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Bitcoin down over 50% as crypto market big chill sets in

Fri, 05/13/2022 - 20:11

Cryptocurrencies — and Bitcoin, in particular — have been in the headlines this week for all the wrong reasons. To the chagrin of investors, the original digital coin dipped to a low of $29,330 to record a decline of 55-57% from its November ATH of $69,000. This flirtation with its key support of $30,000 has prompted many analysts to suggest that we ought to be strapping in for a full-on 'crypto winter' with much more downside ahead. Indeed, in typical bubble-bursting fashion, we're already seeing altcoins dropping like stones, with Terra LUNA plummeting 97% literally overnight (10-11 May). Even more worrying, it appears as though this has even spread to Terra's algorithmic stablecoin UST, which is currently trading at around half its supposedly guaranteed value of $0.49.

These developments have now led many to question the future of the entire cryptocurrency market, or at the very least, its short-term prospects. But what are the reasons for this sudden decline, and how long can it be expected to persist? Read on to find out the answers to these questions and more.

So, should we be preparing for a long winter?

To put it bluntly, it all boils down to your definition of 'long'. Rising central bank interest rates and general instability mean that the world is currently risk-off, for the most part. And with the Fed seemingly ramping up its hawkish rhetoric, there could well be more downside to come. It's no coincidence that Bitcoin's Spring 2021 peak of $63,000 came exactly as the Treasury yield curve began flattening amid the US regulator's normalisation of the country's monetary policy. Since then, the tech-overweight Nasdaq has lost more than 25% of its overall value, with many of the index's smaller-cap stocks losing over 80%. With the Fed now preparing for a cumulative full percentage point rate hike in the next two months, it's hard to envisage a scenario where crypto and tech stocks don't incur further losses. The only question that remains is whether this is the end of the line for crypto or whether — like so many times before — it will ultimately rise again from the ashes, stronger and more resilient than ever.

Light at the end of the tunnel

While things might look bleak at the moment, it's always darkest before the dawn. Remember how bad things looked in early 2018 when BTC corrected by 85%? Bitcoin eventually hit a low of around $3,100 in December of that same year but is now worth almost ten times that today. At some point, the speculators will be driven out of the market, leaving only active crypto users and genuine long-term HODLers, laying the foundation for the green shoots of stable, sustainable growth. That is, of course, not to say that every single project will make it to the other side. If a Top 10 coin like LUNA can lose 97% in the span of just 24 hours, there will definitely be scores of other altcoins that don't survive. The most probable scenario is not unlike the Dotcom Bubble of the early 2000s, meaning we can expect significant bloodletting and a multi-year slowdown in capital investment in the space. However, when the next leg up comes — and it will — the growth will be much more viable and enduring as it will be driven by proper fundamentals and a loyal user base.

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