The first half of May 2022 saw cryptocurrency markets caught in a whirlwind. An algorithmic stablecoin ecosystem Terra, worth over $50bn at its April 2022 peak, saw a dramatic collapse. The fall of Terra’s stablecoin, TerraUSD (UST), exacerbated weakness in investor sentiment, causing bitcoin to plunge to $25,000, its lowest level in over 14 months, resulting in the crypto market crash of 2022.
But the most important question that is on everyone’s mind, How long will this bear market last? And can you still make some profits during all this mess? Stay tuned because we’re about to take a deep dive!
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In 2021 cryptocurrency prices surged to new-highs boosted by ultra-low interest rates, growing retail investor base and increased institutional investor participation. By November 2021, BTC hit an all-time high of $68,789.
The rest of the cryptocurrency market followed suit as ethereum, the second largest cryptocurrency, breached its record high level in November 2021 to peak at $4,891.
But, 2022 has introduced a different story. High inflation in the US and globally have forced central banks to step in to tame inflation by reducing cheap liquidity. The US Federal Reserve (Fed) has turned increasingly hawkish as it followed up a 25-basis-point rate hike in April with a 50-basis-point rate increase in May.
Let’s rewind to January 2022, when the non-profit Luna Foundation Guard (LFG) was created to establish a reserve to ensure UST maintains its dollar peg. Fast forward to May 7 and LFG had amassed over 80,000 BTC and other cryptos, including BNB, AVAX, USDT, USDC, UST and LUNA in its warchest.
As UST depegged on 9 May, bitcoin price came under pressure as LFG sold its BTC reserves to support UST’s dollar peg. UST holders, who were once drawn to Terra’s passive income protocol Anchor (ANC) for its 20% interest rate on deposits, started withdrawing their UST deposits in a panicky exit from the Terra ecosystem.
Subsequently, Terra’s native token, LUNA, which is used as a balancing token to maintain UST’s dollar peg via a network of arbitrageurs, plunged from about $64 on 9 May to $0.0001961 by 16 May.
There were also rumours running online that well-funded market players were selling UST in the open market while shorting BTC in a planned move to profit from Terra’s collapse. Cascading effects from the UST crisis engulfed a cryptocurrency market already weakened by difficult macro conditions.
By the end of it all, LFG’s bitcoin reserves were reduced to 313 BTC units. Terra’s LUNA crashed from being among the top 10 most valuable cryptocurrencies, with a market cap of over $40bn at its peak, to fall outside the top 200 list, with a market cap hovering over $1bn. Global crypto market capitalisation slumped over 27% since the start of the month, as of 16 May.
Has the crypto market bottomed out? According to Will Clemente, lead insight analyst at research company Blockware Intelligence, BTC prices are nearing a “generational cyclical bottom”.
Will crypto keep crashing?
Even though Terra’s algorithmic stablecoin disaster grabbed headlines in the recent crash, this cryptocurrency bear market could be driven by global macro conditions.
Over the years, bitcoin has become increasingly correlated with equity markets due to the growing maturity of cryptocurrency markets and increased institutional investor exposure.
What is your sentiment on Bitcoin? Let us know in the comments down below.
During the Fed’s previous rate hike cycle between 2016 and 2019, cryptocurrency markets performance was hardly correlated to the stock markets. Crypto markets may be entering uncharted waters with the latest global monetary tightening cycle.
Will the bear market continue throughout 2022 and when will the crypto market go back up? These are the questions that all crypto enthusiasts are asking while crypto is crashing. Only time will tell. On a bullish note, it has to be said that, historically, crypto assets like BTC and ETH have bounced back stronger from previous crashes.
Grayscale was also positive on the outlook of Ethereum as the network awaits its highly-anticipated move to become a proof-of-stake chain in a move referred to as ‘the Mergeor Ethereum 2.0. Switzerland-based crypto investment firm Bitcoin Suisse wrote in a report :“Ethereum has embarked on an ambitious journey by performing the largest transformation of a blockchain project ever attempted.”
Bitcoin Suisse said developers expect Ethereum’s move to PoS to result in increased network security, reduced energy consumption and a drop in ETH supply issuance.
The Ethereum community has been patiently waiting for the completion of The Merge, which has been delayed several times already. Grayscale added that the community appears “highly committed to the future of the network as the total ETH staked in preparation for the transition to proof of stake continues to increase”.
As of June 2022, data showed total ETH staked stood at all-time high levels of over 12.1 million ETH, representing about 10% of ether’s total circulating supply,
Bitcoin Suisse remarked that while the tightening of ETH supply, as a result of staking, may be good for investors, it will be less beneficial for developers and users of Ethereum as gas fees become more expensive.
Staci Warden, the CEO of Algorand Foundation, believes that the bear market will likely last till the end of the year.
The cryptocurrency market has lost more than 50% of its value over the past eight months, and Algorand executive believes things might not improve in the short term.
She made this known during an interview with CoinDesk TV at the ongoing Consensus 2022 event.
When asked about her thoughts on the ongoing bear market, Warden said;
“Nobody loves the bear market. However, it is an opportunity for the market to separate the weak from the strong. The bear market will last most probably till the end of 2022. Protocols and projects that are meme-based and don’t have real use cases or applications may or may not survive.”
The Algorand Foundation CEO gave a vote of confidence to projects on the Algorand blockchain, stating that she thinks the projects will survive the crypto winter.
Furthermore, Warden stated that Algorand is investing and positioning itself for the long-term future.
Despite the ongoing crypto winter, cryptocurrency events continue to attract thousands of people from all over the world. The sight of people coming from all parts of the world to attend crypto events is a positive one for Warden and she believes people are excited about the projects currently being built within the crypto ecosystem.
So after assessing the current situation and contrasting it with 2018’s, a crypto winter is probably upon us despite the impressive maturity of the dapp industry and the accelerated expansion of the Web3 community.
The macroeconomic situation, coupled with the Terra collapse, might be too much for the crypto market already facing a pullback phase from the Meta bull run. However, due to the level of adoption, the interest in the industry shouldn’t decrease as much as in 2018.
Bitcoin, NFTs, and other cryptos should continue to be demanded as a new class of digital assets with unique economic properties. Also, corporate and government adoption will force lawmakers to work on policies to regulate digital assets bringing headlines to the mainstream media.
Furthermore, it is necessary to consider that the crypto market is composed of cycles. It is unsustainable for any industry to maintain constant growth. Consolidation and capitulation cycles are healthy to create financial stability within the markets. After the Meta hype cycle, a pullback was expected. However, the war in Ukraine triggered a financial crisis at a time when stocks are more correlated to crypto than ever before.
Don’t worry though, because there are many opportunities out there still. We will keep you updated about the latest projects to invest your money to come out profitable even during these tough times.
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