The most destructive bear market in the history of digital assets from data

As the crypto market develops and matures, the influence of macroeconomic factors on the crypto market is gradually increasing, as the Federal Reserve is expected to raise the benchmark interest rate by 0.75%, which is the largest rate hike in nearly 30 years, Bitcoin, Ethereum and other Prices of major cryptocurrencies fell on Monday. The total market capitalization of all cryptocurrencies has fallen to $1 trillion from $1.08 trillion last Wednesday, according to data provided by CoinMarketCap.

In fact, like traditional markets, the cryptocurrency space is cyclical, but compared to previous bear markets, the industry is currently experiencing what analysts call the “worst bear market” in history. Although U.S. President Biden said that there will be no economic recession in the United States, the impact of inflation and interest rate hikes at the macro level, as well as the market’s potential economic recession expectations, still profoundly affect the crypto market.

The most destructive bear market in history

Bitcoin has always been a “cyclical asset”. From a historical point of view, Bitcoin’s decline from historical highs to bottoms is generally 80% to 90%. In a bear market, most cryptocurrencies will go to zero in the long run and only the strongest will survive. In general, a market crash will have catastrophic consequences for companies in the industry, but at the same time, when the market moves in a bubble bursting can also bring new opportunities.

Looking back at the past few bear markets: During the first crypto market cycle, Bitcoin reached a high of $32 in June 2011 and fell all the way down to $2 in November 2011. This is basically a 90% price drop from high to low, and it took Bitcoin about 5 months to find its bear market bottom.

In the second crypto market cycle, Bitcoin reached a high of $1,100 in November 2013 and fell all the way to $180 in January 2015. This caused the price to drop by more than 80% from high to low, which took more than a year for Bitcoin to find a bottom.

In the third crypto market cycle, Bitcoin reached a high of $20,000 in December 2017 and fell all the way to $3,200 in December 2018. With prices down more than 80% from high to low, it took Bitcoin a year to find its bear market bottom.

Last year, Bitcoin hit $69,000 in November 2021, marking a new all-time high during the last bull run. Grayscale noted that Bitcoin’s realized price (that is, the sum of all purchase values ​​divided by the number of BTC currently in circulation) fell below the market price on June 13, 2022, marking the beginning of a bear market.

According to Bitcoin’s historical data, an 80% drop means Bitcoin could fall to $10,000 to $14,000, with a bear market bottom likely later this year or early next year. According to Grayscale’s findings, cryptocurrency investors may have to wait about eight months for the next bull market.

Glassnode reports that many on-chain and market performance metrics have reached historically and statistically significant lows. On a statistical basis, the market has achieved its largest monthly drop in history. This is supported by selling behavior that locks in absurd relative losses so large that only 3.5% of historical trading days have seen larger capital outflows. The ratio between losses and profits transferred has reached an all-time high, synonymous with beleaguered investors.

Furthermore, in 2022, many countries are under the weight of inflation and other economic conditions. Some analysts believe that the outlook for digital currencies is cloudy, a direct result of macroeconomic uncertainty and Bitcoin’s strong correlation with stocks and fiat currencies. And as the crypto market develops and grows, coupled with its stronger connection to macro factors, the losses in a bear market will be even greater. Given the broad duration and scale of the current bear market, it is reasonable to assume that 2022 will be the most disruptive bear market in the history of digital assets.

Data gradually shows strong disruption

The entire crypto economy turned $1 trillion after losing more than $2 trillion in the past eight months. The top 10 major cryptoassets (excluding stablecoins) have all lost more than 65% or more in dollar value.

According to Arcane Research data, from August 2, 2020 to January 1, 2022, the supply of stablecoins in circulation increased by 8.7 times to $165 billion. However, as of July 1, the number of stablecoins on the entire network dropped to $151.3 billion, of which $35.1 billion fell in the second quarter, reaching 18.8%, which was the largest quarterly drawdown in the history of stablecoins.

The data shows that the NFT transaction volume in various markets in May reached $4 billion, while the transaction volume in June was $1.04 billion, a decrease of 74% month-on-month. It is reported that the 74% drop is by far the largest month-on-month drop in NFT market transaction volume, followed by a 48% drop in NFT market transaction volume between February and March this year.

The number of global cryptocurrency exchanges stood at 500 as of July 6, down from the highs of previous months. Taking into account the June 6 figure of 525, Finbold determined that the industry had lost 25 exchanges in 30 days by using a web archive tool, according to CoinMarketCap.

Additionally, the number of active cryptocurrency users at Bank of America fell by more than half due to a prolonged slump in the digital asset market. The bank’s cryptocurrency users fell from more than 1 million in November 2021, when Bitcoin hit a record high, to just under half a million in May this year.

According to Cryptocompare data, assets under management (AUM) of crypto investment products hit a record low in June 2022, and the data showed that crypto exchange-traded funds (ETFs) suffered the largest decline, with AUM dropping 52.0% to $1.31 billion. On the other hand, trust products, which account for 80.3% of the market, fell 35.8% to $17.3 billion for the month. Exchange-traded commodities (ETC) and exchange-traded notes (ETN) fell 36.7% and 30.6% to $1.34 billion and $1.61 billion, respectively.

All four product types hit record lows, with AUM for trust products hitting the lowest level since December 2020, and AUM for ETC hitting the lowest level since October 2020, Cryptocompare said. ETNs and ETFs followed with their lowest AUMs since January 2021 and April 2021, respectively.

The differences of this bear market and the direction of breakout

The current crash began earlier this year due to macroeconomic factors, including rampant inflation that led to rate hikes by the Federal Reserve and other central banks. These factors did not exist in the previous cycle.

Additionally, Bitcoin and the broader cryptocurrency market have always traded in close correlation with other risky assets, especially stocks. Bitcoin posted its worst quarter in more than a decade in the second quarter of this year. Over the same period, the tech-heavy Nasdaq fell more than 22%. The sharp reversal in the market caught many in the industry, from hedge funds to lenders, off guard.

Separately, Carol Alexander, a professor of finance at the University of Sussex, said another difference was that in 2017 and 2018, no major Wall Street players used “highly leveraged positions”.

Of course, there are parallels between today’s crash and past crashes — most importantly, the massive losses suffered by novice traders lured into the cryptocurrency space by the promise of high returns.

But based on broader macro factors, it can be seen that a lot has changed since the last major bear market. This is also the reason for the large scope and scale of this bear market and huge losses at the same time.

Crypto investors have accumulated massive amounts of leverage thanks to centralized lending schemes and the advent of so-called “decentralized finance” (DeFi). Not only retail investors, in this bear market, many crypto companies are exposed to risky bets that are vulnerable to “attacks”, including terra. At the same time, a more obvious problem is that cryptocurrency companies rely on each other for loans, and the bankruptcy of Three Arrows Capital is based on this.

It is unclear when the market turmoil will finally subside in the wake of the broader market meltdown. Analysts, however, expect more pain to come as crypto companies struggle to pay debts and process customer withdrawals. The next dominoes to fall could be cryptocurrency exchanges and miners, according to James Butterfill, head of research at CoinShares. More top-tier investors have even stated that the crypto bear market could last for two years.

So what needs to happen for the price to bounce back? Some say we need to see a turnaround in the stock market before real capital flows back into Bitcoin, based on the strong influence of macro factors. “Don’t fight the Fed” is a common expression investors use to explain one of the most powerful forces in global financial markets. The Federal Reserve is still adhering to its policy of raising interest rates, and the prices of risk assets around the world have been falling, and it is difficult to see a broader recovery or even flow of funds into the cryptocurrency ecosystem.

And purely for the crypto market, there are hopes for a successful Ethereum merger, approval of a spot Bitcoin ETF, adoption by more large corporations, and adoption of Bitcoin as fiat currency in more countries. Although such a trend exists, it does not seem to be easy to achieve, and the current bear market will still exist for a while.

Posted by:CoinYuppie,Reprinted with attribution to:
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