Here’s how the cryptocurrency market can overcome its macroeconomic woes

Cryp­to investors are tread­ing a tightrope this year, which looks to extend into the longest bear cycle in cryp­to his­to­ry. This anx­i­ety may seem worn out for cryp­to vet­er­ans, but have we entered com­plete­ly new ter­ri­to­ry this year?

First, let’s estab­lish the prop­er point of ref­er­ence by revis­it­ing past bear cycles man­i­fest­ing through Bit­coin price falls.

Bitcoin’s Bear Road Examined

At 13 years and 8 months old, Bit­coin is now enter­ing ado­les­cence. Up until Feb­ru­ary 2017, Bit­coin held 95% total cryp­tocur­ren­cy mar­ket cap dom­i­nance, which has since fall­en to 40%, as of Sep­tem­ber 2022. In oth­er words, for 62% of the entire cryp­to mar­ket exis­tence, Bit­coin has com­plete­ly dom­i­nat­ed the scene.

This may change as Ethereum com­pletes its tran­si­tion from proof-of-work to proof-of-stake. How­ev­er, even at below-half dom­i­nance, Bit­coin is still the dom­i­nant cryp­tocur­ren­cy. Yet at the same time, the entire cryp­to mar­ket moves with Bitcoin.

For this rea­son, it is impor­tant to see how long pre­vi­ous bear cycles have last­ed. Bear in mind that the asset has to decline by at least ‑20%, fol­lowed by very neg­a­tive mar­ket sen­ti­ment, to con­sti­tute a ‘bear mar­ket’ in the tra­di­tion­al sense.

1. In June 2011, Bit­coin under­went its first bear tur­moil, crash­ing from $32 to $2.
   Dura­tion: 163 days at a ‑93% decline.
2. In Novem­ber 2013, Bit­coin crashed for the sec­ond time, just as it crossed the $1,000 mile­stone for the first time, drop­ping to $230. Dura­tion: 410 days at an ‑86% decline.
3. Recov­er­ing from the sec­ond bear cycle in Jan­u­ary 2017, Bit­coin reached all the way up to $20k, but crashed in Decem­ber 2018 at $3.2k. Dura­tion: 411 days at an ‑82% decline.
4. After recov­er­ing the pre­vi­ous $20k mile­stone, Bit­coin got to $63k in April 2021. Short­ly after, it con­tin­ued a three-month slide to $29k. Dura­tion: 90 days at a ‑54% decline.
5. Reach­ing ATH in Novem­ber 2021 at $68.7k, Bit­coin went under $20k sev­er­al times dur­ing 2022 for the first time since Novem­ber 2020. Dura­tion: Ongo­ing, but so far, over 309 days at ‑72% decline.

Although there were monthly/weekly ral­lies, they were short-lived. They were either spurred by insti­tu­tion­al adop­tion mile­stones or cryp­to whales’ shop­ping sprees. Typ­i­cal­ly, bear mar­kets in the tra­di­tion­al stock mar­ket last for 289 days.

How­ev­er, not only has the cryp­to mar­ket exist­ed for a frac­tion of the time­line of the tra­di­tion­al equi­ties mar­ket, it deals with nov­el dig­i­tal assets. For this rea­son, the pro­jec­tion for the end of the fifth bear mar­ket should take into account its main drivers.

What Drives the Current Crypto Bear Market?

For­tu­nate­ly, it is exceed­ing­ly trans­par­ent why total cryp­to mar­ket cap­i­tal­iza­tion shrunk by ‑53% dur­ing 2022. It’s all about the Fed­er­al Reserve’s liq­uid­i­ty pool man­age­ment. Since the pan­dem­ic-fueled eco­nom­ic slow­down, which kicked off in March 2020, the Fed pumped the econ­o­my to the tune of $5 tril­lion, the largest stim­u­la­tive increase through­out the his­to­ry of the dollar.

While this liq­uid­i­ty over­flow found its way into cryp­tocur­ren­cies, DeFi, and NFTs, the ugli­er side began to rear up its ugly head – infla­tion. The Fed’s stat­ed dual goal is to keep both infla­tion and unem­ploy­ment low. After the Con­sumer Price Index (CPI) climbed to 8.5% in March, the Fed used its fed­er­al funds’ rate tool to make bor­row­ing more expensive.

In March, the measly Fed hike was only 25 bps. But, at the hint of dou­bling it from April to May, both stocks and cryp­tocur­ren­cies went into a down­ward spi­ral. Add two addi­tion­al 75 bps hikes in June and July, and the cryp­to mar­ket kept col­laps­ing, one sup­port lev­el at the time.

There is a valu­able les­son to be learned here about the nature of dig­i­tal assets, specif­i­cal­ly Bit­coin. Peo­ple may talk as if Bit­coin did that or the oth­er thing, reify­ing it as an enti­ty. How­ev­er, when all is said and done, Bit­coin is noth­ing more than a plat­form for human input.

And humans’ reac­tions align with the largest movers, the more heav­i­ly cap­i­tal­ized stock mar­ket. In turn, the stock mar­ket is in an addic­tive rela­tion­ship with the Fed for its cheap bor­row­ing sup­ply. More­over, Bit­coin is not a hedge against infla­tion as such but against the dol­lar demand.

When the Fed start­ed turn­ing its dol­lar liq­uid­i­ty spig­ot, it made the dol­lar more valu­able because oth­er coun­tries depend on it. There­fore, oth­er coun­tries must buy more dol­lars against their devalu­ing nation­al cur­ren­cies. This was amply demon­strat­ed by Sri Lanka’s col­lapse when it ran out of for­eign USD reserves.

Fur­ther­more, after Europe sanc­tioned Rus­sia, it engulfed itself into a severe ener­gy cri­sis, col­laps­ing the euro under the dol­lar, for the first time in twen­ty years. Mir­ror­ing this, Bit­coin exchange flows have sunk to mul­ti-year lows.

Con­se­quent­ly, although the dol­lar sup­ply increased, spik­ing infla­tion, its inter­na­tion­al demand is unre­lent­ing. It is now clear that Bit­coin, as the van­guard of the cryp­to mar­ket, is ill-equipped to deal with a strength­en­ing dol­lar despite infla­tion – or is it?

Space for Optimism in Emerging Markets

It may seem that the cryp­to mar­ket is at the mer­cy of the Fed­er­al Reserve, specif­i­cal­ly, how the cen­tral bank’s action affects the stock mar­ket and the dol­lar. It may appear that the Fed has reset the cryp­to mar­ket already. How­ev­er, based on Chainal­y­sis’ recent report on glob­al cryp­to adop­tion across 154 coun­tries, the grass­roots adop­tion index is still above the sum­mer of 2020’s bull market.

The data also sug­gests that many big investors have not real­ized their loss­es. This is pre­vent­ing the cryp­to mar­ket from fur­ther price sup­port col­lapse. On the fiat infla­tion­ary front, the news is even bet­ter. The most like­ly investors to pur­chase cryp­tocur­ren­cies stem from coun­tries that were struck by the dollar’s strength.

How­ev­er, for the next wave of cryp­to investors to lift the mar­ket out of the bear’s clutch­es, much work has to be done in the edu­ca­tion depart­ment. On aver­age, Gemini’s sur­vey respon­dents count on edu­ca­tion­al resources twice as much as a friend’s recommendation.

The most com­mon con­cerns are cus­tody secu­ri­ty, how to use/buy with cryp­tos, trust, and lack of gov­ern­ment back­ing. Such con­cerns are resolv­able through edu­ca­tion. In turn, volatil­i­ty con­cern too is self-resolv­ing via increased adoption.

Regulatory Clarity

In addi­tion to edu­ca­tion, over one-third of Gemini’s cryp­to-curi­ous respon­dents (not yet own­ing but will­ing) have stat­ed that reg­u­la­tion is a major con­cern. This includes tax treat­ment and cat­e­go­riz­ing dig­i­tal assets as either com­modi­ties or securities.

The Secu­ri­ties and Exchange Com­mis­sion has been tak­ing advan­tage of the reg­u­la­to­ry void in the US, imple­ment­ing a “reg­u­la­tion by enforce­ment” pol­i­cy. In the mean­time, Gary Gensler, the SEC Chair, has allud­ed sev­er­al times that only Bit­coin and Ethereum should be regard­ed as com­modi­ties, which would then be under less bur­den­some CFTC supervision.

“Of the near­ly 10,000 tokens in the cryp­to mar­ket, I believe the vast major­i­ty are secu­ri­ties. Offers and sales of these thou­sands of cryp­to secu­ri­ty tokens are cov­ered under the secu­ri­ties laws.”

Gary Gensler at Prac­tis­ing Law Institute’s SEC Speaks conference

Like­wise, Ter­ra (LUNA)’s col­lapse could give leg­is­la­tors the ammo need­ed to impose strict reg­u­la­tions on dig­i­tal assets. This is like­ly to come from the FATF guide­lines, which rec­om­mend all cryp­to trans­ac­tions to be trace­able and reportable. Specif­i­cal­ly, from non-cus­to­di­al wal­lets to cen­tral­ized exchanges.

Whether these mea­sures are pos­i­tive or neg­a­tive, reg­u­la­to­ry clar­i­ty itself would remove a major road­block to glob­al cryp­to adop­tion. As an extra bonus, it would remove the “lack of gov­ern­ment back­ing” off the con­cert table. Giv­en Pres­i­dent Biden’s March exec­u­tive order on the “respon­si­ble devel­op­ment” of dig­i­tal assets, 2023 is like­ly to be the deci­sive year for cryp­to regulation.

If reg­u­la­to­ry clar­i­ty takes place, the scene is already set for wide­spread insti­tu­tion­al adop­tion. Black­Rock, the world’s largest asset man­ag­er han­dling $9.4 tril­lion assets, picked Coin­base to be its cryp­to inter­face for poten­tial­ly hun­dreds of ETFs. We already know that Bit­coin ETFs are grow­ing in pop­u­lar­i­ty because they leave cus­tody in insti­tu­tion­al hands.

Play-to-Earn (P2E) Gaming and NFTs

P2E games and NFTs go hand in hand. In fact, blockchain gam­ing may be the biggest dig­i­tal asset dri­ver of them all. Accord­ing to the Chainal­y­sis report, Viet­nam ranks first among grass­roots cryp­to adoption.

This is no acci­dent. Viet­nam, specif­i­cal­ly Ho Chi Minh City is the home of Sky Mavis, the team behind Axie Infin­i­ty. This tac­ti­cal NFT-pow­ered game broke all rev­enue records and set the stage for oth­er blockchain play­ers yet to appear. In Viet­nam alone, it turned the coun­try into a cryp­to start­up hub. Many areas of the Philip­pines have also seen sim­i­lar adop­tion of blockchain gaming.

This trend aligns with Q2 2022 invest­ments, where cryp­to gam­ing account­ed for 59% of all VC-fund­ed projects. In August, Meta, the king of all things social, inte­grat­ed its Insta­gram NFT fea­ture across 100 coun­tries. If there is a bet­ter set­up for a dig­i­tal asset infra­struc­ture, it would be dif­fi­cult to find a bet­ter one.

Speak­ing of infra­struc­ture, Ethereum is yet anoth­er one that is spear­head­ing the entire DeFi/NFT ecosys­tem. Although post-Merge, Ethereum will remain slow until the Surge, it has its lay­er 2 scal­a­bil­i­ty solu­tion – Poly­gon. The sidechain already racked up an impres­sive range of busi­ness part­ners: DraftK­ings, YugaL­abs, Dis­ney, Stripe, Red­dit, Meta, and Starbucks.

Zooming Out for a Better Crypto View

The Fed may act as the world’s cen­tral bank. Its tools flood or drain economies with liq­uid­i­ty, affect­ing the cost of liv­ing and the cost of doing busi­ness. Nonethe­less, this is just sig­nal­ing infor­ma­tion. The real-world assets are in place to start churn­ing anew.

In the cryp­to world, these assets include unabat­ed VC-backed projects, cor­po­rate blockchain inte­gra­tion, and the merg­er of Web2 and Web3 plat­forms (Twit­ter, Red­dit, Meta, etc.). Even neg­a­tive­ly-received reg­u­la­tion is like­ly to turn into a pos­i­tive if it clears the fog of uncertainty.

For these rea­sons, we come full cir­cle to War­ren Buffett’s invest­ing axiom, “fear­ful when oth­ers are greedy, and greedy when oth­ers are fearful”.