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Where is the crypto market going?

Where is the crypto market going?

Started by the collapse of the stablecoin LUNA, the market sell-off resulted in huge losses for some major players in the crypto market, the biggest being Three Arrows Capital. Its default and bankruptcy had a negative ripple effect on the majority of centralized crypto lending firms, some crypto exchanges, and hundreds of crypto projects and funds.

These events forced the crypto market into a liquidity crunch, caused a major leverage unwind, and a major withdrawal of credit from the ecosystem. However, this is far from the first bloodbath the crypto market has seen.

The main fundamental issues driving market turmoil are not new: currency peg breaks, high leverage, volume-driven lending with insufficient risk management, or term mismatches between deposits. and loans. These market problems have been seen hundreds, if not thousands, of times in traditional financial markets.

Crypto Market Cycles

The crypto market has historically followed a four-year market cycle relatively closely, with exuberant and parabolic market peaks followed by severe and painful bear markets. These market cycles roughly followed bitcoin’s so-called halving events, which are half the supply rate of new bitcoins.

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We are currently coming to the end of the third crypto market cycle with reliable trading prices, with the next bitcoin halving scheduled for April/May 2024. Historically, crypto bull markets have started more than a year before the bitcoin halving event, possibly driven by the anticipation of future supply declines and the completion of the previous market cycle wipeout.

A key aspect of determining where we are in the crypto market cycle is comparing prices against previous bitcoin bear markets and observing market corrections. Although the particulars of each market cycle are different, the dynamics of each cycle are similar.

The maximum decline in the current market cycle has so far been less severe than before. The highs and lows of the crypto market seem to become less extreme over time as the market matures. Given this, we could see the current market maximum decline being less severe than in previous cycles, which could suggest that we may be close to the market bottom.

Where are we in the current crypto market cycle

Blockchain data is one of the data sources that could shed some light on where we stand in the current market cycle. It provides the ability to recognize patterns and behaviors of blockchain users through their transactional data, known as on-chain data. This data usually indicates that the market is in a late stage bear market. The bitcoin mining industry also appears to be in financial trouble, which has historically happened in the late stages of bear markets.

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A more traditional way to access the health of the market is through technical analysis, which attempts to understand at what prices the market is willing to buy and sell. These again point to a late-stage bear market, with many indicators recently hitting record highs and the most oversold conditions ever.

Where is the market going

Overall, analysis of crypto-asset market data, especially data from the bitcoin ecosystem, clearly indicates that the market is currently experiencing an advanced bear market. Whether we have already seen the market bottom or if it is yet to come is never clear until the next bull market has firmly taken hold. Identifying market highs and lows “in the moment” is more of an art than a science.

Nevertheless, the next few months should be volatile with a high degree of uncertainty. The fallout from recent market events, from the collapse of stablecoin LUNA to the bankruptcy of Three Arrows Capital to contagion to numerous centralized crypto lenders, has yet to fully find its way into the system. There may still be unknown events in the shadows waiting to tip the market. If these risks materialize, it could push the market below its June 18 lows.

Beyond these near-term risks, the crypto market is likely to follow previous cycles in the crypto market, relatively independent of broader macroeconomic conditions, unless there is a widespread liquidity crunch that drives sale of all assets. A “U” shaped bottom is the most likely formation with a gradual recovery that could take hold by the end of 2022.

If traditional markets continue to deteriorate, this will lead to a decoupling of crypto markets from traditional markets, with correlations having been trading lower since May 2022. 2023 is likely to be another bright year for crypto, where the next crypto bull market will start to gain momentum.

Peter Habermacher is CEO and co-founder of Aaro Capital


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