Bear markets have become almost routine for the prices of bitcoin and other cryptocurrencies. Since its launch in 2009, the price of bitcoin has fallen by more than 50% six times.
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Coinbase (COIN) CEO Brian Armstrong, in a June 14 letter announcing staff cuts of 18%, offered guarantees despite the recent collapse of bitcoin and the collapse of other cryptocurrencies. Armstrong said the cryptocurrency exchange “survived four major crypto winters” and is taking the steps to do so again.
And yet this storm is on a completely different level. “This is a crypto ice age,” Mizuho analyst Dan Dolev told IBD. “I think it will be very deep, very long and many cryptocurrencies will not survive.
The explosion of the alleged “stable coin” TerraUSD, destroying the market value of $ 40 billion, accelerated a wave of debt reduction, which has not yet begun. This month, the crypto lending platform Celsius Network, which monitored $ 20 billion in crypto deposits and loans, halted withdrawals as it faced a liquidity crisis.
Both Terra, a blockchain payment and savings network, and Celsius offered double-digit interest payments that depended on bullish crypto scenarios. But the collapse of these business models in the Wild West is not so much a cause as a symptom of the collapse of crypto. The real reason the cryptocurrency market is falling apart: Bitcoin and about 19,000 other digital currencies are facing their first cycle of tightening the Federal Reserve to stop inflation from erupting.
Prices of cryptocurrencies fueled by easy money
For most of its existence, cryptocurrencies have enjoyed the most favorable monetary conditions. The period since the launch of bitcoin has mostly seen the Fed try to support demand. Meanwhile, the Fed bought $ 6.5 trillion in government-backed government bonds and mortgage-backed securities. This suppressed rates in an attempt to encourage risk-taking, increase asset value and stimulate demand through wealth gains.
Most of these Fed purchases – $ 4.5 trillion – came after the coronavirus blockade hit the economy in March 2020. Along with many rounds of fiscal stimulus, the Fed’s ultra-easy policy is working too well. All this monetary fuel has contributed to the recovery of the economy through vaccines and caused the biggest inflation attack in 40 years.
Now the reversal of the Fed’s unprecedented stimulus is deflating most asset values. The jump in 10-year bond yields affected rising stocks in particular. Their future profit streams are less valuable when discounted to present based on a higher risk-free rate of return. This helps explain why the tech Nasdaq didn’t perform less well in the wider market.
But when it comes to valuing bitcoin and other cryptocurrencies, there is no future discount cash flow.
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The collapse of bitcoin shows that it is not digital gold
The collapse of bitcoin “debunked” the idea of offering a hedge against inflation, like digital gold, Deutsche Bank economists Marion Labour and Galina Pozdnyakova wrote in May. Instead of trading like gold, the ups and downs of cryptocurrency prices are linked to the Nasdaq to a “stunning” degree, they write.
Still, a walk in the cryptocurrency at an amusement park makes the Nasdaq’s volatility seem meek. By June 23, the Nasdaq had fallen nearly 31% from its highest level since November 22. Bitcoin, which peaked on November 10, fell 70%.
Raising interest rates on the Fed and other tightening movements
Just days before Bitcoin began its withdrawal, the Fed said it would cut $ 120 billion in monthly asset purchases. It seems that the time is not accidental. In fact, the history of the peaks and valleys of bitcoin largely coincides with changes in the Fed’s asset purchases.
The first bitcoin crash began in June 2011, just as the Fed was completing its second round of asset purchases from the financial crisis era. The second coincided with the hysteria in the spring of 2013 due to the possible suspension of another round of asset purchases. The beginning of the actual decline at the end of 2013 coincided with the third collapse of bitcoin.
The collapse at the end of 2017 coincided with the rise in Federal Reserve interest rates, which came when the Fed began to loosen asset purchases slightly. Yet none of these cases saw anything like today’s tightening.
At the end of 2018, when the tightening of funds helped trigger a financial market crash, the Fed’s key interest rate reached only 2.5% -2.75%. This was the highest in the history of bitcoin. However, as the decline of the S&P 500 approached the threshold of 20% bear market, Fed politicians signaled a change in course. By the fall of 2019, the Fed was cutting interest rates and buying more assets.
But last week, although the S&P 500 and Nasdaq had already crossed into the bear market, politicians decided to speed up their tightening plans.
The Fed does not target any specific asset class. However, the destruction of $ 2 trillion for cryptocurrency markets is planned.
“We’ve seen financial conditions tighten, and that’s appropriate,” Fed chief Jerome Powell said on June 15.
Against the background of the collapse of cryptocurrency prices, players are looking for the following catalysts
The price of bitcoin has crossed this line
In recent days, this collapse in bitcoin prices has crossed the line that previous bear markets in cryptocurrency prices have not even come close to.
Bitcoin fell as much as 75% from a record $ 68,990.90 in November to a low of June 18 near $ 17,800. This briefly undercut its last big peak near $ 19,600 in December 2017. At its worst, in early 2015, the lowest level of bitcoin was almost 40% higher than the previous peak.
Since then, bitcoin has jumped to just over $ 21,000. That’s about the average purchase price of $ 21,000, says Dolev of Mizuho.
Deleting bitcoin profits over the past 4.5 years challenges the idea that long-term holders cannot lose. This will test the faith that ultimately determines the value of all cryptocurrencies.
This faith probably has limits, but it is clearly deep. Nearly 50% of Bitcoin traders in Coinbase say they will not sell, no matter how low the prices of cryptocurrencies are, Dolev wrote on May 19. “For the remaining ~ 50%, the tipping point is about $ 9,000,” a Mizuho study found.
Despite the massacre of cryptocurrency prices, Silicon Valley venture capital firm Andreessen Horowitz announced a $ 4.5 billion crypto fund on May 25. Venture capital firms invested $ 4.2 billion in cryptocurrencies early last month, a significant amount, albeit less than $ 6.8 billion in April. In 2021, VC funding for blockchain companies amounted to $ 33 billion.
The Cryptocurrency Killer app?
What have all these billions bought? The main excitement, if not the main goal, of cryptocurrencies seems to be digital alchemy – creating money from code.
Without a doubt, creating nearly $ 3 trillion in code – then deleting $ 2 trillion – was an incredible feat.
NFT or irreplaceable tokens may be the closest thing to a killer application. NFT ownership is tracked in the same blockchain registers that record cryptocurrency ownership. Tokens can provide ownership of digital art, sports cards, music videos and the like.
But these digital collectibles may have even less support than cryptocurrencies.
The digital rights to the first tweet of its kind sold for $ 2.9 million in March 2021. When they were auctioned a year later, the highest price was about $ 12,600.
The most expensive sale of NFT in the last month was a digital print from the Bored Ape Yacht Club collection. Owning one in 10,000 images has become a pseudo-status symbol. Club members include Jimmy Fallon and Justin Bieber.
Still, Bored Apes’ ratings dropped. The minimum price – the lowest current auction price for part of the collection – fell by 77% from the May 1 peak from $ 420,000 to about $ 97,250.
News from Bear Market and how to deal with market correction
The functionality of crypto payment has been revised after the collapse of bitcoin
What distinguishes bitcoin and most other cryptocurrencies from just collector’s value is their usefulness for transactions.
Progress on this front has been slow. In 2014, Stripe was the first large payment company to support bitcoin transactions. Until 2018, it discontinued this support, citing slow transaction times, high fees and low customer interest.
Four years later, Stripe resumed its links with bitcoin, while some crypto players won applause for the efficiency of transactions.
In April, Morgan Stanley advertised Bitcoin’s Lightning Network as more practical for retailers than debit cards for small purchases. The secondary network allows fast and cheap transactions between countries outside the network.
These transactions do not require slow, expensive, energy-intensive calculations to prove the workings of bitcoin to update the blockchain book. Lightning Network works more like Visa (V) and Mastercard (MA), allowing settlement of funds after the transaction is completed.
Ethereum is preparing to switch its entire network to the same kind of lightning-fast transactions, while reducing energy consumption by 99%.
In April, Lightning Labs, the team behind Bitcoin’s Lightning Network, announced $ 70 million in funding. His new big project is to enable the network to process transactions through stable coins backed by fiat currencies such as the dollar.
Still, if paying with $ 1 stablecoins makes more sense than using bitcoin, why should bitcoin be valued at $ 20,000 or more?
“I am a big supporter of blockchain technology and smart contracts and decentralized financing,” Dolev said, pointing to the potential for reducing the cost of transferring money worldwide. “But I make a big difference between all this stuff and the noise around the coins.”
The market forecast for the next six months hides great risks, but also hope
Stablecoin cryptocurrency price test
Stablecoins are the biggest winners and losers since the last cryptographic crash. Tether and USD Coin, now the third and fourth largest cryptocurrencies by market capitalization, hold essentially 100% of their value.
The value of the coins is backed by an equal amount of highly secure assets such as cash and US government debt. Tether also holds a short-term trade debt with a high rating. Against the background of the crisis, they had liquid money in …
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