UNDERSTANDING CRYPTO BEAR MARKET
Ever since the beginning of 2022 – the crypto market has been on a steady downward slide. Six months since the beginning of the year, and the words ‘bear market’ and ‘crypto winter’ are being thrown around a lot more than usual. Wondering what all of these mean?
In traditional finance and stock markets, a ‘bear market’ described a conditioning in which prices of securities in a market decline by more than 20% from their recent highs, often accompanied by negative investor sentiment and declining economic prospects.
In the crypto space, a ‘crypto winter’ is something that runs along similar lines. A crypto winter signifies negative sentiment and lower average asset values among a large swath of digital assets. Now, take a look at this chart.
Also Read: Crypto Crash Reasons
It is quite clear from the chart that the crypto market’s total market capitalization has fallen from $3 trillion at its all-time-high to around $877 billion – a value erosion of over 70% in a matter of 7-8 months.
But, this isn’t something new. In fact, it has happened multiple times in the past, ever since the dawn of the father of all cryptos – Bitcoin. The latest one being from late 2017 to December 2020 during which crypto prices fell and hovered far off from prior peak prices. However, in December 2020, prices exploded to record highs in a significant crypto bull market that followed.
Unlike in traditional stock or commodity markets, there are no widely accepted or specific guidelines for how far cryptocurrency prices must fall to be considered a crypto winter. But market leaders and influencers in the space of crypto and finance tend to agree that we are in the midst of one – that began in early 2022.
Also Read: Crypto Bear Market 2022 vs 2018
WHAT CAUSES A BEAR MARKET IN CRYPTOS?
The cause behind a bear market in crypto, or any bear market for that matter cannot be pinpointed to one or two reasons. It generally is a complicated mixture of a variety of reasons that can trigger a bear market. It could be something as simple as a bust that comes after a boom in the market or due to some financial debacle that might plague investors in a particular asset class.
Now, in the case of our current bear market in crypto – it can be drawn out to a handful of reasons.
1. Quantitative tightening
Quantitative tightening (QT) is a contractionary monetary policy tool applied by central banks to decrease the amount of liquidity or money supply in the economy. During the initial phases of Covid-19 – when government across the world were printing billions and billions of dollars worth of cash and pumping it into the economy in an effort to prop the economy up during a time of crisis, when all business had to be shut down.
While, the effort did help prop up the economy and ensure people were spending more and more – it created a different problem – the problem of easily available cheap cash. And thanks to cheap cash available in the economy – inflation began setting in. Prices of simple basis necessities began skyrocketing, along with valuations of assets classes, including cryptos. A part of 2021’s crypto bull run can be associated to such easily available cash in the system.
But now, through the process of QT, governments are working to cutting down the easily available cash in the market and essentially bring about a mini-recession to slash inflation. That is being done by increasing government interest rates. And interest rates typically have an inverse correlation with asset classes like stocks, and now cryptos too.
2. Excessively high valuations
During a bull run, valuations also tend to skyrocket beyond reasonable measures at a given point in time. But such excessively high valuations don’t tend to last long and a price correction is almost always inevitable in any asset class, including cryptos. So the current bear market also as a little bit of value correction happening behind the scenes. Not-so-good crypto projects are being filtered out of the system while the good ones will see through it all.
3. Poor investor sentiments
Another reason behind bear runs in the market are poor investor sentiments. Investors looking at losses over 70-80%, even near 100% on their books will surely have troubles re-entering the market again. Confidence tends to be on the down-low during these phases, and understandably so. Thus following basic market dynamics, poor sentiment leads to poor demand which then leads to lower demand and thus value erosion in assets.
Poor sentiments also include another factor of exit scams and defrauding of investors on the market – something which is commonplace in the crypto space. The bear run from 2017-18 began with the bust of the ICO boom, this time’s nail in the coffin was the massive depegging of the biggest algorithmic stablecoin, namely TerraUSD (UST), founded by Do Kwon. The depegging resulted in a catastrophic loss, with over $40 billion wiped out from the market.
Poor sentiments are also derived from geo-political issues, like the current Russia-Ukraine war that has sent the world down the rabbit hole of inflation and continuous FUD (fear, uncertainty and doubt). Along with that, obscurity over regulatory action on the crypto segment across most major economies in the world has also put a major question mark in the short-term future for the crypto space.
Additional Read: Terra (LUNA) Crash Explained
PHASES OF A CRYPTO BEAR MARKET
Crypto markets, in general is a very novel space with not a lot of history. However, here’s how bear markets in traditional financial markets tend to work.
Bear markets typically consist of four distinct stages:
- High prices characterize the first phase. After this period, investors begin to exit the markets and collect gains.
- In the second phase, asset prices and trading activity decline, company earnings decline, and previously optimistic economic indicators deteriorate. As the mood begins to deteriorate, some investors experience fear, a condition known as capitulation.
- The third phase is when speculators join the market, increasing prices and trade volume.
- Crypto continued to fall in the fourth and final phase, albeit slower. As lower prices and optimistic news re-attract investors, bear markets eventually transition into bull markets.
Read more in detail on Top Crypto Bear Market Indicators
CRYPTO BULL VS BEAR MARKETS: AN OVERVIEW
|BULL MARKET||BEAR MARKET|
|SENTIMENT||POSITIVE MARKET SENTIMENT||NEGATIVE MARKET SENTIMENT|
|DEMAND/SUPPLY||HIGH DEMAND, LOW SUPPLY||LOW DEMAND, HIGH SUPPLY|
|NATURE||NEW PROJECTS ARE RELEASED, PEOPLE TEND TO MAKE LOT OF MONEY||MANY BAD PROJECTS GO BUST, PEOPLE BECOME FEARFUL, MAKING MONEY BECOMES MORE DIFFICULT|
BITCOIN (BTC) & ETHEREUM (ETH) PRICE TREND
As is evident on the chart above, ever since the crypto market touched its all-time-highs in November 2021, both Bitcoin and Ethereum have been on a strong downward trend. Bitcoin has eroded nearly two-thirds of its ATH valuations and its currently standing at around $20,000 (~INR 15.75 lakhs) while Ethereum has shed over 80% of its ATH prices – a crash from close to $5000 (~INR 4 lakh) to now just over $1100 (~INR 87,000).
Additional Read: Bitcoin vs Ethereum
INVESTMENT STRATEGIES IN A CRYPTO BEAR MARKET
1. Accumulate with dollar cost averaging
Dollar-cost averaging refers to the investment strategy wherein an investor divides the total invested amount across periodic purchases of the asset with an effort to reduce the impact of volatility on the overall purchase.
Diversification is the key factor to fight volatility. A wise investor must spread his or her portfolio among various crypto assets. The process of diversifying the portfolio among various crypto assets depends solely on the risk appetite of the investor.
3. Invest only what you can afford to lose
Having a proper idea about your risk appetite is important before you start investing in any asset class. This becomes all the more important with volatile asset classes like crypto. Investing is good to create long-term wealth, however, it is important to invest wisely.
4. Rebalance crypto portfolio
Go over your portfolio at regular intervals to weed out bad projects and invest more on good ones. Bull runs sometimes can skew portfolios to favour one or two components heavily thus revising those to address them and maintain balance is a good idea too.
5. Don’t freak out, stay calm through the winter
Bull runs are followed by bear runs in the market and the reverse is also true. This is the nature of any asset class and one shouldn’t be too worried over short term speculative actions and swings. Crypto winters can last for a few months or may last over a few years. Don’t freak out, stay calm and collected and keep the above points in mind.
To know more about these strategies, read: Ways to Survive the Crypto Bear Market
CRYPTO BEAR MARKET: THE INDIAN SCENARIO
So, it is well known that we are currently living in a crypto bear market aka crypto winter. That holds true more of less on a global scale. However, the Indian experience of the crypto bear market is slightly different from the rest of the world. Why so?
Primarily because of the fact that we are now living in the reality of a 30% tax on crypto gains and a crippling 1% TDS on every crypto sale transaction. And top that off with no off-setting of crypto losses against crypto gains, or any other gains for that matter.
And undoubtedly, such tax practices have dampened the mood of Indian crypto investors – which could soon be one of the largest markets out there.
The highest tax slab of 30% tax became applicable from the 1st of April, 2022, while the 1% TDS came into effect on 1 July, 2022.
To get detailed information on Crypto Taxation in India, you may also visit our comprehensive guides below:
In conclusion – all indications in the crypto market suggest the bear run is here to stay. The probability of a resumption of a bull run seems very low thanks to a number of issues ranging from inflation, geo-political tensions to regulatory obscurity. However, that doesn’t mean that it is the end of the road for the crypto market and it will never be able to pull through. Rather, its far from it. Bear markets come and go but the basic nature of investment assets remain the same. Good assets, chosen wisely at the right time will reap rewards on the long run.
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What's the difference between a bear market and a market correction?
A bear market is when the whole crypto space is on a steady decline for a longer period of time while a market correction is when there is a huge surge in certain crypto asset’s value due to high demand and results in many investors selling off the assets to incur the profits.
What’s the difference between a bear market and a bull market?
In a bull market, the crypto space has its value direction upwards while in a bear market the crypto asset sees a downward trend in value. To put it simply, Bear Market = High Supply + Low Demand whereas a Bull Market = Low Supply + High Demand.
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