There are good reasons to be afraid. The market that had previously fallen was down more than 80%. While stingy hoarding may be a wise move among many Bitcoin (BTC) extremists, altcoin speculators know that a diamond trade could mean near (or complete) destruction.
Regardless of one’s investment philosophy, in a risk-off environment, participation can rush out of space. The purest among us may see a glimmer of hope, as destruction clears the forest floor of weeds, leaving room for the most powerful projects to flourish. However, there is no doubt that many of the lost saplings would have grown to great heights on their own, given the opportunity.
Investment and interest in the digital asset space is the water and sunshine of fertile ground for ideas and entrepreneurship. Less severe dips serve the market better; gardens trump deserts.
A Brief History of the Crypto Bear Market
To solve a problem, we first need to understand its catalyst. Bitcoin and the wider digital asset space have survived many bear markets since its inception. By some accounts, we are currently number five by one’s definition.
The first half of 2012 was filled with regulatory uncertainty, culminating in the closure of the second-largest bitcoin exchange, TradeHill. This was followed by the Bitcoinica and Linode hacks, which resulted in the loss of tens of thousands of bitcoins and a market drop of around 40%. ¹ However, the price rally, albeit short-lived, hit new highs above $16, until further hacking, regulatory concerns over Bitcoin savings and trust Ponzi defaults caused prices to plunge again, dropping 37%. ¹
Enthusiasm for the new digital currency did not hold back for long, as BTC rose again to around $120 for most of next year before surging above $1,100 in the last quarter of 2013. And, just as striking, the DEA’s seizure of Silk Road, the ban by the People’s Bank of China, and the scandal surrounding the closure of Mt. Gox sent the market into a vicious long-term correction of 415 days. This phase continued until early 2015, when prices fell to 17% of the previous market high. ¹
Since then, growth has been steady until mid-2017, when enthusiasm and market frenzy pushed bitcoin prices to a peak of nearly $20,000 in December. Eager profit-taking, further hacks and rumors of a state ban on the asset have crashed the market again, with Bitcoin languishing in a slump for more than a year. 2019 is poised to rise to nearly $14,000 and largely above $10,000 until March 2020 when pandemic fears drive BTC below $4,000. It was a staggering 1,089 days (nearly three years) before the crypto market regained its 2017 highs. ²
But, as many in the field say, the money printer is “brrrrrrr”. Global expansionist monetary policies and concerns about fiat inflation have fueled an unprecedented rise in asset values.
Bitcoin and the larger crypto market have reached new heights, reaching nearly $69,000 per BTC and a total asset class market cap of over $3 trillion by the end of 2021. ²
Pandemic liquidity has dried up as of June 20. Central banks are raising interest rates in response to worrying inflation figures, while total investment in the larger crypto market is only $845 billion. ² More worryingly, trends point to a deeper and longer crypto winter, rather than a shorter one, suitable for more mature markets. No doubt this is largely due to the inclusion and speculative frenzy of high-risk startups that are Enterprises account for approximately 50% to 60% of the total digital market capitalization. ²
Altcoins are not entirely to blame, however. The 2018 crash caused a 65% drop in the price of Bitcoin. ⁴ The growth and adoption of cryptoassets has raised regulatory alarms in many countries, followed by questions about the sovereignty of national currencies.
How to avoid market risk?
So, of course, it is risk that drives this excessive downside volatility. And, we are in a risk-off environment. As a result, our young and fragile gardens will first wither in deeply entrenched traditional asset classes.
Portfolio managers are acutely aware of this and need to balance a small portion of crypto investments with more safe-haven assets. Retail investors and professionals often give up entirely at the first sign of a bear market, returning to traditional markets or cashing out. This reactionary strategy is seen as a necessary evil, often at the cost of generating short-term capital gains taxes and risking missing out on major unpredictable reversals, which are preferable to the devastating and prolonged recession of a crypto winter.
Does it have to be this way?
How can an asset class so driven by speculative promises reduce risk to keep interest and investment in the worst of times? Bitcoin-heavy crypto portfolios performed better, with a higher share of the least volatile among the major assets. Even so, with Bitcoin’s correlation to the altcoin market above 0.90, the rise of the most dominant currencies in cryptocurrencies tends to lead to the loss of smaller assets caught in the same storm.
Many people flee to stablecoins in times of crisis, but as the recent Terra disaster proved, they are fundamentally riskier than pegging to fiat currencies. And, commodities paired with tokens are saddled with the same issues as any other digital asset: trust—both in the market and in their organizational entities—regulatory uncertainty and technical vulnerabilities.
No, simply tokenizing safe-haven assets will not provide a stable yang to the volatile yin of the crypto market. When fear is at its greatest, an inverse price relationship, not just neutrality, must be achieved in order to maintain investment in cryptocurrencies and earn reasonable returns that justify the risks inherent in adopting this.
For those willing and able, the inclusion of inverse Bitcoin exchange-traded funds (ETFs) offered by BetaPro and Proshares does provide hedging. However, like taking a short position, accessibility barriers and fees make these solutions less likely to sustain the average investor in a bear market.
Additionally, increasingly regulated and compliant centralized exchanges make leveraged accounts and cryptocurrency derivatives unavailable to many in the larger retail market. ⁵
Decentralized exchanges (DEXs) are limited by anonymity, and the solutions provided for short-selling mechanisms on such types largely require centralized exchanges to work together. And, more importantly, neither solution functionally directly supports value retention in the crypto market.
Are crypto safe-haven assets enough?
The solution to the massive outflow of investment in the cryptocurrency bear market must be found in the asset itself, not in its derivatives. In the medium term, it may not be possible to escape the inherent risks mentioned above. However, regulatory clarification has been promised and debated globally. Centralization and technology risks are finding new mitigations through decentralized autonomous strategies and the participation of increasingly discerning crypto-savvy investors.
Through many experiments and trials, cryptocurrency entrepreneurs will continue to bring real solutions to the forefront. The use of blockchain technology in low-market “defensive” industries such as healthcare, utilities, and purchasing or production of consumer staples will provide an alternative to flying. This development should be encouraged during these uncertain times. Rather, according to the wisdom of the market, such uncertain times should encourage such developments.
However, ingenuity should not be limited to tokenizing weak solutions in traditional markets. It’s a new world with new rules and possibilities. After all, the reverse mechanism of programmatically incentivizing is possible.
Synthetix’s inverse synthesizer aspires to do just that, but the protocol sets a minimum and maximum price, in which case the exchange rate is frozen and can only be redeemed on their platform. ³ Certainly an interesting tool, but unlikely to be used by the larger crypto market. The real solution will be widespread geographically and conceptually. Instead of just providing a dry place to wait out a down market storm, crypto solutions must provide returns that justify the risks still inherent in our developing asset class.
Is there a silver lining in the bear market? Will the survivors of crypto winter emerge in a market where application and adoption are more valuable than speculation? Healthy pruning may be just what our young garden needs; prolonged drought is certainly unnecessary. The downturn in the market is just a problem, and through the clever application of blockchain technology, it is expected to become a solvable problem.
Disclaimer. Cointelegraph does not endorse any product content on this page. While we aim to provide you with all the important information we can obtain, readers should do their own research before taking any company-related action and take full responsibility for their decisions, nor can this article be considered investment advice.
Trevor is a Technical Advisor, Entrepreneur and Principal at Positron Market Instruments LLC. He has advised corporate planning teams in the US, Canada and Europe and believes that blockchain technology holds promise for a more efficient, just and equitable future.
¹ A Brief History of the Bitcoin Bear Market | by Mosaic – Medium
² Total crypto market cap (symbol: CRYPTOCAP): Calculated by TradingView
³ Travers, Garth (19 July 2019). “The reverse synth is back”
⁴ Choudhury, Saheli Roy (January 11, 2018). “South Korea is rejecting the idea of a looming ban on cryptocurrency exchanges”
⁵ Newbery, Emma (August 3, 2021). “Why aren’t there so many cryptocurrency exchanges in the US?”