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Will cryptocurrency stop rising

Falling for the sake of growth. People have been making millions from cryptocurrency for years. Why will it stop growing now?

Bitcoin approached a record high of $70,000 in the fall of 2021 – it seemed that the market’s coveted $100,000 mark was just around the corner, and the financial world would finally recognize the cryptocurrency as a safe asset. However, just three months after the record, the value of the first cryptocurrency has fallen by half, with experts around the world believing that the worst is yet to come. Geopolitical tensions, the US Federal Reserve’s actions, and falling equities have all led to a prolonged “crypto-zima”. However, some experts believe that the crisis will only benefit the industry because the market will cease to rush and there will be time to improve crypto products.

After November’s record of $69,000, bitcoin lost half of its value – in January its price dipped below $33,000 and later corrected to just over $35,000. The major cryptocurrency has dragged the entire market with its capitalisation down by a trillion dollars and the value of strongest assets, such as ether and solanium, down 50-65 per cent from their autumn highs.

Some experts thought the crisis was due to geopolitical tensions in the world, as a serious conflict broke out between Russia and the West over Ukraine. However, investors around the world fear that cryptocurrencies will continue to fall – in their view, the events of recent months have been driven by economic factors and have marked the arrival of a long “crypto-zima”. This is the term in the financial world for a “bear market” period, when the value of an asset falls at least 20 per cent off its record high and stays at low levels for a long time. These are psychologically difficult periods for investors, when portfolio size decreases and panic sets in in the market.

In one voice

The vast majority of experts attribute their negative outlook to a tightening of monetary policy and a subsequent key rate hike in the US. With the onset of the pandemic, the Federal Reserve (Fed) rolled out its so-called quantitative easing programme – starting to inject money into the US economy to stimulate growth.

As part of this policy, banks receive large amounts of liquidity, as the Central Bank (in this case the Fed) buys government and corporate bonds on the secondary market and issues new money with which to pay off current liabilities. By obtaining more liquidity, banks are able to lend more money, which ultimately “triggers” economic life in the country.

However, now that the US economy has recovered from the lockdown, the Fed has decided to phase out the programme and raise its key rate in order to fight inflation, a ‘side effect’ of quantitative easing. Additional liquidity in the economy has helped stocks and other assets rise more quickly – experts now claim that the Fed’s soft monetary policy has turned many of them into bubbles and that they are grossly overvalued. These claims also apply to cryptocurrencies.

The research centre of Huobi, one of the largest cryptocurrency exchanges, warned of bitcoin’s decline back in November, when the Federal Reserve announced the launch of a tapering program (tapering can be translated as “gradual loosening” – the process of slowing the pace of Fed asset purchases and the subsequent key rate hike).

“The backdrop to bitcoin’s rising price is the spread of COVID-19 around the world and the extremely loose monetary policy pursued by central banks to bail out markets. Because of the huge liquidity released to the market by central banks, many risky assets, including bitcoin, have risen over the past year. However, on the 3rd of this month (November – Lenta.ru commentary), when the Fed announced a post-meeting taper, there was a turning point for global liquidity growth,” Huobi noted.

Crypto-assets have benefited from the Fed’s extremely accommodative monetary policy, but will also suffer if it tightens, as investors will move money into safer asset classes. (…) Bitcoin is now a macro asset and its value is an indicator of liquidity levels. As liquidity decreases, macro players sell bitcoins and all cryptocurrencies go down following their value

Alex Krueger
Founder of investment firm Aike Capital
Bank of America (BofA), the U.S. financial conglomerate, said in January that the effects of the Fed’s announcement had already taken their toll – “many bubbles started to burst simultaneously” and risky assets such as cryptocurrencies and tech stocks began to plummet in price. According to BofA strategists, investors have begun to exit speculative trading in droves to reduce risk in their portfolios ahead of an accelerated tightening of monetary policy.

“Reduced cash injections into the economy by the Fed will increase both risk premiums and interest rates, and this will primarily affect the riskiest assets in the market – loss-making tech stocks, meme stocks and especially cryptocurrencies, which have no intrinsic value,” explained Jay Hatfield, investment manager at Infrastructure Capital Advisors. This is the reason why bitcoin and ether have lost half their value, according to financiers.

According to researchers at Huobi, bitcoin has traditionally been regarded as one of the riskiest assets, making it particularly sensitive to changes in liquidity in the US economy. Experts recalled that in March 2020, due to a lack of market liquidity, the price of bitcoin fell by almost 50 per cent in a single day. They also cited a graph of the main cryptocurrency’s price movements during the last round of Fed teypering in 2013-2014 to back up their prediction.

Billionaire investor Jeff Gundlach, who is considered the “bond king”, called the Fed’s action a “headwind for investors” and said he advised against buying bitcoin in the current environment. He added that the fair price of the first cryptocurrency is now $25,000, and it would be wise to buy bitcoin when its value is at that level.

Falling for the sake of growth

Amidst everyone’s concerns, Du Jun, co-founder of cryptocurrency exchange Huobi, said that bitcoin price dynamics are cyclical and the value of the first cryptocurrency has experienced a fall more than once – only to later rise to a new record. The fact is that it is directly dependent on a process called halving, which happens in the blockchain network about once every 4 years.

Halving is the halving of miners’ rewards for each block mined. Initially miners received 50 bitcoins, the number was reduced to 25 coins in 2012, 12.5 in 2016 and 6.25 in 2020. This procedure makes cryptocurrency issuance controllable – it becomes increasingly difficult to mine a coin and they are issued more slowly, thus keeping cryptocurrency inflation in check. After each halving, the value of the first cryptocurrency increased many times over. For example, bitcoin went from $11 to $1,100 after the first halving, and from $600 to $20,000 after the second.

From $600 to $20,000 – Bitcoin’s value rose after the halving in 2016

Given the price cycles, the downturn in the cryptocurrency market will last until late 2024 or early 2025 (halving is expected in May 2024), notes Du Jun. “Bitcoin has been in a downward corridor since November last year. Under the 4-year cycles hypothesis in bitcoin – 2022 could be a repeat of 2018 and 2014 – bear market years,” notes the FxPro team of analysts. The head of Thailand’s largest cryptocurrency exchange Bitkub, Jirajut Srupsisopa, also predicts a new golden age for bitcoin six months after the next halving.

That said, Nikita Zuborev, senior analyst at Russian cryptocurrency exchange aggregator Bestchange.ru, believes that many experts’ estimates on the duration of the “crypto-zima” are overly negative. According to him, positive changes in market conditions and the start of an uptrend will begin much earlier, about a year before the halving, and already in a few weeks after this event the market will move to the phase of explosive growth.

“According to our estimates, the correction could drag on for another year or so and, at its apogee, reach levels about 25 per cent below current prices. That is, around $26,000 to $28,000 for bitcoin and $1,700 to $1,800 for etherium. Approximately should expect an exit from the global “bear” trend in mid-2023, and the phase of active growth – throughout late 2024 and all of 2025, “- said the expert.

Another factor in bitcoin’s possible decline in value is its growing correlation with the U.S. stock market, especially shares of technology companies. Experts say that more and more large institutional investors (investment funds, pension funds, insurance companies and banks) are investing in cryptocurrency, which means that digital assets are increasingly dependent on “traditional” markets. According to data provider CryptoCompare, the total amount of crypto assets under management by such investors in 2021 rose from $36 billion in January to $58 billion in December.

Bloomberg analysts said in late January that the bitcoin price chart had reached an unprecedented similarity with US stock exchange indices. The 40-day correlation coefficient between bitcoin and the NASDAQ stock exchange index rose to nearly 0.66, the highest ever observed. The correlation with the S&P 500 index is also at a record high. Meanwhile, the former index is down 12 percent since the start of 2022 and the latter is down 8 percent.

In addition, corporations, such as Tesla and MicroStrategy, are also buying into cryptocurrency. If tech stocks continue to fall, bitcoin will also collapse. Researchers at the International Monetary Fund (IMF) said bitcoin’s growing correlation with stocks limits its “risk-diversification advantage (for investors – Lenta.ru commentary) and increases the risk of “contagion” in financial markets.

Taking a breather

At the same time, many experts are of the opinion that the “cryptozyma” is not such a bad event. Periods of decline in the crypto market are a time when the industry can take time out and build infrastructure and applications that will make it easier for newcomers to the industry to use the products during the next bull market (cryptocurrency appreciation).

Nadia Ivanova, chief operating officer of research tech company L’Atelier, said many developers have been distracted by the “hype” and “easy profits from speculation” with NFTs (non-interchangeable tokens) and other digital assets over the past year. “Cryptozyme could be an opportunity to build market fundamentals, she said.

The creator of the second largest cryptocurrency, ether, Vitalik Buterin, holds a similar position. According to him, the downturn in the market will help developers focus on improving technology. “Many people who have a deep understanding of cryptocurrency and especially the creation of crypto products are welcoming a bear market,” the billionaire said. “In times of skyrocketing quotes, the market attracts too much ‘very short-lived speculative attention’.

“Cryptowinter” in Buterin’s understanding is a chance to determine which projects, models, teams and people will stay in cryptocurrency for the long term. “Any correction, especially a long-term one, is good for the market, as such a ‘clean-up’ effectively clears the industry of short-term speculators as well as projects that are not exactly clean, leaving room for those who look at the market exclusively in the long term,” Denis Smirnov, a blockchain specialist at EMCD, supported the ether creator’s view.

In addition to decentralised finance technology (DeFi), NFT and meta-universes, investors are also showing great interest in many new sectors of the crypto-world, says Prime Trust CFO Rodrigo Vicuna: “We have just touched the surface of where a lot of blockchains are heading.” That said, according to Chris King, founder of Eaglebrook Advisors, some technologies are not yet mature enough to make a splash, and the lull in the crypto world will provide an opportunity to build on them with quality, well-developed products. Above all, says King, this applies to the DeFi sector, which allows users to engage in credit and other financial transactions using blockchain without intermediaries.

“DeFi is still speculative. The infrastructure is still being built, it’s still cumbersome and difficult to use. From 2013 to 2016, bitcoin was difficult to buy, but companies like Coinbase and Gemini have made it easier. In the case of DeFi technology, we also need to figure out how to improve it and make it less speculative. It just takes time,” said Chris King.

Great expectations

Some market participants are in denial about the coming of the “crypto-zima”. Vijay Aiyar, vice president of cryptocurrency exchange Luno, believes that the recent developments in the crypto market are more of a correction than a sustained downturn. The expert recalled that bitcoin often experiences a sharp drop after another peak in value.

Corrections in bitcoin’s value are usually in the 30-50 per cent range, which is what is currently being seen, so the market is still within normal correction territory

Vijay Aiyar
vice president of cryptocurrency exchange Luno
Bloomberg Intelligence also gives a positive outlook for the near future in its January report on cryptocurrencies. According to the group, bitcoin and other digital assets will survive the US monetary policy tightening relatively unscathed and recover before other affected assets. There are a number of reasons for that.

Although bitcoin is considered a risky asset, many investors view it as a “safe haven” asset in times of high market volatility because of its formal independence from the traditional financial system, as well as its limited supply. In addition, according to Bloomberg Intelligence, bitcoin (along with commodities) is still in bull market territory, and a quick bounce in value after a downturn is more likely than in the case of equities.

Investors have also been impressed by how quickly miners are able to recover bitcoin’s hash rate. In May 2021, China, the mining capital of the world with a 44 per cent hash rate, banned cryptocurrency mining, and in July the country shut down almost all mining equipment, bringing the hash rate down to zero. However, following the mass “exodus” from China, miners quickly re-established operations in new locations.

Global hash rate dynamics

International cryptocurrency exchange EXMO development director Maria Stankevich also argues that 2022 could be the year of a “parabolic rise” in cryptocurrency prices, repeating their fate of 2013 and 2017. “I rely on the psychological figure of $100,000 as a price benchmark. This marker, long before bitcoin reached 20 or 50 thousand, appeared in the media as a fair price of the first cryptocurrency, and it is largely on its achievement that the community is guided,” the expert stressed.

Stankevich added that in the near future bitcoin expects another decline to the level of 28-30 thousand dollars, after which the asset will return to its growth, “We believe that the level of 29 thousand dollars and below will push a large number of investors to buy, so after its breakdown, we will see a sharp rise up. Even Arthur Hayes (former head of crypto exchange BitMEX) recently wrote in a new article that he would definitely buy at a level below $30k. Many traders and investors on EXMO are talking about 25 thousand as a new entry point for large amounts (over $100 million).”

Blockchain has repeatedly proved that its revolutionary technology is not just another bubble in the financial market – it is already used by large companies, constantly finding new applications. Experts are unanimous in their view that bitcoin has a great future, and, according to Stankiewicz, an update to its historic high in the second half of 2021 certainly indicates that the first cryptocurrency is in a new upward cycle.

Crises in the development of any financial instrument are inevitable, but data shows that fewer investors are willing to sell bitcoin in the event of high volatility and consider it a long-term investment. According to January data from cryptocurrency broker Genesis Trading, the number of bitcoins held in digital wallets for more than five months has steadily increased globally since July 2021. This behaviour suggests that investors are aware of the fleeting impact of external factors on the cryptocurrency and that the market is unlikely to experience another all-out sell-off.