Coinbase Chief Economist: The Origin and End of the Bull Market


How should we evaluate the recent cryptocurrency price highs and lows? From a market efficiency perspective, cryptocurrency prices reflect the market’s assessment of the future prospects of digital assets. This angle can help us understand historical trends in cryptocurrency prices and their correlation with the overall financial market:

  • The cryptocurrency market has enjoyed tremendous returns over the past 5 years, in part due to adoption by institutional and retail investors, as well as laying the foundations of web3.
  • While the cryptocurrency market was initially uncorrelated with financial markets, since 2020, the correlation has risen sharply. As such, the market expects crypto assets to be increasingly intertwined with the rest of the financial system.
  • Today, the risk profile of the cryptocurrency market is similar to that of oil prices and tech stocks.
  • The recent decline in the cryptocurrency market can be attributed to the deterioration of ⅔ macro factors, as well as the weakening of ⅓ of the cryptocurrency outlook.


Over the past eight months, the total market capitalization of cryptocurrencies has fallen by more than two-thirds from a peak of $2.9 trillion to its current level of less than $1 trillion. This is not uncommon in the cryptocurrency market. Since 2010, the total cryptocurrency market capitalization has experienced nine quarters of more than 20% declines (a typical measure of bear market conditions).

Coinbase Chief Economist: The Origin and End of the Bull Market

Every time a cryptocurrency price plummets, comments from the media and experts usually come in two forms:

1. The cry of “cryptocurrency is dead” reappears, at this time cryptocurrencies will be portrayed as a giant Ponzi scheme, driven by FOMO (Fear of Missing Out, fear of missing out\stepping empty) sentiment, and at the same time when prices fall But it is accompanied by FUD (Fear\Uncertainty\Doubt, Fear\Uncertainty\Doubt) emotions.

2. Firmly hold the attitude of “HODL”, at this time, cryptocurrency is regarded as a breakthrough technology. Cryptocurrency bulls and bears are a feature, not a bug, of disruptive innovation, like national banks in the early 18th century, railroads in the mid-19th century, and the Internet and artificial intelligence in the late 20th century. We should hold and ride out the volatility period as cryptocurrency prices will resume rising in the near future.

However, neither scenario explains the historical trends we’ve seen in cryptocurrencies and the correlations we’re seeing today with the overall stock market. But there is a third way to explain changes in prices, “market efficiency,” where prices are a reflection of the market’s assessment of the future prospects of a digital asset.

market efficiency

Studying the crypto market based on an understanding of market efficiency can help us interpret the data. E.g:

  • From June 2017 to June 2022, the market value of cryptocurrencies rose by 860%, indicating that the prospects for cryptocurrencies are much brighter today than they were back then. Adoption by institutional and retail investors, and the laying of the foundations of web3 (eg DeFi, NFTs, DIDs, DAOs, etc.) are part of the reason for these exceptional returns.
  • Since 2020, the correlation between stock and cryptoasset prices has risen markedly: while Bitcoin’s returns were on average uncorrelated with stock market performance during the first decade of its existence, since the onset of Covid-19 this correlation has Rapid increase. This suggests that the market expects cryptoassets to be increasingly intertwined with the rest of the financial system, thereby being exposed to the same macroeconomic forces that drive the world economy.

Coinbase Chief Economist: The Origin and End of the Bull Market

  • In particular, today’s crypto-assets share similar risk characteristics to oil commodity prices and tech stocks. The beta value is a typical indicator to measure the systemic risk of financial assets. A beta value of zero means that the asset is not correlated with the market. A beta of 1 means that the asset moves with the market. A beta of 2 means that when the stock market goes up or down by 1%, the asset increases or decreases by 2%. Our data simulation shows that the beta coefficients of Bitcoin and Ethereum have jumped from 0 in 2019 to 1 in 2020-2021 to 2 today. They now have a very similar risk profile to more traditional assets, tech stocks.
  • As the Federal Reserve and other central banks around the world have recently started raising interest rates, long-term assets such as cryptocurrencies and tech stocks have become heavily discounted and their value has fallen rapidly. It may be useful to consider how much of the current decline is due to deteriorating macroeconomic conditions rather than a worsening outlook for cryptocurrencies specifically, especially given that 2022 has seen cryptocurrency market capitalization fall by more than 57% so far. Notably, over the same period, the S&P 500 fell 19%, and if macroeconomic conditions were the only reason for the decline, we would expect crypto assets with a beta of 2 to decline by about 38%. Therefore, we can roughly estimate that two-thirds of the recent decline in cryptocurrency prices can be attributed to macro factors, and one-third to the weakening of the cryptocurrency outlook alone. This is similar to what happened during the dot-com recession of 2000-2001, when the S&P 500 fell 29% and the Nasdaq Composite (mostly made up of tech stocks), with a beta of 1.25, fell 70% from top to bottom. %.

The future of the cryptocurrency market

From the perspective of market efficiency, there is not much mention of “the future direction of cryptocurrency prices”. The most important theoretical support for the market efficiency hypothesis is that any tradable asset, from stocks to bonds, commodities, and even cryptocurrencies, incorporates market expectations of the asset’s future value into its price. For example, if the market expects Tesla to sell a very large number of cars in the future, the stock price today would be high to reflect that expectation. If Tesla meets this expectation in the future, its stock price will not rise because it has factored this event into today’s price.

Well, likewise, prices will only change when expectations about the asset’s future prospects change. Therefore, according to the market efficiency theory of the cryptocurrency market, only the outlook of the cryptocurrency industry relative to the changes already expected will bring about changes in prices.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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