In brief
- Cryptocurrencies have been closely correlated with U.S. equities.
- Prices are expected to keep trending downward.
Crypto Winter is no longer coming—it’s here. A bear market. But just how bad will it get, and for how long? Well, according to analysts who spoke to Decrypt, the worst is yet to come.
The real issue now is inflation, which is soaring in the U.S. (and everywhere else), and which the Federal Reserve wants to get under control by raising interest rates.
Last week, the central bank increased rates by 0.75%, the single largest raise since 1994. Fed officials added that more raises likely would come later this year. Higher interest rates make it tougher to borrow money, which means fewer investors are willing to bet on assets with greater perceived risk, such as stocks or cryptocurrencies.
Bitcoin, considered by many to be “risky,” is plunging alongside equities. Right now, the biggest cryptocurrency by market cap is trading for $20,333.59, according to CoinMarketCap. The current correlation with traditional markets is what makes this crypto bear market different from the crash of 2018.
Bloomberg Intelligence analyst Eric Balchunas told Decrypt that the Federal Reserve would be less likely to step in and lower interest rates—like it has done in the past—to help if things got messy.
“The reason that this is different is that the Fed is serious this time,” Balchunas said. “In every past selloff there was this thought behind it that the Fed would step in if the market really needed it, and this time they’re not going to do that.
“And the reason is inflation—it’s a major issue in the election. Normally, they [the Fed] care, but they have a bigger issue and that’s the quagmire. Markets are going to have to learn to live without the Fed, and that’s going to be painful. It’s like coming off heroin—the first year is going to be rough.”
Ouch. Want some figures? Scott Norris, co-founder of the private U.S.-based Bitcoin miner LSJ Ops, said he believes Bitcoin still could plummet to $11,000. Over the weekend, it fell below $20,000, a significant support level, dropping more than 70% from its all-time high in November.
“The Fed has been extremely slow to move on inflation or even wholly acknowledge its existence,” he said. “Many adults have never lived through a bank run before, and now it’s happening in crypto and equities first.
“Max pain is coming but it hasn’t hit yet—this time the governments of the world aren’t handing out bailouts, just bills, while they maintain their own levels of spending. The U.S. may skip the recession altogether and just dive head first into a depression.”
Julio Moreno, a macro on-chain senior analyst at CryptoQuant, an analytics firm, was slightly less pessimistic, telling Decrypt in an interview that Bitcoin could drop to around $16,000.
“In March 2020, it [the crash] didn’t last long because the Fed aggressively provided liquidity due to the pandemic,” Moreno added. “This time, it is doing the exact opposite.”
The Fed likely will remain hawkish throughout 2022, pushing asset prices even lower, trader and analyst Alex Kruger told Decrypt. He added that the S&P could bottom out in the second half of the year, to around 10% to 15% lower than current levels, with Bitcoin tracking that similarly.
“It’s all about inflation and the Fed, even for crypto,” Kruger added.
And as for Ethereum, the second-largest digital asset by market cap, and which has helped make crypto more mainstream as the digital fuel that powers NFTs, things aren’t much better. (As of this writing, it had rebounded a bit, to slightly more than $1,100.)
Lucas Outumuro, head of research at IntoTheBlock, told Decrypt that although Bitcoin and Ethereum work differently to traditional tech companies, they are performing like said tech stocks “likely due to there being an intersection between the types of investors holding these assets.”
“I expect these conditions to continue pushing prices lower until macro uncertainty eases,” he added.
During the last Crypto Winter, in 2017, Bitcoin fell from $19,497 on December 15 to $13,831 just six days later. The pain didn’t stop there: Throughout 2018 it continued to plunge, until, exactly one year later, it was worth less that $3,300.
This Crypto Winter, analysts told Decrypt, could be even colder, even longer.