main conclusions
Cryptocurrency has been in a vicious bear market for a year This is the first time that cryptocurrency has also experienced a bear market in the broader economy With many negative macro variables and the zero interest rate era over, it seems naive to think that cryptocurrency can jump significantly in the short term
Anyone betting on a quick recovery in cryptocurrency markets needs to reevaluate. If you’re familiar with my analysis, you’ll know that I’ve been bearish for a while. This mostly boils down to the macro setup, as the economy reels from this new paradigm of high interest rates. Cryptocurrencies represent one of the highest risk asset classes and therefore have always been up for the fight when the rug has been pulled out from under them. And that’s what happened, with Jerome Powell and the Federal Reserve ruthlessly pulling the rug out. With the macro backdrop in this position, there is a ceiling in place. Cryptocurrency will not rise until inflation is overcome and interest rates peak. Treasuries are currently trading at 4%, but this will likely rise to 5% in early 2023. There are still concerns that inflation, which appears to have peaked, will persist for some time. The job market has yet to feel a real squeeze, while demand has moderated, but not significantly.
more bad news
This scenario led me to declare that Bitcoin could be one bad event away from a meltdown. It sat at the $20,000 mark for too long, unable to break out as it was held back by bearish sentiment in the broader markets. I didn’t expect this event to be so seismic, though. The FTX implosion represents a watershed for cryptocurrencies. I believe it will do even greater damage than most predict. We saw credit bureau Moody’s put Coinbase’s bonds on review for downgrade, hinting at the damaging action that could follow the exchange’s insolvency. I wrote an article analyzing the flood of Bitcoin exiting exchanges, showing that trust had been broken and was at an all-time low. In fact, a staggering 200,000 bitcoins exited exchanges less than a month after the FTX collapse. And even Cathie Wood is warning of a backlash in institutional adoption. They say “be greedy when others are scared”, but I’m not sure that applies here. Cryptocurrency is at a fork in the road. It has never existed during a general economic bear market before – remember, Bitcoin was launched in 2009 and therefore experienced nothing but an explosive bull market in financial assets. Now it’s different. Contagion is on the rise again, cryptocurrency’s reputation is in tatters, and the money printing press is no longer sustaining everything. Times are tough.
previous crypto winters
In this context, this environment is unprecedented for cryptocurrency. This is why I believe that extrapolating past cycles to current conditions is naive. It’s much easier to bounce back when interest rates are at 0% and the rest of the economy is booming. Not only that, but the scale of capital destruction this time around is much greater given that crypto has grown so much during the pandemic years. That said, there will come a time when inflation will be overcome. There will come a time when interest rates will no longer be higher. This is the cyclical world we live in and therefore risky assets will rise again. I only believe that this time winter may last a little longer than many expect. And when looking at previous cycles, the winters lasted a long time as well. The chart below traces the Bitcoin price back to 2014, showing this well. After peaking at nearly $20,000 in December 2017, it was not until Q4 2020, in the midst of the pandemic, that Bitcoin once again broke that mark. This marked a period of almost 3 years of inactivity, in which investors failed to make significant gains in the cryptocurrency world. We have been in this bear market for a year, both in cryptocurrencies and in financial assets in general. Predicting the future in cryptocurrencies will only end up with you looking silly, but I’ll give it a try anyway. I would be surprised if we are past the midpoint of this bear market. As winter pressure hits Europe hard and people feel high energy prices, the war in Ukraine rages on and inflation stubbornly persists, it seems naive to think that cryptocurrencies can rise anytime soon. Of course, that could theoretically change in an instant. Positive news out of Ukraine could send markets north in an instant, but that’s impossible to predict. I think the bottom line, though, is a longer period of pain ahead than many people realise.