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The turbulence of the virtual assets market has become a key challenge for crypto investors in 2022. Digital assets have lost more than USD 2 trillion compared to 2021, with bitcoin losing more than half its value. Bitcoin, the largest cryptocurrency in the world, accounts for about 42% of the total market. The price of one bitcoin is currently hovering around USD 22,000, down 70% from the previous year’s all-time high. Experts note that bitcoin is becoming an illiquid crypto-asset, that is, holders of these assets have long been waiting for a positive trend of price growth.

Instead, the market continues to be bearish and the world’s main cryptocurrency continues its downward trend. Thus, investors are in a dependent position with respect to the crypto market and accept the risk that the price of bitcoin will not meet their expectations. Notably, the world’s first cryptocurrency loses the function of accumulating and preserving value, which was inherent to it in previous years.

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Current trends in the cryptocurrency market and the value of bitcoin

It should be noted that due to global macroeconomic instability, the collapse of the terra USD algorithmic stablecoin, the emergence of centralized lending schemes, and interconnected decentralized finance, the current period of cryptocurrency turbulence has deeper implications for investors.

Owners of the world’s main cryptocurrency prefer a wait-and-see strategy since it is definitely not profitable to sell Bitcoin at the current price. Moreover, the majority of crypto-investors accumulated Bitcoin in order to preserve the value of their funds, and to protect against inflation in the global financial market and the depreciation of fiat money, in particular the US dollar. However, the volatility of the cryptocurrency market does not allow Bitcoin to overcome the declining trend and make a reversal in the direction of growth.

Technical analysis data shows that there were several attempts to reverse the trend in August, when the price of Bitcoin exceeded USD 25,000, however, due to the action of fundamental macro factors, it returned to USD 20,000 again and did not meet the expectations of investors.

A key question for Bitcoin analysts is understanding the factors that will contribute to the growth of the cryptocurrency’s price and the recovery of the virtual asset market. An interesting fact is that the behaviour of crypto holders is different. So, individual enthusiastic investors believe more in the market reversal and actively participate in other crypto projects, such as launchpads, investing in altcoins of new companies, buying NFTs, etc. Instead, institutional players who have invested significant sums of money in digital assets freeze their investment portfolios and take a wait-and-see position.

Analytical data from Chainalysis shows that the number of “illiquid bitcoins” in the global crypto market increased by 73,840 bitcoins in the last week, the largest weekly increase in more than two months. This equates to approximately USD 1.7 billion at recent prices. Additionally, the number of bitcoins held for more than a year increased by an average of 54,300 over the past four weeks, the largest increase in about four months, according to Chainalysis. At the same time, according to Arcane Research, cryptocurrency exchanges saw net outflows for three straight months as investors moved their tokens into cold storage rather than selling.

Individual crypto-investors are also in no hurry to sell Bitcoin, creating a shortage of this currency in the markets. In the long run, this can lead to a decrease in supply, which, as per the laws of the market, will contribute to the emergence of demand and affect the increase in price.

The behavior of institutional bitcoin-holders in the crypto market

Institutional investors, who bought bitcoin last year at a relatively high price of about USD 65,000, expecting it to rise to USD 200,000 per bitcoin, are at the highest risk of losing their investment today. The big players probably caused the cryptocurrency to fall, as they were forced to sell it at a much lower price, clearing their investment portfolios of illiquid assets. So, until August 19, according to Coinshares, the outflow of bitcoins worth more than 9 million US dollars was recorded on the cryptocurrency market. This outflow was caused by the selling of Bitcoin by the big players, which caused the market to decline as there was a large supply of Bitcoin for sale.

On that note, Ed Hindy, chief investment officer at Tyr Capital Partners, pointed to the significant discount between futures prices and the spot price of bitcoin on the CME exchange as further evidence of an institutional decline. According to Arcane Research analysts, the discount for the most popular contract reached an all-time low of 3.36% in August. Other experts, such as the managing director of Swan Advisor Services, noted that his company continues to see interest from financial advisors and their clients in bitcoin investments, despite the ongoing crypto winter.

Conclusion

Thus, a reversal of trend in the cryptocurrency market could be a confirmation for the sector’s biggest supporters. At the same time, it should be a reminder that the market will remain very volatile for the foreseeable future. Therefore, crypto-holders should weigh the risks and remember that after such losses, interest in cryptocurrencies may fall, and the strongest Bitcoin might, over time, show a reversal of the market.

One way or another, the cryptocurrency market has become a global experiment that has highlighted many of the imperfections of the classical financial system and the shortcomings of fiat money circulation, as well as encouraged financial companies to develop on a new technological basis. Time will tell how much this experiment will cost.

References

1. Cryptoverse: Bleeding bitcoin’s holding out for a hero By Lisa Pauline Mattackal and Medha Singh. URL: https://www.reuters.com/markets/europe/cryptoverse-bleeding-bitcoins-holding-out-hero-2022-08-30/
2. Chainalysis. How the Crypto Industry Can Leverage Blockchains’ Transparency to Understand and Prevent Market Contagion. URL: https://blog.chainalysis.com/reports/2022-crypto-market-contagion-defi-web3-risk/

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