The term ‘cryptocurrency crash’ is often used very loosely in the volatile digital markets, since even a 10% dropdown is considered a daily normal rather than a sign of an impending bear market. But the new year has witnessed turmoil at every corner since the cryptocurrency and the stock markets have been correcting massively to the point where the term ‘crash’ is starting to look more real by the day.
Post-November, a month that witnessed all-time-highs for bitcoin and various altcoins, the crypto markets have been plunging. The last few weeks has seen Bitcoin drop down to yearly lows, up and coming networks like Solana face major turmoil with network outages and even Ethereum sink massively despite the buzz around their upcoming upgrades later in 2022.
But, is it safe to say that we are officially in the bear market? Or is a possible upside still on the cards after a minor day of prices picking up? Let’s take a look.
As the largest cryptocurrency in the world, Bitcoin’s recent price drop has affected the entire cryptocurrency market. From highs of $69,000 in November, Bitcoin has corrected by almost 50% in the last two months. The token faced a major drop on January 21, when BTC slumped below the $40K threshold and plummeted down to $34K in the following days. Since the near 5% drop on the 21st, Bitcoin has recovered to $36K, after going up by 3% on January 24. According to Coinmarketcap, the market cap of Bitcoin is currently $680 billion, which is a huge correction from the near $2 trillion market cap that the largest cryptocurrency in the world once had.
Since the start of the new year, Bitcoin has corrected by over 20%, beginning just under $50K. When the price fell on the 21st, more than $150 billion was wiped out from the worldwide crypto markets, making investors vary in what is to come. Bitcoin is currently the lowest it has been since July 2021, which was a result of the huge market crash following China’s crypto ban.
Along with BTC, Ethereum has also lost more than 20% of its value in 2022, currently trading at $2,400.
The Reasons Behind the Bitcoin Crash
The stock markets are witnessing a similar correction in 2022 after the NASDAQ managed to lose over 7% last week, while the S&P 500 corrected by almost 6%. The correction is attributed to the rising rates that are being pushed by the U.S Federal Reserve after they announced their plans of reducing their balance sheets by tapering the bonds.
An even more damning report emerges from Goldman Sachs, which have now taken the stance that the possibility of interest rates hiking by more than four times is on the cards. In order to tackle the high inflation rates due to the over-purchasing that has been taking place post-Covid, a further hike will prompt even more volatility in stocks, especially with technology companies.
For the cryptocurrency markets, this is a bearish sign due to the recent closeness of performance being linked between Bitcoin and the stock market. Bitcoin, altcoins and the technology sector have been performing similarly for the past few months, which has come as an unexpected shock to some.
Bitcoin is often dubbed as a hedge against inflation, meaning the price should resist inflation hikes, which normally affect the stock markets. However, on paper, this has not been the case. Bitcoin has been one of the worst-performing top assets, despite its claim for tackling inflation due to its standardised and limited number of tokens. An article from CNBC also claims that if the Federal Reserve decides to further hike up interest rates, it will be a big blow for Bitcoin.
Experts have recently successfully managed to predict the recent drop in Bitcoin’s prices, since their failure to resist the recent Fed regulatory changes. A senior marketing analyst from the trading firm Oana, also claims that Bitcoin’s performance has been disappointing against the news of the recent treasury yields. Another analyst named Edward Moya predicted that Bitcoin could fall below $40K following Russia’s central banks proposed ban on cryptocurrency mining. Turns out, this is exactly what happened towards the end of last week, currently making BTC a huge gamble to hold for the short term.
Short-Term Holders Are Running Away
Glassnode Insights are claiming that we are officially in the bear market. One huge contributor to this are the ‘Short-term holders’ (STH), who have been massively selling the asset. As of this week, the entire supply being held by short-term holders is completely underwater, which has triggered a major selling in Bitcoin. This can include day traders along with new investors, who are most prone to react hazardously to such dips in the market. According to newsbtc, the STH holding remains at multi-year lows, but there’s a slight glimmer of hope from the long-term investors of the token.
While the short-term holders have been diminishing, the majority of the current BTC holdings have been long-term ones. Glassnode reports that almost 60% of the circulating BTC supply has been dormant for over 1 year, meaning that people are considering this as a long-term proposition rather than a get rich quick scheme. The 60% rate is a 5.8% increase year on year. But in actuality, this is a bearish indicator for the current phase of the market. The fact that long term HODLers are remaining patient with their holdings while the short-term traders fizzle out, signals a bear market is on the horizon.
The current numbers of Bitcoin and the crypto markets are looking bad, but the same markets have seen much worse. Despite the biggest cryptocurrency going down by almost 50%, the markets have witnessed a similar crash less than a year ago. After a record-breaking start to 2020, Bitcoin managed to fall from $60k levels to $30K in May 2021. The crypto market corrected by 40%, thanks to over-buying of meme coins and China once again banning all cryptocurrencies.
The current crash is also nothing compared to the flash crash that took place between the end of 2017 and lasted until 2018. Those market lows were followed by a huge bull run, and now cryptocurrencies are increasing use-cases with more developers jumping on the DeFi and Web3.0 train.
As for when Bitcoin can rise again, investors have their own opinions. One of these predictions came from Plan B, a notable Bitcoin investor that successfully predicted the bull market in 2021. After taking out a Twitter poll, the majority of the industry that participated felt that BTC has the potential to reach its highs in the next three months.
While past performance is not an indicator of future results, the best solution is to HODL and eventually wait for a consolidating period to result in sky-rocketing of prices.