This cryptocurrency bear market has been long and painful, but here are some signs that could indicate when it is coming to an end.
The current cryptocurrency bear market has caused panic, fear and uncertainty among investors. The dire situation began when the global market capitalization of cryptocurrencies fell below the $2 trillion mark in January 2022. Since then, the price of Bitcoin
is down more than 70% from its all-time high of $69,044.77, reached on November 10, 2021. Similarly, the values of other major cryptocurrencies such as Ether
for 18.32 US dollars
for 0.12 US dollars
have decreased by around 90%.
So does history tell us anything about when the bear market will end? Let’s begin by examining the causes of the 2022 bear market.
2022 Bear Market Catalysts
There are several factors that have caused the current bear run.
First of all, the bear market began to build up in 2021. During this period, many regulatory authorities threatened to introduce strict laws to govern cryptocurrency. This generates fear and uncertainty in the market. For example, the US Securities and Exchange Commission (SEC) issued a lawsuit against Ripple. In addition, China has banned Bitcoin mining, causing most of its BTC miners to relocate to other countries.
A global surge in inflation and rising interest rates have instilled fear and uncertainty in the market, resulting in lower than expected investment of cryptocurrencies. Although there is a lot of hype related to inflation and interest rates in the US, other countries like India have experienced similar challenges.
Notably, earlier this year the Federal Reserve announced that it was taking tough action to “accelerate the decline in monthly bond purchases.” In other words, the United States planned to introduce measures that would slow down its economy in order to control the rising inflation in the country. The following graph shows the inflation trend from 2016 to 2022.
FRED consumer price index. Source: St. Louis Federal Reserve
In fact, to reduce the rate of inflation, the Federal Reserve raised the Fed funds rate twice a year. This reduces the disposable income of US residents, weakening investment efforts in risky assets such as cryptocurrencies.
United States interest rate. Source: St. Louis Federal Reserve
Crypto analysts believe that leverage was another main cause of the current bear market. Leverage involves borrowing a small amount of money as collateral for a large amount to invest. In this case, investors borrow from stock markets to finance their investments in the market.
The downside of leverage is that when the price of an asset begins to fall, trading positions are liquidated, resulting in a cascading decline in cryptocurrency prices. This reduces investor confidence and tends to inject fear and uncertainty into the market.
While traditional markets have circuit breakers and protection, this is not the case with the crypto market. Take for example the recent collapse of Terra, its LUNA token, now known as Terra Classic (LUNC), and its TerraUSD (UST) stablecoin. In the same period, several other cryptocurrency companies such as Celsius, Three Arrows Capital and Voyager Capital filed for bankruptcy.
Signs that the bear market is coming to an end
Analysts study market cycles to predict when a bear market will end. Generally, market cycles include four phases: accumulation, markup, distribution, and price reduction. For Bitcoin, the market cycle occurs over four years or 1,275 days. The last phase is usually associated with the bear market.
Bitcoin market cycles. Source: Greyscale
According to Grayscale, the crypto bear market starts when the realized price of Bitcoin exceeds its market price. Grayscale defines realized price as:
“The sum of each asset at its purchase price or realized market capitalization divided by the asset’s market capitalization, which provides a measure of how many positions are in or out of profit.”
The realized price of BTC exceeded the market price on June 13, 2022. The table below shows the prices of Bitcoin when its market price was higher than the realized price.
BTC realized price vs market price. Source: Greyscale
It is interesting to note that