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Can the crypto market return to growth?

Can the crypto market return to growth?

At the beginning of 2022, bitcoin was worth $47,000, but for almost the entire first half of the year, it became cheaper, losing more than 60% of its value. On June 19, the Bitcoin exchange rate briefly fell below $18,000 for the first time since December 2020. Contrary to long-term trends in the rise in the price of cryptocurrencies, this collapse turned out to be much deeper than in the summer of 2021, when the minimum was $29 thousand. In July, the bitcoin rate began to grow and has now reached $22.8 thousand, writes RBC Crypto.

Will this recovery be sustainable? Will last year’s scenario repeat itself, when the market turned around after the summer collapses and set new records in the fall? What contributes to this, and what can interfere?

Why the fall of 2022 was so deep

Often, after the collapse of the stock markets, in particular, the S&P 500 index, there are strong drops in cryptocurrency quotes. These assets are risky, so in moments of uncertainty, investors give up on them first of all.

In the summer of 2021, cryptocurrencies also sank, but not as deep as now. Last year, stock indices did not fall, but grew, and this could become a partial support for the market. Cryptocurrency rates fell after the Chinese authorities introduced a strict ban on mining.

US indices fell in 2022 as a result of the Fed’s rapid rate hike in hopes of curbing inflation, which has exceeded 9% per annum. Although the inflation of national currencies in itself usually portends an increase in the price of cryptocurrencies (as a hedge against inflation), after a drawdown in the stock market, digital assets most often fall in price.

In both 2020 and 2022, there was a massive sale of assets. Traders dumped cryptocurrencies, stocks, and sometimes even gold at the same time. The fall rate of the S&P 500 index and the BTC rate in both cases were comparable.

In February-March 2020, the S&P 500 fell by 29%, and BTC simultaneously fell in price from $10.1 thousand to $3.8 thousand, that is, by 63%. After hitting the bottom, it quickly rebounded, but the maximum depth of the fall of BTC was more than twice the depth of the fall of the S&P 500 (due to the attitude towards BTC as a risky asset). In January-June 2022, the S&P 500 drawdown was 24%. BTC during the same time fell from $47 thousand to $17.7 thousand, that is, by 62%, almost like in 2020.

Another analogy between the crises of 2020 and 2022 is that after a deep synchronous fall, indices and cryptocurrencies quickly returned to growth. In 2020, by May, the bitcoin rate almost restored its pre-crisis value, outstripping the S&P 500 in terms of growth. In 2022, from mid-June to early August, both values ​​also had a positive trend, although not as impressive. Over the month, the S&P 500 added 9%, and BTC, due to greater volatility, about 20%.

Long-term investors and FOMO against further decline

During the fall of cryptocurrency rates after the next price highs, they are dumped mainly by speculators – those who initially pursued the goal of buying and reselling profitably as soon as possible. At the same time, however, there are many long-term investors in the market who believe in the global growth of bitcoin. They know that there have been many ups and downs in its history, and therefore they are in no hurry to sell.

The descent-rise cycle often occurs according to the following scenario. The decline consists of a series of sharp collapses, each of which ends with a rebound due to the activation of buyers. Then some of the buyers sell the asset that has risen in price, and in this way helps the bears arrange a new, even deeper collapse. But with each bear attack, it becomes more and more difficult to update the lows.

The lower the rate, the greater the percentage of investors goes into the buyers’ camp, and after the purchase becomes interested in growth. The trader’s aerobatics is to catch the “ultimate bottom” and buy there. If at some point the bears make a “misfire”, and the next collapse turns out to be smaller than the previous one, this can serve as a signal for traders that the previous low was just “the same” bottom. Then the FOMO factor comes into play: the fear of investors to miss out on profits and “miss the train”, which is about to “fly to the moon”. The influx of buyers becomes colossal and the price returns to growth.

Real ups and downs in numbers

For example, consider how BTC rates changed in September-December 2019 and in May-July 2021.

In mid-September 2019, BTC was worth just over $10,000. But on September 23-26, it collapsed to $8.1 thousand. This was followed by a series of bounces and new collapses to the next levels.

  • October 6 $8 thousand
  • October 23 $7.5 thousand
  • November 24 $7 thousand
  • December 17 $6.6 thousand
  • January 2 $7 thousand

The unsuccessful attempt by the bears on January 2 to renew the low led to a sharp increase, and by February BTC was again worth $10,000.

A similar pattern was observed in 2021 after the scandalous tweets of Elon Musk, and then a series of Chinese bans on the crypto market in the country. On May 8, BTC was worth $58.8 thousand, on May 12 it fell to $49.2 thousand, and then the next series of collapses followed.

  • May 19 $37,000
  • May 23 $34.8 thousand
  • May 29 $34.6 thousand
  • June 9 $31.7 thousand
  • June 22 $28.9 thousand
  • June 26 $30.4 thousand
  • July 20 $29.8 thousand

After two unsuccessful attempts to update the minimum set on June 22, the bitcoin rate began to rise. In early August, he overcame the $40,000 mark, and in November, he set a historic record of $69,000.

Now consider how the collapse occurred in 2022. The main fall began in May. On May 5, Bitcoin was worth $39.8 thousand, and already on May 12 it was only $26.8 thousand. In June, BTC fell to the levels of the end of 2020, although the next crashes were smaller.

  • June 19 $17.7 thousand
  • July 1 $18.8 thousand
  • July 13 $19.1 thousand
  • July 27 $20.8 thousand

If we continue the analogy with the previous scenarios, this time the bears have already made 3 “misfires”. By July 30, the price of BTC reached $24.6 thousand, as of August 5, the cryptocurrency is trading at $23 thousand. Unfortunately, we cannot make a quantitative comparison of the current crisis with its sister Covid crisis of 2020, since there was a fall lightning fast and without a long series of “bear attacks”.

In which case the market will continue to decline

Although the comparison of the series of collapses of different years hints at the imminent recovery of the market, we should not forget about the fundamental difference between the current crisis and most of the past. Now cryptocurrencies are not in “free flight”, but to a large extent repeat the dynamics of American stock indices. For almost the whole of July, the BTC rate moved in the same direction as the S&P500: both rose and fell on approximately the same days, which was not the case last summer.

Now the crypto market is closely tied to the stock market. The 20% growth of the crypto market in July is largely dictated by optimism in the stock market. And this optimism, in turn, has not too sure grounds.

In both June and July, US inflation data was higher than expected, and both times the Fed raised rates by 0.75 percentage points. Now the stock and cryptocurrency markets are growing in spite of rather than thanks to the economic situation in the country. They are partly driven by the understanding that stocks and cryptocurrencies are more reliable in the long run than a depreciating dollar. The markets were also positively affected by the words of US officials that a recession is unlikely. But do not forget that in the same way a year ago they assured citizens of the short duration of inflation, but they were mistaken.

The unwillingness of the US authorities to allow a new collapse of the indices plays in favor of the growth of the crypto market, but they are determined to fight inflation. If the next inflation data is again disappointing, and the Fed continues to sharply raise rates, the growth of indices and cryptocurrencies may slow down. And even if the positive trend continues, there are doubts that BTC will set new historical records before the end of the year.

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Source: Cryptocurrency



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