Over the past couple of weeks, the cryptocurrency market has been on a steady decline, and today saw a sharp decline of 8% in total market capitalization. This price action has led some to speculate that the bear market is starting, while others are staying optimistic that there are a few more months of bullish action to be had. The truth is likely somewhere in the middle, and is likely related to the COVID resurgence and stock market panic.
The cryptocurrency market has followed a 4-year cycle for the past eight years. Typically, there is a yearlong bull market where most cryptocurrencies reach new all-time highs. Subsequently, there is a 3-year bear market where the market capitalization of cryptocurrencies falls by 50–75%, if not more, and leads to some projects never recovering. This exact pattern has happened twice before, in 2014 and 2017, and could be happening again in early 2022.
At first glance, this analysis would make sense, as the three years following 2017 saw lackluster price action and Bitcoin reaching a low of around $3,000, only to shoot up to over $60,000 in 2021. If history repeats itself, as it often does, early 2022 will look similar to early 2018 and be the beginning of a massive bear market lasting until 2025.
Though this may be a believable theory, it fails to fully capture the current state of the cryptocurrency market. Unlike 2018, 2021 saw massive mainstream adoption and marketing efforts, which brought more investors into the cryptocurrency space than ever before, along with the general public’s knowledge of NFTs and Dogecoin. Some believe that this newfound adoption will help prop up the cryptocurrency market in a way that was not possible in 2018, and thus history will fail to repeat itself and cryptocurrencies will continue to climb. Additionally, whenever a pattern is found in the world of investing, many people try to make money by playing the patterns and following trends. However, this style of investing rarely works, as patterns in investing tend to not repeat themselves once they have been discovered and taken advantage of. This optimistic viewpoint could help explain why this recent price decrease is merely a dip, and why Bitcoin is still on a trajectory to reach $100,000 in the short term.
The truth about the current state of the market is likely somewhere in the middle of these two perspectives. While it is true that history does not repeat itself in finance, it is also true that the perception of an impending bear market may scare investors off, leading to negative price action. On the other hand, the amount of development, venture capital, and adoption in the cryptocurrency space will also help to ensure that the cryptocurrency market stays afloat, even during times with negative sentiment.
This most recent price dip can be attributed to the resurgence of COVID-19, specifically the Omicron variant, around the world. This highly contagious variant has caused a massive spike in both infected individuals and ICU beds being used, which has consequently caused labor shortages and a lack of essential workers. With all of this uncertainty surrounding the world, both the stock market and the cryptocurrency market have taken a hit, as investors move to safer assets and do not feel comfortable taking high risks.
If Omicron proves to not be a major issue, and the world quickly returns to normal, this dip may be bought up quickly as investors regain confidence. However, if there are continued labor shortages and even the possibility of stay-at-home mandates again, investors will continue to lose faith in the markets and prices will continue to drop.
Even though it is impossible to predict what the market will do with complete accuracy, an informed and well-researched take can help prevent downside risk. Any cryptocurrency investor should only invest an amount they are comfortable losing, and must accept the high volatility required to achieve the massive gains that they ultimately want.
By Lincoln Murr