The cryptocurrency bear market is here, or at least that’s what the headline party news headlines want us to believe. It’s no mystery that the cryptocurrency market has been moving sideways since mid-May, and at times it does feel like we may be on the verge of another big crash that will kick off a bear market.
Other times, the bulls seem to be on the verge of rallying and hitting new all-time highs. In a bull market like the one we are in now, it is wise to have a bullish bias, but again, that does not seem to be the case.
While the bear market may not be here yet, it will come eventually, but when? How do we know when we are entering a bear market? How do we prepare for it? What exactly is a bear market?
Short-term market cycles
Each asset has its own boom and bust market cycle. Although each asset’s market cycles tend to differ in length and volatility, they all follow a pattern similar to this famous photo, known as the Wall Street Cheat Sheet.
As the photo shows, the fundamental reason why asset prices fluctuate up and down in the short term has to do with human psychology, specifically human emotions such as fear and greed.
That’s why the value of fiat currencies fluctuates from day to day. They are not very stable. It’s just that the degree of fluctuation in fiat currencies is usually small enough to be considered stable.
Even so, there is still a full Forex market where traders can still make millions of dollars in percentage of pips changes or pips in various fiat currencies. That’s 101%.
In contrast, the value of cryptocurrencies can change by hundreds or even thousands of percentage points per day. This puts them at the other end of the asset volatility spectrum.
The reason cryptocurrencies are so volatile is that no one knows exactly what they are actually worth. Take cryptocurrencies like ethereum, for example. Ether allows people to do things like borrow and save money without a middleman like a bank. All we need is an internet connection to access these services.
There’s even something called a lightning loan that allows us to borrow over $20 billion in cryptocurrency in 15 seconds with zero security and zero risk. We only need to pay a small internet fee.
So, what kind of price tag would we put on such a technology? Some would say that cryptocurrencies are more valuable than all the currencies in the world because they exist to replace the financial system.
Others say that cryptocurrencies should be worth at least as much as their real-world equivalents, as they are slowly playing a similar role in some parts of the world. Some still insist that cryptocurrencies are nothing more than a Ponzi scheme. To be fair, some cryptocurrencies are just that.
This complex information can create mixed emotions in the average trader, who usually buys and sells cryptocurrencies based on their feelings. This is actually the basis for technical analysis trading.
Long-term market cycles
In addition to human emotions, there are macro factors that influence the rise and fall of any given asset market. In the long run, this tends to have a greater impact.
According to Ray Dalio, a well-known hedge fund manager, the most important macro market factor is the so-called debt cycle. This debt cycle can be divided into two phases, a short-term debt cycle that lasts 5-8 years and ends in a recession, and a long-term debt cycle that lasts 75-100 years and ends in a depression.
Borrowing can create economic growth in the short term. Individuals typically use borrowed money to buy more stuff, companies use it to create more stuff, and governments use it to fund more projects.
This creates a bull market for most asset classes. A sustained long-term uptrend in prices. Higher highs, lower lows, all the fun stuff. Eventually, all this debt piles up and all these individuals, companies and governments need to start paying off some of their debt. That requires less spending, and less spending means individuals buy less stuff. Companies produce less stuff, and the government cuts their programs.
This has created bear markets for most asset classes. A continued long-term downtrend in prices. Lower lows, lower highs, definitely not interesting stuff.
If we look at the price history of a large stock market index like the S&P 500, we can clearly see this debt cycle activity.
From 1997 to 2002, from 2002 to 2009, from 2009 to 2016, and from 2016 to the end of this cycle. Note that this is counting the end of each cycle from the beginning of the bear market, not the top of the bull market.
Interestingly, a surprising correlation can be seen when we compare the previous market cycles of cryptocurrencies with the stock market.
In other words, every time the crypto market reaches a high, the stock market is likely to do something similar and vice versa.
This makes sense because we live in a globalized world where all assets are linked in some way since 2017 when institutions gained exposure through CME futures on Bitcoin, and even more so with cryptocurrencies.
For example, the correlation between bitcoin and the stock market reached its highest level last year.
Why is this important? It means that the cryptocurrency market could see a bear market at the same time that the stock market sees a bear market. The price history of the stock market suggests that this will be sometime in mid-2022, which happens to coincide with signals from the cryptocurrency’s own market cycle.
As we now know, the cryptocurrency market follows a four-year cycle, which seems to be caused by the halving of bitcoin, which happens every four years.
The number of newly mined bitcoins decreases by 50% and the decrease in supply, combined with a gradual increase in demand, means that the price of bitcoin rises.
Since almost every cryptocurrency is related to Bitcoin, other markets react in the same way.
Bitcoin’s last halving occurred last May, and assuming history repeats itself, this means that the top of the current bull market will occur this summer or earlier.
In any case, after the cryptocurrency market tops, we will see a major crash, followed by about a year of gradual price declines until the bottom of the current cycle. It should be clarified that this decline is the beginning of a bear market and the bottom of the bear market should come sometime in the summer or fall of 2022.
There are two things to keep in mind here. First, this cryptocurrency bull market has the potential to last indefinitely into the future as the influx of all cryptocurrencies, tokens and technologies replace the current financial system. This has been called a super cycle in the cryptocurrency market, and even if this is possible, it is not very plausible. This is simply because it is logically impossible to accomplish such a thing in such a short period of time.
Cryptocurrency adoption has always been a gradual process, with many obstacles and red tape. Arguably, this is more likely than an adoption-driven supercycle.
Governments around the world are printing money like crazy, and the inflationary effects of this practice are just beginning to emerge.
The problem is that while the price of Bitcoin and Ether is measured in the hundreds of millions of dollars, that doesn’t necessarily mean that the purchasing power of Bitcoin or Ether has gone up.
Technically, Bitcoin and Ether may be in a bear market, but the currency is still growing in nominal terms as its value is declining due to inflation.
This inflationary effect may have played a role in the so-called real estate, stock and cryptocurrency bubbles.
The second warning is that the next cryptocurrency bear market could last much longer than a year or two. As mentioned before, long-term debt cycles last 75 to 100 years.
Let’s assume this model is correct. The Great Depression may be just around the corner. That’s because the last Great Depression occurred in the 1930s, about 90 years ago.
Some economists believe that we are already in a depression due to the pandemic.
Others insist that the Great Recession should have happened in 2008. But the government has managed to continue to put the issue aside by printing money.
A few even believe that depressions will never happen again thanks to our magical modern monetary policies.
History shows that when a Great Depression inevitably occurs, it can last as long as 10 years. The next Great Depression could be many years away and no one can guarantee that it will happen. But this is one thing we need to keep in mind when planning for the next cryptocurrency bear market.
With that in mind, let’s take a look at how to prepare for these different bear markets. To briefly review, there are three possible crypto market bear market scenarios.
The first thing I would say about a common bear market is that if we are in the crypto business for the long term, we better hold what we have and increase our positions regularly.
This is called “dollar cost averaging” and it is the most statistically successful long-term investment strategy, regardless of the asset.
If we want to ride the wave, the first thing we need to understand is that we are unlikely to buy at the absolute bottom of the next bear market.
Everyone is guessing where this one will be, and assuming we have a regular bear market, the bottom of the bear market will be in the 20 to 30K range.
At the bottom of a bear market, we see a series of bull traps. This is where prices suddenly spike in the short term before continuing to collapse.
The easiest way to filter out these bull traps is to set up price charts by month. This will give you a better understanding of long-term price trends.
In terms of entry, what we are looking for is a clear trend reversal. Now take the previous bear market in bitcoin for example. in May 2019, this price was around $6,000 .
And the $3,000 price point is the ideal one. There’s no way to know if that’s really the bottom, and if we put in at that price, we’re going to kick ourselves and it continues to fall. It’s best to stay safe and wait for that reversal, especially if we’re facing two other bear market scenarios.
Hyperinflationary Bear Market Scenario
In a hyperinflationary bear market, the price of cryptocurrencies may spike, but their purchasing power will decline.
This may sound surprising because it is often said that assets like bitcoin and gold thrive in these inflationary conditions. Apparently, that’s not entirely accurate. A financial oil pipe user named Star Path Academy recently produced a series of videos about the value of precious metals during the hyperinflationary period in Romania in the 1990s.
At that time, the annual inflation rate in Romania was well over 100% and even exceeded 200% for two consecutive years.
Gold and silver are not used as a medium of exchange, mainly because most people do not own any gold or silver. Those who hold gold and silver understand that precious metals are the best way to store wealth over the long term. So this is usually the last thing they sell.
This is related to Gresham’s Law. Gresham’s Law states that people usually use the least valuable currency to buy things.
In any case, the practical effect of this precious metal hoarding means that whenever someone sells gold or silver, it means they have nothing left to sell. Thus, a buyer can offer a much lower price than the real value of gold or silver because the seller is desperate.
This means that if we enter some sort of bear market hyperinflationary period, the last thing we actually want to do is buy or sell cryptocurrencies based on their legal value. Instead, we must estimate as best we can how much our cryptocurrency is worth relative to other assets we actually need or want, and buy and sell our cryptocurrency based on that information.
At that point, I think we’ll have bigger concerns than buying at the bottom of a bear market, which may also be the case for a third bear market.
If the next cryptocurrency bear market ends up being part of a global depression, it will present an amazing average dollar cost opportunity. Assuming, of course, that we have the extra money.
The problem with Great Depressions is that we don’t know we are in one until much later. Typically, they start with a normal recession/bear market, which means a big crash and lots of job losses.
Although the cryptocurrency market has never experienced a depression, history suggests that it will not hold up too well and prices may continue to fall for years. This is because during a recession, people tend to buy two things. Things they need to survive and things that relieve stress. Cryptocurrencies do not fall into either of these categories.
Some of the things that fell into these categories were shelter, energy, clothing, food, water, interestingly enough alcohol, cigarettes made from various plants, news media, and even entertainment like movies and television.
All of the companies that provided access to these much needed items during this period of stress did well during the Great Depression, and some of them even grew during this period.
The only cryptocurrencies that may offer the same outlet are those powered by virtual worlds such as Decentraland (MANA) and those used for eSports and video games, such as Enjin coin (ENJ).
Now some things show that people won’t be too eager to spend their limited funds on certain in-game NFTs, but I fully expect that people will be gambling in the go-central area during the next depression.
A cryptocurrency bear market may worry us, but it is a normal and necessary part of every asset market cycle. It’s easy to forget this when we’re used to seeing our favorite cryptocurrencies grow at double-digit rates every week.
Last month’s price volatility may have made us think a bear market was coming. But global and crypto macroeconomic factors suggest otherwise. Assets continue to rise across the board, and despite some short-term volatility, the long-term uptrend continues.
However, the end result is bound to be a decline, and 2022 appears to be the year when that decline begins. The real question is, how tough will the next bear market in cryptocurrencies be? The good news is that cryptocurrencies have gained enough adoption that they are likely to survive the various bear markets.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/is-the-bear-market-coming-or-not-if-it-is-how-should-we-react/
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