Bitcoin / "Crypto Winter" or "Crypto Ice-Age?"

What's happening with Bitcoin and Crypto space?

Investopedia defines a “Bear market” as one in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.

Bitcoin touched $68,789 on the 8th of Nov. 2021. As of now, it is trading at $35,036, a decline of over -49%. While this is alarming no doubt to the HODLERS, it comes as no surprise really. Bitcoin is known as a volatile asset and has seen 7 previous bear markets with price declines ranging from -49% to -86%.

What’s different with this time’s correction of $33,753 (and counting) is that it is the largest ever downswing in dollar terms overshooting the previous decline of $33,043 in 2021, that coincided with Elon Musk’s tweet that Tesla would stop accepting Bitcoin as payment. However for the current decline, there is no one specific reason, but multiple factors that have spread a cloud of gloom over Bitcoin and the whole crypto space.

The free fall in crypto current has erased more than 1 trillion dollars in market value. The question being asked among crypto enthusiasts is this over? Or is it a “long crypto winter” or alarmingly a “crypto ice-age?”

What factors are negatively impacting the crypto space.?

· In the Dec. 2021 FOMC (Federal Open Market Committee) meeting, made known the Fed’s hawkish announcement to fasten the pace of paring its bond purchases. This results in a larger number of bonds being available in the market, resulting in lower bond prices. With lower bond prices, the yield or return on bond increases, and thus the money flows away from the stock markets into bonds that are considered safe and risk-off assets. What has this to do with crypto? Before 2020, Bitcoin/Crypto moved independently of the stock markets. However, since then, the correlation is gradually increasing (from .01 to .36 – up 17 times). And thus a rise/sell-off in the stock market has an influence on the crypto space as well. The International Monetary Fund (IMF) warned in its blog post that sentiment in equities and crypto appear increasingly connected, raising the “risk of contagion across financial markets.”

· With the rise in inflation, the Fed has no choice but to raise the interest rates. A Reuters poll showed that the Fed would likely raise its key interest rate three times in 2022, to 0.75-1.00% by end-2022. Rising interest rates, impact crypto as well as other “investing assets” as long-term bets look “less attractive” and investors look for safer investment avenues.

· In 2021, crypto was a hot sector for investing. The overall crypto space saw a record high net inflow of $9.30 billion. With high liquidity chasing a few good investment themes, asset bubbles were formed that saw astounding annual gains ranging from 100-10,000% and 15,00%+ even. Astute investors booked profits and exited with gains, leaving latecomers to hold bags or exit at huge losses.

· The current geopolitical situation is not favorable for “risk-on assets” including Bitcoin and crypto. Russia has a huge military build-up on the border with Ukraine. There is a real fear that with the Russia-Ukraine crisis, Europe is 'close to war' in decades. Any Russian invasion of Ukraine, will divide and destabilize Europe and create economic instability worldwide, in a world battling the covid pandemic as well the China-Taiwan tension.

· The Bitcoin fear and greed index is at 11, showing extreme fear, as many leveraged traders have their accounts wiped off. Many first-time investors would have also cut their losses unable to withstand the large price correction and the currently prevailing negative sentiment.

So the question remains what happens to Bitcoin and crypto from here on?

Whenever there is a great decline in the price of an investment asset, there is a high volume of selling as investors head to the exits. Then there is a long period of low volume as investors stay away and there is little money flowing in for investment. This decreased volume and the lower but stable price is an indication that a bottom is being formed. The process of bottom formation takes time, sometimes weeks, months, or years even.

For long-term investors, it is a time to buy in small tranches in projects they have confidence in without trying to time the market.

Though the news of the interest rates hike and Fed tapering has been factored in, the other key event to watch is the resolution of the Russia-Ukraine issue. A peaceful resolution of which will help create a positive sentiment to Bitcoin and the crypto sector.