Turbulence, Challenges, and Hints of a Thaw

Crypto Market trends in 2022 painted a grim picture for investors. Digital assets hemorrhaged over USD 2 trillion in value, with Bitcoin, the dominant figure holding 42% market share, plunging more than 65% from its 2021 peak. This bear market, dubbed the “crypto winter,” echoed the 2017-2018 episode but with deeper scars. Global economic woes, the terraUSD fiasco, the rise of centralized lending, and intertwined DeFi amplified the turbulence, leaving investors facing a colder winter than before.

The historical context of the 2018-2022 trend and cyclicality of the market

Crypto’s volatility isn’t news, mirroring financial markets throughout history. Bitcoin’s 2017 skyrocket and subsequent 2018 plummet highlight this. Back then, hype-fueled ICOs (promising 6% monthly returns!) flooded the market, leading to a bubble burst and crash. 2022’s decline, however, runs deeper. Rampant inflation and rising interest rates in major economies cast a long shadow, tightening investor belts. Moreover, crypto’s increasing correlation with the stock market, coupled with lenders’ reliance on hedge funds and risky leveraged trading, amplified the turbulence. This isn’t just another bubbleburst; it’s a complex storm in a maturing and interconnected market.

Read more on how to get a Crypto license in Hong Kong

The key challenges of 2022 destabilization of the crypto market

In addition to the mentioned factors, the destabilisation of the TerraUSD (UST) stablecoin, which was an algorithmic stablecoin, a type of cryptocurrency with a direct one-to-one peg to the US dollar, was an important factor in the current downturn in the crypto market. UST’s loss of its peg to the dollar led to the complete collapse of its sister token luna, and millions of crypto-investors got significant losses overnight, including hedge fund Three Arrows Capital.

In addition, losses were provoked by high-risk trading strategies with high leverage. Crypto investors have amassed huge leverage thanks to the emergence of centralized lending schemes and “decentralized finance” (DeFi), a general term for financial products developed on the blockchain. But the nature of leverage in this cycle was different from 2018. 

The Impact of Leverage, DeFi Ventures, and Market Trends on the Crypto Winter

According to Martin Green, CEO of Cambrian Asset Management, in 2017, leverage was provided to retail investors through derivatives on cryptocurrency exchanges. When cryptocurrency markets crashed in 2018, positions opened by retail investors were automatically liquidated on exchanges because they could not meet margin requirements. Instead, in 2022, leverage was provided to crypto funds by retail cryptocurrency investors investing for profit. High credit risks in the context of falling market prices in the second quarter of this year led to the fact that funds, lenders, and other traders became forced sellers due to margin requirements. Failure to meet margin requirements led to further contamination of the crypto market.

The crypto winter bite deepened thanks in part to high-risk DeFi ventures promising unsustainable returns. Celsius, offering a tantalizing 18% on deposits, halted withdrawals in December, its liquidity woes mirroring a halted bank run in the crypto world. Similarly, Singapore’s Three Arrows Capital, heavily invested in the doomed Luna token, defaulted on a margin call and spiraled into bankruptcy after UST’s collapse. These DeFi blowups, emblematic of wider crypto market trends towards risky bets, amplified the downturn’s severity, leaving investors facing a long, cold crypto winter.

Current trends in crypto market volatility – what awaits us?

At present, it remains unclear when the turbulence in the crypto market will finally settle down. However, analysts distinguish two main forecasts: Pessimists warn of dominoes toppling, with crypto companies buckling under debt pressure and customer withdrawal woes. James Butterfill of CoinShares sees exchanges and miners teetering on the brink. Even stalwarts like Coinbase haven’t escaped the icy grip, slashing 18% of their workforce and facing dwindling trading volumes. Rising energy costs threaten to further chill the climate, potentially crippling mining processes and reshaping the market’s infrastructure. Whether this winter deepens or hints of spring whisper on the horizon, one thing is clear: the crypto landscape is in for a transformative upheaval.

Crypto Market Hints at a Thaw: Prices and Stocks Surge

A wave of optimism has washed over the crypto market, defying recent bearish predictions. Leading cryptocurrencies like Bitcoin (up 15%), Solana (up 35%), and Ethereum (up 45%) have witnessed significant gains in the past week. Even Coinbase, a major crypto exchange, saw its market cap rise by 9%. This upswing extends beyond established players, with mining companies like Marathon Digital (up 50%) and Riot Blockchain (up 40%) enjoying notable hikes. Traditionally cautious institutions like banks are joining the dance, with Silvergate Capital and Signature Bank exceeding analyst expectations in their recent earnings reports.

However, this potential thaw doesn’t mean every corner of the crypto landscape is bathed in sunshine. Celsius, a crypto lender, filed for bankruptcy earlier this month, highlighting the ongoing risks within the decentralized finance (DeFi) space. Despite this cautionary tale, the overall market sentiment appears to be shifting toward potential recovery, with even giants like FTX stepping in to offer financial support to other struggling companies. With this mix of cautious optimism and bold moves, the crypto market seems poised for an interesting new chapter.

Conclusion

Thus, a reversal of the trend in the cryptocurrency market can be a confirmation for the biggest supporters of the sector. At the same time, it should serve as a reminder that the market will remain highly volatile for the foreseeable future. Therefore, crypto-investors should weigh the risks and remember that after such losses, interest in cryptocurrencies may fall and the strongest tokens with a good technological basis for projects will grow. One way or another, the cryptocurrency market became a global experiment that highlighted many imperfections in the classical financial system and the shortcomings of fiat money circulation, and encouraged financial companies to develop on a new technological basis. Time will tell us how much this experiment will cost.

References

1. CNBC (2022). This ‘crypto winter’ is unlike any downturn in the history of digital currencies. Here’s why by Arjun Kharpal & Ryan Browne. – Published Wed, Jul 13, updated The Jul 14. URL: https://www.cnbc.com/2022/07/14/why-the-2022-crypto-winter-is-unlike-previous-bear-markets.html
2. CNN Business (2022). Markets now. Crypto is making a big comeback. Will it last? By Paul R.La Monica, July 19, 2022. URL: https://edition.cnn.com/2022/07/19/investing/bitcoin-cryptocurrencies-stocks-coinbase/index.html
3. Coinamrket cap (2022). Today’s Cryptocurrency Prices by Market Cap. URL: https://coinmarketcap.com/currencies/coimatic-3/

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