The year 2022 was rich in major shocks and bankruptcies of cryptocurrency projects - after each such event, all assets fall in price simultaneously. The current crisis was no exception: the transformation of FTX, the fourth-largest cryptocurrency exchange by turnover, into a full-fledged bankruptcy in a few days was a shock to investors. During November 8-9 alone, bitcoin dropped more than 20% and ether dropped almost 30%. At some point, the price of bitcoin reached less than $16,000 - this is the minimum in the last two years, since November 2020. Altcoins were not left out: for example, Solana (SOL) more than halved - the fact is that in addition to the large amount of FTT on the balance sheet of the shaken Alameda fund there was also a significant share of assets in this coin.
So, what is going on with bitcoin, and why it appeared to be so dependent on one crypto exchange? Is there any chance that the price will be back to its 2021 maximum? Let us try to get to the bottom of it.
The Reasons Behind The Bitcoin Collapse In 2022
Confident cryptocurrency users remember the times when Bitcoin was at its peak in popularity and regularly set new all-time highs. The most recent one came on November 9, 2021, at $68,513. After such a rapid rise, cryptoanalysts predicted that the coin will be even more successful - it was expected that Bitcoin will be worth at least $100,000 by the spring of 2022.
BTC reaching its maximum in November 2021
But those optimistic predictions were not destined to come true. As often happens in the stock market, the sharp rise was followed by an equally sharp drop. On June 13, 2022, bitcoin's price fell by 15%, followed by the other players in the virtual financial market. ETH lost 17% of its value, while SOL and DOGE lost 16%. The capitalization of the entire crypto market also suffered significant losses: if at the time of bitcoin's maximum rise, it was more than $3 trillion, then in June 2022, this figure dropped threefold.
SOL/USD, DOG/USD, BTC/USD, and ETH/USD drop on June 13
These events could not help but affect the general sentiment among the major players in the cryptocurrency ecosystem. Immediately after the significant collapse, leading exchange Binance announced a temporary suspension of BTC withdrawals, and Celsius, the world's largest digital currency lender, announced a ban not only on virtual money withdrawals but also on exchanges and transfers between accounts. Experts found a logical explanation for the negative trends.
Inflation in the U.S. has reached its forty-year high
Consumer prices in the U.S. increased more than predicted by experts in October in a sign that the inflation fight in the world's largest economy is far from over. Inflation was 8.2% in the 12 months to September, down from 8.3% in August. In spite of this drop, the figure was still higher than estimates.
Inflation in the U.S. is being closely watched as the U.S. central bank's efforts to tackle the issue push up the dollar and global borrowing costs. The rate is pretty above the central bank's 2% target and entails that the Federal Reserve is likely to continue to keep hiking interest rates in an attempt to tame increasing prices.
The U.S. monetary authorities are tightening their macroeconomic policy
The Fed’s latest increase brings the federal funds rate – which acts as a benchmark for everything including business loans, credit card, and mortgage rates – to between 3.75% and 4% after sitting at 0% for more than a year during the coronavirus pandemic. As a result, depositors had an opportunity to make large profits with little risk, so the volume of investments in cryptocurrencies has decreased markedly.
The collapse of Terra's stablecoin
The UST, or Terra Dollar, refers to stablecoins, a category of cryptocurrencies whose exchange rate is stabilized by pegging to conventional currencies or exchange-traded commodities. There has always been more confidence in such digital money than in bitcoin because of the lower risk of financial transactions. However, in May 2022, TerraUSD lost its peg to fiat currency, causing it to collapse by 76.4%. The resulting panic caused massive sales of virtual money, which resulted in unprecedented losses - the cryptocurrency market lost $200 billion overnight.
And, of course, we can`t but mention the war in Ukraine and the recent FTX drama that dragged BTC prices down, causing more than a 20% loss. Let us look into the latter in more detail.
The Collapse Of FTX And The Vanished Billion
FTX, then the third-biggest crypto exchange in the world, was valued at $32 billion back in January. The investor flight started with a Coindesk article on November 2. It revealed that at least 40% of the assets of Bankman-Fried Research's trading company, Alameda Research, were in the low-liquid cryptocurrency FTT, which was issued by his own exchange, FTX. Binance founder Changpeng Zhao took a stab at FTX: on Nov. 6 he announced, citing "recent revelations," that he was liquidating all of his $580 million position in FTT.
Latter it was announced that Binance would buy FTX to help it out of a "liquidity crisis." Next day, however, Binance changed its mind, and that further compounded FTX's problems. FTX filed for bankruptcy, and Bankman-Fried himself, dropped from Forbes' list of billionaires, announced that he was resigning as CEO.
Creator of the product newsletter Creator Economy Peter Young believes that billions of dollars have already evaporated in the collapse of FTX and this is far from the limit. The expert provides a list of companies and funds FTX and Alameda invested in. One of their partners, the cryptocurrency company BlockFi, has already suspended withdrawals. FTX crisis is at least the fourth cryptocurrency crash in 2022 (before that there were cases of Luna/UST, Celsius, and Three Arrows Capital), developing according to a typical bank run scenario: when investors learn about possible problems with crypto project liquidity, they run to take money, and the crisis becomes self-fulfilling.
Interestingly, Twitter CEO Elon Musk believes that the collapse of FTX in no way means that cryptocurrencies based on blockchain technology have failed. From his perspective, the FTX fiasco was actually helpful. What users need to learn when dealing with cryptocurrencies is that crypto exchanges are only suitable for buying or selling bitcoin, Ethereum, and so on. But they are absolutely not suitable for storing cryptocurrencies. You should use your own wallet for that.
Why Crypto Market Reacts So Badly To FTX Crash?
Now, finally, it's time to talk about the main point. Why are decentralized cryptocurrencies falling due to the collapse of a private company? Why are analysts of different caliber suddenly talking about the loss of trust in cryptocurrencies because one bad manager failed to manage? The reasons lie primarily in the generalization of views on very different classes of financial instruments. Mature experts on traditional markets do not understand the very different nature of cryptocurrencies from the centralized assets they are used to: stocks, bonds, and fiat currencies.
The young cryptocurrency market has already faced the problems of large centralized exchanges several times. The most memorable are the MtGOX hacks in 2011 and 2013, the Bitfinex hack in 2016, and the BTC-e/WEX shutdown in 2017-2018. But the serious fall of BTC occurred only after the hacks of MtGOX, which was at that time, if not the only exchange, then certainly the largest exchange, on which the entire market was focused on. All the other cracking and closing of exchanges didn't make the market considerably fall and caused loud statements about "loss of trust". So, did people understand the nature of bitcoin better before? Or has something else changed?
The FTX bankruptcy was not the cause, but the reason for the cryptocurrency market crash that was brewing due to external circumstances. In a calmer environment, it would have passed without much consequence for cryptocurrencies themselves. When common sense finally prevails and investors can overcome panic, the consequences of the collapse of FTX and all related companies will be short-lived.
Those who thoughtlessly invested in overvalued tokens will be forced to write off losses, but otherwise, the ecosystem will not be disrupted. Several billion dollars will change hands and thousands of FTX customers will suffer losses, but blockchains will still work and cryptocurrencies will not become a less reliable financial instrument. Even analysts at JP Morgan Bank assess the situation more adequately and say the cryptocurrency industry is recovering after another speculative bubble deflates, though they predict BTC to fall to $13,000. They also noted that centralized platforms go bankrupt much more often than decentralized ones.
What Should Investors Do During The Crypto Bear Market
Here are a few options to help investors wait out and potentially make money in a bear market. These strategies will be useful for better risk and portfolio management during both bearish sentiment and crypto winter.
- More disciplined trading. Many of today's market participants are short-term traders. Increasing Stop Loss levels will help lock in more profits from trades while the price is at an optimal level. In addition, du,ring a downtrend, it is important not to expect huge profits, but to record modest "pluses" from time to time. While there may be fewer big gains, there will still be profitable trades. Relying on speculative price increases is not a good idea, because they are often unstable.
- Learn to short cryptocurrency. Shorting (short position) is the selling of a cryptocurrency at a high price in order to buy it later at a lower price. The goal is to open a position in anticipation of a price decline. Short selling can be an optimal solution to capitalize on a cryptocurrency's declining price, as the probability of a loss is roughly equal to the probability of a profit. Taking into account that crypto winter is coming, we recommend you learn the principles of short selling in the cryptocurrency markets. It is crucial to choose the right time for placing short positions. Take enough time to learn more about this tactic and determine when it is potentially profitable or unprofitable.
- Diversifying your cryptocurrency portfolio. Financial advisors recommend diversifying your portfolio during bear market periods and not investing solely in cryptocurrency. Investors with a diversified portfolio are less prone to serious losses when the price of a single asset declines. However, cryptocurrency investors can also diversify their crypto portfolios by investing in new projects and coins with a good history. Cryptocurrency projects at an early stage of development can potentially yield high profits. The newest such ideas are MAOs, in which each participant can contribute to the construction of the project and subsequently share in the profits from its operation. Proper attention and a thorough initial study of the projects is crucial to building a strategy to behave in a bearish cryptocurrency market.
- Controlling emotions. A bearish cryptocurrency market evokes a range of emotions in many investors. The constant changes in the market increase the risk of potentially unprofitable decisions made under the influence of emotion. Given the current situation in the world, emotions can be detrimental to investors. Fear and greed lead to bad decisions, so investors must keep their wits about them. By combining smart averaging and diversification strategies, traders can protect themselves from potentially unprofitable emotional decisions.
What`S In Store For Bitcoin?
Against the backdrop of what was happening, the price of bitcoin momentarily dropped to $15,604. Now the number one cryptocurrency is trading at $16,534. However, experts do not rule out new price dips. Independent market analyst Cantering Clark said that the price of BTC may rebound to the level of $15,000 in the short term. Citing several indicators, the analyst suggested that bitcoin could eventually strengthen at the $12,000 level.
However, in his opinion, as early as December or the first quarter of 2023, the position of leading cryptocurrencies can begin to strengthen again after the U.S. Federal Reserve reports a slowdown in the pace of interest rate increases. This will lead to a drop in the dollar, an increase in the value of U.S. stocks, and, through the correlation of the digital currency market with them, a rise in the price of crypto. So, in the first half of 2023, bitcoin may reach $30-40 thousand and Ethereum may reach $2 thousand.
Undoubtedly, the collapse of the cryptocurrency exchange FTX undermined the confidence of investors and can extend the crypto winter until the end of 2023. According to experts, the events around FTX resulted in deleveraging of short positions and the departure of major players, which increased the vulnerability of the cryptocurrency market. Therefore, there could be "second-order effects," which would affect clients and counterparties of the bitcoin exchange and its related Alameda Research. In addition, many investors will continue to monitor the dynamics of interest rates. If they develop optimistically, the market will recover from the shock in a few months. However, experts doubt that the macroeconomic background will improve in January after the current weakening of the dollar due to inflation data.
At the same time, the most positive scenario that comes to mind is the emergence of extremely friendly regulation for the crypto industry in the currently leading market for cryptocurrencies - the United States. If let's say, regulation of stablуcoins does not involve excessive reporting for issuing companies, and if the U.S. regulator approves the launch of a spot bitcoin ETF, while inflation continues to decline, giving a positive signal for the financial market in general, then the crypto market will get a strong boost to growth. If that is the case, bitcoin will be able to return to the $20K-$25K level by the end of the year and stay in that range. Even in this case, the renewal of the historical maximum seems unlikely, but due to the confident fixation at this level, bitcoin in 2023 will be able to grow significantly on expectations of the coming (in 2024) halving.
Right now, the crypto market is still heavily dependent on the rate of growth in U.S. consumer prices. Participants in an active market such as the U.S. are looking at this and are guided accordingly by inflation and key rate levels, balancing high-risk and low-risk assets in their portfolios. The slowdown in inflation plays into the hands of high-risk assets, which is clearly visible in the growth of the S&P 500 after the publication of consumer price growth data.
Why Trade With AdroFx During Crypto Bear Market?
Founded by a team of professionals with many years of experience in financial markets, AdroFx is the ultimate trading platform not only for forex traders but also for those who prefer to trade stocks, metals, and cryptocurrencies. The main advantage of this broker is the possibility to trade CFD contracts, which is especially important in the current situation in the crypto market, because you can open not only long but also short positions, thereby making a profit even when cryptocurrencies fall.
In addition, AdroFx clients can open crypto accounts - you can choose bitcoin and ether. Open a trading account by following this link and start getting the most out of the bearish crypto market.
So, should we expect a lower BTC price? Perhaps, but not significantly. At most, it will be adjusted by a few percent. We already see that the market is beginning to stabilize gradually, and soon there will be a return to the usual mark of 20 thousand dollars. Why is it so? Bitcoin is a fairly strong cryptocurrency that works in a stable and popular blockchain. The collapse of bitcoin will lead to the collapse of the entire market, so this scenario is unlikely. A year ago, on November 9, Bitcoin was at the top of the world ranking and traded at a record high, having more than quadrupled in a year. This year, it has crashed as the war in Ukraine, post-coronavirus supply lockdowns, and rampant inflation have crushed investor sentiment.
However, over the past few months, Bitcoin has performed quite well, holding steady at around $20 thousand. While other coins were falling rapidly, and some even completely depreciated. In addition, crypto investors who hold assets long-term have no incentive to sell at the current low level and are waiting for a recovery to the positions that were at the beginning of the year. History shows that cryptocurrency tends to recover after a long fall and investors have certainly not lost interest.
If you are investing for the long term, then now is the time to open positions as the price is now at its lowest level. Still, the crypto winter may be prolonged by global inflation and a lack of confidence. But it is not expected to last forever. Bitcoin is in short supply, the amount of cryptocurrency is limited to 21 million, that is, it is to some extent protected from inflationary pressures. The mood of fear that is currently in the market means that investors need some time to recover. So we will have to be patient and wait.