Bitcoin, Ethereum and many other top cryptocurrencies have fallen sharply and are now down nearly 50% from their all-time highs. The stock market has also taken a major hit, seemingly related to COVID-19 and inflation. Why there is a continued decline in the cryptocurrency market?
Stocks Pull Back Sharply
The Nasdaq Composite lost 7.6% over the past week, its biggest drop since 2020 and the outbreak.
Some companies that saw huge growth due to working from home, such as Zoom, Peloton and Netflix, saw demand fall back to pre-pandemic levels. While this may be good for society as a whole, it is certainly bad for these stocks and their prices. Netflix shares fell 21% on Friday due to poor earnings.
As society returns to normalcy, so does fiscal and monetary policy. The Fed has been reducing the amount of bonds they buy each month and has signaled a rate hike in 2022, both of which have reduced the appeal of high-growth tech stocks.
Most investors view cryptocurrencies as a high-risk tech-related investment, so it’s only natural that their prices would fall along with tech stocks. In the same week that Netflix fell 20%, the overall cryptocurrency market fell 22% as investors turned to safer assets such as gold, blue-chip stocks and interest-bearing stablecoins.
As long as the tech market continues to crash, it will be difficult for the cryptocurrency market to make new highs. Over time, as the economy continues to recover and investors regain confidence in riskier assets, cryptocurrencies will once again be a popular investment vehicle. It could be as long as a few months, it could be as long as a few years.
Another factor behind the cryptocurrency market’s recent decline is the spread of its 4-year bear and bull cycle. For the past 12 years, the crypto market has followed a steady cycle of a 3-year bear market and a 1-year bull market. There were bull markets in 2014 and 2017, followed by long bear markets. This trend continues in 2021 as cryptocurrencies go mainstream again and hit new all-time highs.
Now, about a year after the bull market began, seasoned investors fear that history will repeat itself, with a “crypto winter” in the coming years.
This possibility becomes even more dire when looking at the price chart from January 2018, which saw the start of a massive bear market, with Bitcoin falling from $20,000 to $4,000.
Whether history repeats itself remains to be seen, and no one really knows what will happen next in the market. Nonetheless, understanding the context and history of market movements is critical to understanding how best to protect wealth.
Even if the cryptocurrency market enters a multi-year slump, the fundamentals will not change, developers will continue to work hard, and blockchain will continue to be adopted globally.