You don’t have to be a crypto specialist to know that digital currencies are well-known for their berserk price swings. In their short history, they’ve gone through multiple bear and bull market cycles, or as crypto enthusiasts call them, hot summers and frigid winters. Well, it looks like Winter is here, again. The last bear market began in 2018 and lasted around two and a half years. Over the last few months, cryptocurrency prices have dropped again due to the growing inflation and recession concerns. It’s clear for crypto investors that the market is heading to another extended frigid winter, and the next few years will be rough for some coins and investors. However, it doesn’t mean that the crypto industry will lose its popularity because new high-quality founders and new software developers are joining it. It’s the first time in the history of digital currencies when they exist together with Web3 in a macroeconomic crypto winter, and it’s interesting to witness what it’ll mean for them.
What is a bear market?
A bear phase develops when the crypto prices decrease considerably over an extended period. It’s usually a period in which the value of assets falls by more than 20%, often characterised by poor market sentiments and widespread pessimism. However, seasoned investors aren’t worried about the effects it has in the long run because they know that financial markets often go through reset periods after they register record-breaking performances.
If you look at the market’s evolution over the years, you’ll notice that crypto winters often coincide with big declines in the industry. At the moment, Ethereum and Bitcoin are the market’s leaders, and all the other digital currencies are looking to them to set the tone.
Digital currencies are classified as being in the bear market when they register a 20% decline over a period of two months or more. Crypto winters are usually connected with significant economic downturns like the growing inflation we’re experiencing right now or the upcoming recession. They contrast to hot summers when the markets are heading higher, and all assets perform well.
What you should know about bear markets
If you intend to enter the crypto market during the bear phase, you might want to increase your knowledge about it because, according to experts, these stages last around 18 months. However, the financial markets even experienced secular bear phases that lasted over 10 years and were characterised by returns below the market average. However, the crypto industry is highly volatile, and changes could happen every hour. When a cryptocurrency’s growth prospects are dashed, its price immediately declines. And because the crypto market is also characterised by herd behaviour, all the other digital coins connected to it register a similar decrease. It’s a domino effect that can only lead to poor returns and a prolonged period of asset price deflation.
Even if the definition states that the crypto market enters the bear phase when the digital currencies decline by 20% from their high, even a 10% decrease can have a negative impact on their evolution.
What factors cause a bear market?
Now that you know what a bear market is, let’s learn more about the causes that lead to its development. As mentioned above, the bear market usually strikes before or after the recession, but it’s crucial for crypto investors to closely monitor essential indicators such as interest rates, inflation, wage growth, or hiring because they show how healthy an economy is. For example, during the pandemic, the closures and social distancing triggered several economic restrictions, and the economy faced numerous unemployment claims. These symptoms showed that the economy was in danger, so cryptos entered a bear market.
If crypto investors see the economy declining, they expect a sharp decline in their profits and are more reserved in their investing strategies. Bear markets often foretell challenging economic circumstances and unemployment, so investors prefer to safeguard their wallets.
Why is this crypto winter different from the previous ones?
Digital currencies experienced a brutal comedown over the last few months, losing over $2 trillion in value compared to their highest moment in 2021. Even Bitcoin price dropped 70% from the all-time high it registered in November 2021. The present circumstances have made specialists wonder if the industry isn’t heading to a prolonged crypto market, like the event from 2017-2018. But there’s something different about this bear market that makes it challenging to predict how it’ll go. Several events caused the development of the last downturn in crypto, and they all suffered due to their interconnected nature. Research shows that a hype bubble caused the 2017 crash because enthusiastic investors poured money into crypto projects, and several failed. However, the present downturn results from rampant inflation and other macroeconomic factors that made central banks increase interest rates. Cryptocurrencies like Bitcoin and Ethereum have been closely correlated to other assets, and their values dropped when the Nasdaq fell by more than 20%.
It’s challenging for someone to predict when the market turbulence will come to an end, but analysts expect crypto projects to experience some pain in the following months. They believe crypto miners and exchanges will be the next pieces in the domino to fall. The crypto market is a crowded place, and because some exchanges rely on the economies of scale of the ecosystem, they’re most likely the next casualties. However, established players won’t be as impacted by declining markets as smaller ones because they have higher trading volumes.
What does the bear market mean for Bitcoin?
Bitcoin also suffers in the bear market as it experiences a death cross. As of this writing, it’s in a green zone, but its value dipped below its average a couple of times over the last few months. However, it’s uncertain if Bitcoin will maintain this pattern or fight back and consolidate its position in the market. Yes, the crypto market is dealing with some unusual conditions, but experts think it’ll have a better period in 2023.