Why is the Cryptocurrency Market Declining?
Bitcoin, Ethereum, and many other top cryptocurrencies are down significantly over the past couple of weeks and are now nearly 50% down from their all-time highs. The stock market has also taken a significant hit, especially in the growth and tech sectors, and the cause appears to be related to COVID and inflation concerns.
The stock market is currently in a large correction. In fact, the Nasdaq composite index fell 7.6% over the past week, the biggest decline since 2020 and the start of the pandemic. Some companies that saw huge growth as a result of the stay-at-home movement, like Zoom, Peloton, and Netflix, are beginning to see demand slipping back to pre-pandemic levels. While this may be good for society as a whole, it is definitely not good for these stocks and their prices. Netflix share prices fell 21% on Friday due to a poor earnings report, and there were rumors about Peloton halting production (though this rumor was debunked by Peloton).
Along with a return to normalcy in society comes a return to normalcy in fiscal and monetary policy. The federal reserve has been lowering the number of bonds they are buying monthly and hinting at interest rate hikes for 2022, both of which reduce the appeal of high-growth tech stocks since it is now easier to get a higher yield on money without taking as much risk.
Most investors see cryptocurrencies as a type of high-risk tech-related investment, so it is natural for the prices to dump along with tech stocks. In the same week that Netflix fell 20%, the entire cryptocurrency market saw a 22% decrease as investors move into safer assets, like gold, blue-chip stocks, and interest-bearing stablecoins.
As long as the tech market continues to crumble, it will be difficult for the cryptocurrency market to climb back to new highs. Over time, as the economy continues to recover and investors regain confidence in riskier assets, cryptocurrencies will once again become a popular investment vehicle. The time frame for this is unknown and could be as quick as a few months or as long as several years.
Another consideration in the cryptocurrency market is the proliferation of its 4-year bear and bull market cycle. For the past 12 years, the crypto market has followed a steady cycle of having a 3-year bear market followed by a 1-year bull market. This pattern saw bull markets take place in 2014 and 2017, and both were subsequently followed by lengthy bear markets. In 2021, the trend continued, as cryptocurrencies became mainstream yet again and reached new all-time highs.
Now, about one year after the start of the bull market, experienced investors are fearing that history will repeat itself and that there will be a ‘Crypto Winter’ for the next couple of years. This possibility becomes even scarier when looking at the January 2018 price chart, which saw the beginning of a massive bear market that brought Bitcoin from $20,000 to as low as $4,000.
Whether or not history will repeat itself remains to be seen, and nobody truly knows what will happen next with the market. Nonetheless, knowing the context and history of the market movements is critical to understanding how to best protect wealth. Even if the cryptocurrency market enters a multi-year decline, the fundamentals will not change, the developers will continue working, and blockchain will continue being adopted around the world.
By Lincoln Murr
