4 major factors analyze the reasons for Bitcoin's plunge, and whether the bear market in 2022 is historical

Affected by various business environments and many large-scale institutional events, Bitcoin reached an all-time high of $67,802 in November 2021, and has continued to decline since then, hovering at $20,000 as of June 15, 2022, making new lows.

The recent Bitcoin crash has been the fourth largest decline in the history of cryptocurrency in the 13 years since the scale of cryptocurrency has been scaled. It has also affected the operations of many cryptocurrency companies. For example, Coinbase announced that it will lay off 18% of its full-time employees. Kyle Voigt, managing director at KBW, said the declines reflect a sharp drop in trading activity, and industry players like Coinbase are likely to remain under pressure until that reverses.

Bitcoin crash background: technology stocks plummet, physical experience deteriorates

As the importance of cryptocurrencies gradually increases in the market and the application level becomes more and more extensive, more and more traders on Wall Street are involved in the cryptocurrency market, and the trend of Bitcoin is more and more closely linked with technology stocks.

The Nasdaq has fallen about 23% since 2022, and the S&P 500 has fallen 3.9%, as inflation continues to rise and the Federal Reserve is under pressure to raise interest rates aggressively. , 495 of the 500 constituent stocks closed down, entering a bear market for the first time since 2020, and the trend is still continuing to decline.

Cryptocurrency-related stocks have also been hit hard as prices of cryptocurrencies such as bitcoin plummeted, with Coinbase’s share price crashing 74% since 2022. Under the demand for safe-haven, the highly speculative cryptocurrency has also become the first asset for investors to get rid of.

Not only technology stocks are threatened by inflation, but retail stocks that seem to be less correlated are also affected. For example, the well-known retailer Wal-Mart, in the Q1 financial report, sales increased by 3% year-on-year, and net profit also plummeted by 25% compared with the same period last year. % to $2.05 billion, showing that inflation is indeed highly eroding corporate profitability, and large companies are worried about how to deal with decades of record-high inflation.

Four analysis of the reasons for Bitcoin's plunge

According to data from CoinMarketCap, the total market value of cryptocurrencies peaked at nearly $3 trillion in November last year and was $975 billion on June 13, 2022. The continuous decline has reduced the overall market value of the cryptocurrency market by about $2 trillion, of which The reasons can be grouped into the following four items:

Reason 1. Various "black swan" crash events have repeatedly occurred in the currency circle

The decoupling event of TerraUSD (UST for short) in 2022 can be said to be a very fatal blow to the currency circle.

UST was once the fifth largest stablecoin in the cryptocurrency market, so there are many large institutions holding UST coins. After the incident, UST collapsed in an all-round way, and the market value fell from the highest of more than 18.7 billion US dollars to less than 3 billion US dollars. In the process of saving the market, Luna officially sold a large amount of bitcoin, which also indirectly caused bitcoin. fell.

In the end of the rescue failure, UST, which was originally pegged to the US dollar, almost returned to zero, which not only affected the liquidity of UST, but also affected the market's perception of the decentralized market. The market has found that many emerging technologies are not yet perfected, and the insurance mechanism is not as effective and transparent as imagined, making more people worry about whether the entire DeFi system can still be sustainable.

In particular, in June 2022, Celsius Network LLC, one of the world’s largest cryptocurrency lending companies, said that due to extreme market conditions, it will suspend all withdrawals, swaps between cryptocurrencies and transfers between accounts.

Foreign media reported that Celsius once had more than $20 billion in assets. After the incident, CEL’s stock price plummeted 60% and fell 97% in the past year.

On June 13, 2022, the major cryptocurrency exchange Binance suspended bitcoin withdrawals. Although withdrawals resumed half an hour later, it also shows that the exchange is currently facing de-currency and market panic. It has affected its blockchain network operations.

Reason 2: Inflation hits a record high

The Consumer Price Index (CPI) is a measure of inflation based on changes in the price levels of consumer goods and services purchased by general households.

Affected by the new crown pneumonia epidemic and the blockage of supply chains, etc., the prices of energy and food have soared, and the overall price has risen. The US Department of Labor announced that the consumer price index (CPI) in May 2022 will increase by 8.6% year-on-year, a record high in December 1981. This is the highest record in more than 40 years. Although decentralized finance and the real economy are generally considered to be two systems, market factors will always affect investment sentiment.

The Fed hopes to respond to the challenge of soaring prices with a "soft landing" approach, that is, to reduce high inflation without causing an economic recession. Possibly, the sharp drop in Bitcoin also challenges the value preservation of the so-called digital gold.

Reason 3: The Federal Reserve (Fed) raises interest rates

In order to curb inflation since 2022, the Federal Reserve (Fed) has begun to gradually raise interest rates, but as of June 2022, the effect is still limited, and the highest inflation rate in history will still appear in May 2022, exceeding the expectations of officials. must also change to more aggressive monetary tightening,

Some investment banks, including Goldman Sachs, are now forecasting that the Fed will raise rates by 75 basis points in June and July, and by 50 basis points in September, according to Reuters. TD Securities also predicts that the Fed will raise interest rates by the same amount in June and July, and whether the actual rate hike will also depend on the direction of the market.

Reason 4. Global market expectations are pessimistic

According to a Bank of America Global Research survey, the bank asked more than 260 investors with assets under management of about $750 billion whether the economy would strengthen, and a net negative 73 percent said it would not.

Since the beginning of the new crown epidemic and the bursting of the Internet bubble, the market has been pessimistic, but the current situation is more severe, and investors have the most pessimistic view of the world economy in nearly 30 years. Coupled with chaos such as the Ukraine-Russian war, market investors have become more conservative in their decision-making. The former cryptocurrency star has also caused Bitcoin to plummet amid pessimism in the market.

While the majority of respondents believe that inflation will decline next year, the actual inflation rate remains high by historical standards under the inflation trend.

When will the Bitcoin crash end?

In the face of a bear market, many people will think about when will the decline end? First of all, the advantage of virtual currency is that it is not completely linked to the real economy, but so are the disadvantages. The real economy has its cycles, but the virtual currency does not. The bear market may last for a very long time. For example, after Bitcoin fell sharply in early 2018, it will not officially recover until the end of 2020, and it will take more than two years in between.

In a long bear market, we can only find ways to hedge. Investors have been dragged down by their holdings of stocks and bonds, and their assets have shrunk significantly, and they have raised cash by selling mainstream cryptocurrencies with good liquidity. At the same time, stocks and bonds have been affected by the global climate, which has also led to a sharp drop in the trading demand of many investors in the cryptocurrency market.

With the exception of commodity products that have surged due to inflation, almost no asset class has been spared. It is recommended that investors remain conservative in this storm and gradually return to the trading market after the economy and the external environment pick up.

This article was also published in Daily Coin Research: Analysis of the Reasons for Bitcoin's Crash ｜ 4 Factors Dismantling When Will the Bear Market End?

Daily Coin Research is a self-media brand founded by writers from Taiwan and Hong Kong. We are committed to conveying the difficult and difficult knowledge of blockchain and cryptocurrency to more people. Currently, the main social platform For Instagram, welcome to follow us @crypto_wesearch