might be seen among these tragic stories. BTC has demonstrated some consistency over the past several months in terms of price range and global market value, which has hovered between $800 billion and $1.2 trillion since June. This is notable considering that the market has a reputation for being quite volatile historically. More specifically, compared to other assets like equities, gold, and even other currencies like the Euro and British Pound, bitcoin has fared somewhat better.
Despite this fortitude and a recent, fleeting increase (finally breaking the $20,000 threshold), it is still unclear if bitcoin will see a substantial rally before the end of the year. The path of the cryptocurrency and the crypto market as a whole will depend on upcoming midterm elections, Federal Reserve meetings, and data on the Consumer Price Indices.
But don't get your expectations up too high. By the end of the year, Deutsche Bank may have indicated an increase of $28,000. By 2023, the price should be between $40,000 and $50,000, and under extremely favourable circumstances, it may possibly reach $100,000 by 2025. But with 2022 coming to an end in less than eight weeks and problems still present, it looks doubtful right now. In any event, it's advisable not to depend on a single projection because bitcoin predictions are as unpredictable as the asset's real price (some predict as low as $10,000).
How to Invest
A huge HODL wave is evident as holders search for ways to make up for their losses as a record 78% of bitcoin units haven't been utilised in any transactions in the last six months. The same is true for owners of cryptocurrencies, however this group mostly comprises of traders who are taking short positions rather than making longer-term transactions. According to an analyst, such a pattern can result in unexpected price rebounds, but so far none have happened because of bigger economic developments and the bitcoin bear.
In any event, you might HODL your present assets, purchase the drop on crypto assets, or have a look at these alternate methods of investing in cryptocurrency without actually holding any crypto coins:
- Purchase the stock of crypto-related firms: If you are hesitant to engage in crypto assets, consider doing so indirectly by buying the stock of companies that are either key crypto exchanges or just assist the industry by accepting cryptocurrency payments.
- Invest in Bitcoin ETFs: Bitcoin ETFs cannot trade bitcoins on their own due to current rules. However, they deal in assets tethered to the price of bitcoin as well as financial items like futures contracts.
- Trade cryptocurrency options You may trade without having to own or sell the underlying asset when you use BTC or ETH options. Indeed, according to CoinDesk, BTC options are currently at a neutral call-put skew, suggesting that the slump will soon begin to gradually subside.
The greatest long-term plan is to go from a "buy the dip" attitude to a risk reduction approach if you would still choose to trade cryptocurrency directly. Expert advise for risk reduction includes well-known suggestions like diversifying your cryptocurrency portfolio with several different altcoins, adhering to the 5% rule of investing in cryptocurrencies, and hodling against FOMO pressure. There was obviously nothing unusual about it.
But the industry holds out a lot of hope, especially in light of the connections it makes with other cutting-edge technologies like web 3, decentralised banking, and the metaverse. Tech executives really believe that a crypto bear market might be a great time to create tech firms because it presents potential to use blockchain and crypto technologies to solve long-standing finance problems.