Can crypto market crash and recover? The crypto market has had a good run last year and has seen a lot of crypto companies such as Coinbase go public as well as an increased institutional participation in it from Wall Street banks such as Goldman Sachs.
If you consider Bitcoin only, over the years it has risen in value consistently and since the start of 2021 till date it has risen approximately 700% in value.
This coin alone is the one that drives the whole crypto market to its current combined value of more than $2 trillion.
With an aggregate value of up to $2.14 trillion, in the entire 2021 the crypto market saw a lot of investors driven by the DeFi or Decentralized Applications, the rise of NFTs or Non-Fungible Tokens, and enormous potential for blockchain-based games in the Metaverse.
It has also seen life-changing gains in some meme coins such as Shiba Inu with more than 45,000,000% year-to-date increase in its value.
Add to that, it has also witnessed the approval of the first US Exchange Traded Fund linked to Bitcoin.
However even after considering all these aspects, the upcoming year may not be as kind to crypto as the last year was.
This is because with all these came stricter regulatory scrutiny, which experts believe has resulted in the intense price fluctuations of the crypto assets thereby dampening their prospects of late.
In fact, they believe that there will be a sharp decline in the prices of crypto coins in the future, which may even result in a complete crashing of the market in 2022.
Can Crypto Market Crash and Recover?
If you go by the records, in November last year, the price of Bitcoin moved up to a new high of approximately $69,000 but now it is well under $50,000.
This means that the prices of crypto coins have dipped almost by 30% from its peak which is much more than what Wall Street wisdom defines a bear market as, which is a 20% fall or more from recent highs.
Few experts like Carol Alexander, who is a professor of finance at Sussex University, believe that the price of Bitcoin in 2022 will hit as low as $10,000.
This will virtually wipe out all the gains it has made within a year and a half.
She feels that prudent crypto investors should pull out thinking that Bitcoin will crash sometime soon this year and will lose all its basic value to become just a ‘toy’ rather than an investment.
The crypto market analysts and experts believe that history would repeat itself and just as it happened in 2018, the price of Bitcoin may reach even below $3,000.
However, the only silver lining is that more and more institutional investors are entering the market which might make things a bit different this year.
Still, they feel that crypto may not be considered as a good alternative hedge against inflation in 2022 because the Federal Reserve, with its hawk-eye supervision and stricter control, may soon take away the wind beneath the wings of Bitcoin.
They also say that the liquidity tide is losing ground and the conditions are coming to an end which may harm the asset class disproportionately that is already overvalued.
However, crypto can recover a fall, and pretty quickly at that, and therefore there is no reason to believe that the crypto party will cease to exist in 2022.
There are a few good reasons to say so, of course with some risk-riders.
One good reason is the approval of the first spot Bitcoin ETF in the United States.
However, it is not considered to be retail-friendly or risk-free for the novice traders since it is linked with Bitcoin futures contracts and does not give direct ownership of the coin itself.
Another good reason is the DeFi which has helped the crypto industry to evolve even when Bitcoin has waned.
This has enabled other crypto assets such as Ethereum, Solana, Cardano, and Polkadot to play a larger role.
This is expected to continue in 2022 and investors will look for smaller projects to invest in and make bigger gains.
With DeFi poised to re-establish conventional financial products without any intermediary, DAO has the potential to become the new internet community.
This will prove to be one of the higher growth areas in crypto being the part of a broader new tech called Web3.
This movement asks for a new and more decentralized iteration of the internet that surrounds blockchain and crypto technologies such as NFTs.
Understanding Crypto Value
The value of cryptocurrency seems to have a rollercoaster ride since its existence, rising and falling steeply.
For example, if you consider Bitcoin, the ride was like this according to the records:
- 16 December 2020 – Hits $20,000 for the first time
- 13 April 2021 – Hits record high of $63,375
- 22 June 2021 – Falls below $30,000 for the first time in 5 months
- 2 August 2021 – Rises up to $40,000
- 23 August 2021 – Increases further crossing the $50,000 mark
- 20 October 2021 – Reaches $67,000
- 27 October 2021 – Falls down to $58,000
- 10 November – Hits record high of $69,000
- 4 December – Falls down to $42,000
- 1 January 2022 – Begins a new journey with a value of $46,208.
So, the prices of crypto coins, as you can see, are pretty unpredictable.
The primary reason for it is the news stories which have both a positive and negative effect on the value of crypto coins.
However, you may wonder why the price falls so drastically. Well, there are several reasons.
Understandably, the primary reason for the fall in price last year was due to the uncertainties raised by the COVID 19 pandemic.
But, add to that, the other reasons for such dramatic prices swings in crypto coin prices, both upward and downward, are:
- Inflation rate
- Regulation and its anticipation and
- Negative and positive stories.
You may have some understanding about the effects due to inflation and regulation but the effects on crypto value due to negative and positive stories may need some further explanation.
The negative stories surrounding the crypto market and its assets may involve anything from the regulation to celebrity culture, opinions of the experts and activities of major players.
For example, stories that can affect the price of crypto assets to fall include:
- Elon Musk declaring in May 2021 that Tesla would not accept crypto payments any longer due to concerns over the environment
- The ban from the Chinese government on trading and mining Bitcoin
- Donald Trump describing Bitcoin as a scam
- UK banks blocking payments to the crypto exchanges
- FBI agents seizing Bitcoin worth millions of dollars from criminals
- Financial watchdog of UK, Santander, and HSBC blacklisting Binance and
- IMF warning countries using crypto as legal mode of payment on the harm it may cause to financial integrity and macroeconomic stability.
Another significant incident that raised concerns over the safety and security of the crypto assets and its operational platforms is the crypto heist on Poly network by crypto hackers.
They took away more than $600 million worth of coins in August but returned more than a third of it after 4 days.
They claimed that they did it for fun and just to expose the vulnerability of the entire system!
The positive stories also affect the value of the crypto coins and push it upwards. Some of these are:
- Morgan Stanley is the first US bank to allow access to Bitcoin funds to their wealthier clients only but limited to 2.5% of the total net worth of the investor in March 2021
- Elon Musk saying in June last year that Tesla is again planning to accept Bitcoin payments if it uses renewable energy of at least 50% of the total resources
- The Amazon ad post for a job for a ‘Digital Currency and Blockchain Product Lead’ which prompted speculation among the users that it will accept crypto payments soon and
- Bitcoin has become a legal tender in El Salvador from 7 September.
Whether these stories are true to the last word is a matter of debate but it surely affected the value of a crypto asset pushing it either upward or downward.
When the price of a particular crypto asset rises very quickly, this typically indicates a likelihood of a crash.
If not, it will at least result in a market correction as and when the value of the coin comes down to the ‘normal’ level, though it is hard to tell who actually determines this ‘normal’ level and how it is done.
This is the condition with Bitcoin right now.
If you look at the price history, you will see that it took almost 11 years for the coin to reach a high value of $20,000 per coin, but from there, it only took 3 weeks to reach up to almost double the value.
And, as said earlier, in the past 12 months it has soared to a 700% increase in value.
Given this rate, it is quite impossible to say where it is heading and when it will crash.
Reasons to Crash
The crypto market and the prices of crypto coins crash due to several reasons which are much different from those mentioned above as well as those in the earlier days of cryptocurrencies.
A reversion following big upswings is a common occurrence in the crypto circuit as history suggests that the market itself is in trouble.
According to reports, the value of crypto coins in the market soared by more than 14-fold and reached up to 2.14 trillion dollars from its bottom in March 2020.
This is almost similar to the jump the crypto industry witnessed between March 2017 and January 2018 which was about 35-fold in just 10 months.
However, after the rise in prices of crypto coins in January 2018, the prices once again reached a new low.
This time the aggregate value of all crypto coins was down by just a tad less than 90% of the peak value in just about 11 months till December last year.
Similar reversions were witnessed for the individual crypto coins, some of which experienced life-changing gains.
For example, crypto coins such as XRP, Nano, and Litecoin experienced a price variance from about 24,000% to approximately 462,000%.
However, all these indicated a loss of 93% to 99% of the original value in aggregate within a period of 12 months to 26 months.
Lack of blockchain adoption:
The future potential of blockchain causes a euphoria among the users that outpaces the use case, and they have all the right to be so excited about it.
This is because DeFi offers them an opportunity to make cross-border payments almost instantly and that too at a very low cost.
This also allows the smaller and merging market sector to take part in it since it democratizes the process.
Apart from that, the supply chains can also exploit the potential of blockchain by making the best use of the smart contracts based on this technology that has revolutionized the payments systems.
However, in spite of being the next big thing in technology, a large number of investors are still reluctant to adopt this new service or technology.
It is the case always as the world saw it happen with the internet, B2B commerce, 3D printing, and genomics.
Therefore, until and unless it shows real-world use cases and effectiveness businesses are highly unlikely to jump in and support large-scale blockchain projects.
Stock market decoupling:
Another significant reason that the crypto market may crash in 2022 is its failure to decouple it from the stock market.
It is true that the crypto assets are considered to be a separate asset class with a store of value that can act as a hedge against inflation due to its limited supply and immutability concept.
However, the problem is that the crypto market or the crypto assets have not been able to hold up well and prove its mettle when the stock market undergoes corrections or crashes.
Whether it is due to COVID 19 pandemic when the market crashed in February and March 2020 or during the fourth quarter of 2018 when the S&P 500 market declined by 20% when it dropped from $222 billion to about $130 billion indicating a 41% drop, it failed miserably to stay high in price and value.
Given the fact that there is a high chance of the stock market crashing again in 2022 and undergoing a drastic correction, the crypto market will crash along with it if it cannot decouple it from the stock market soon.
Margin debt is the fourth major reason that crypto may crash in the following year.
This is the process in which the crypto investors can borrow from a broker with interest to buy or short sell crypto.
This process allows them to leverage their trade and expect to have a high return on their investment.
However, there is a lot of risk in it since the crypto asset may not move in the direction as predicted by the investors in the short term.
The brokers offering the loans would then may come calling and either demand some extra capital put up by the investors as collateral or force sell the assets.
This is known as margin call and it may wreak havoc in the crypto industry.
This is because it is hard to determine the exact amount of margin debt that is outstanding since the crypto space itself is so disjointed.
And, in such situations, there is no dearth of offers to deploy leverage on cash positions by the investors.
Sometimes this leverage can be immense, such as 100 times as it was earlier last year.
With such huge leverage, even if there is a move in price of crypto assets by 1% or 2%, which is a common occurrence and can happen in the blink of an eye, it would result in a forced liquidation or a margin call.
Meme coin magic and FOMO:
Last but not least, the panic actions taken by the users due to FOMO or Fear of Missing Out may also result in a crash of the crypto market.
Coupled with that, the meme coins losing its magic aggravate the situation as well.
For example, this year the meme coin Shiba Inu was on fire and gained more than 45,000,000% in value followed by others such as Dogecoin with an increase of 3,119% and Floki Inu by 2,763% till December.
However, the most significant drawback of these meme coins is that they fail to provide any competitive advantage, in spite of the fact that they were the most-searched currencies last year.
This is because people do not believe that hype in social media about these meme coins automatically translates into their potential in the long term.
It does not even create a real-world appeal for that matter.
These coins built on the Ethereum blockchain are therefore less likely to be accepted as payment coins by businesses given the fact that there are already a large number of such projects available out there which comes with downsides like processing lags and high fees.
If the FOMO regarding the meme coins that has driven the investors towards it subsides, the crypto euphoria will fade away quickly as well.
Prospects of Recovering
Now, the question is – can the crypto market recover after a crash, and, if so, how soon.
Well, this is the question that haunts most of the people, both who are involved in crypto trading and those who are not.
If the answer to this question is known, you will find it very easy to decide whether or not you should stick to crypto or think otherwise.
However, the problem is that there is no definite answer to it.
This is because different people have different opinions and everybody seems to come up with their own version of an answer to this question.
This makes things very difficult when it comes to deciding whether or not it is the right time to move with the crypto space or move away from it.
The best thing to do is to try to find out the prospects of recovering and then do what you feel best according to your needs, preferences, and individual circumstances.
According to a report of Coinbase, Bitcoin, one of the most popular and largest crypto coins available today, experienced a surge in its value by as much as 255.65% last year.
However, this is the November 18 report and in spite of the fact that there were two incidents of crypto crashes before, one in May 19 and the other in June 8.
This shows that Bitcoin, in particular, has a great potential and possibility of recovering from a crash.
However, this does not mean it will not crash in future.
As it goes with cryptocurrencies, as quickly the prices fall, these coins can climb again just as quickly, and vice versa.
Moreover, there is no guarantee that the prices will rise after a crash to the same height as it was before.
In fact, the rise of the overall price in Bitcoin was nowhere close to the record highs that the coin enjoyed in mid-April last year.
Therefore, if you are planning to invest, no one would guarantee anything because, as it is customary with cryptocurrencies, there are a number of concerns related to it. A few of them are:
- The recent crackdowns in China and other countries
- Impact on the environment
- Its utterly speculative nature and
- Need for greater and stricter regulation all over the globe.
As for the regulation, people seem to be divided on this point.
Few crypto experts think that any further regulation imposed on it will be seen as a threat to the very essence of cryptocurrency – decentralization.
This will further have an impact on the price of the crypto coins.
However, crypto fans point out its positive qualities that they feel would be enough for it to recover soon after a crash. These qualities are:
- The transformative technology involved in it
- It ability to simplify transactions and make it cheaper due to the elimination of an intermediary
- Its ability to facilitate global trade and make it much easier and convenient for all
- Its ability to maintain anonymity while making transactions and keeping them confidential
- Its higher store of value and
- Its safety aspect because it cannot be seized, duplicated or printed.
In fact, a few users think crypto is a good alternative hedge against inflation and an alternative to gold.
Typically, it is due to the volatile nature of crypto that gives it the power to recover after a crash because it can gain momentum again quickly.
However, there is no reason to believe that it will be easy for crypto to recover if, in case, the stock market crashes.
In fact, crypto behaves in no better way than stocks because investors tend to panic-sell what they have during emergencies like the coronavirus pandemic.
Everything, in fact, depends on how and why the financial market collapsed on the whole, and not the crypto market in particular.
Yes, in the case of an average inflationary shock the crypto can survive and recover easily and quickly.
However, there is no one with a crystal ball out there to say when the crypto market will crash and recover.
But, it is surely more resilient than ordinary stock markets.
The prices of crypto coins like the market are extremely volatile and can change drastically within a short period.
But can it crash completely, and, if so, can it recover. Well, by now you must be aware of the probabilities and outcomes.