“This storm is on a whole new level” – Here’s why this Bitcoin and cryptocurrency crash is different from previous ones – The ₿log

Bear markets have become almost routine for the prices of Bitcoin and other cryptocurrencies. Since its launch in 2009, the price of Bitcoin has fallen by more than 50% on six occasions.

Coinbase CEO ( CORNER ), Brian Armstrong, in a June 14 letter announcing an 18% staff cut, offered reassurance despite Bitcoin’s latest crash and other crypto prices plummeting. Armstrong said the cryptocurrency exchange “has survived four great crypto winters” and is taking steps to do so again.

Yet this storm is on a whole other level. “It’s a crypto ice age,” Dan Dolev, an analyst at Mizuho, ​​told IBD. “I think it’s going to be very deep, very protracted, and many cryptocurrencies will not survive. »

The explosion of the supposed “stablecoin” TerraUSD, wiping out $40 billion in market value, accelerated a wave of deleveraging that has yet to run its course. This month, crypto lending platform Celsius Network, which oversaw $20 billion in crypto deposits and loans, halted withdrawals as it faced a liquidity crunch.

Terra, a blockchain payments and savings network, and Celsius offered double-digit interest payouts that depended on bullish crypto scenarios. But the collapse of these Old West business models is less a cause than a symptom of the crypto meltdown. The real reason the cryptocurrency market is imploding: Bitcoin and the roughly 19,000 other digital currencies are facing their first round of Federal Reserve tightening to stem a spike in inflation.

Easy Money Fueled Cryptocurrency Prices

For most of their existence, cryptocurrencies have enjoyed the softest monetary conditions. The period since Bitcoin’s launch has mostly seen the Fed attempt to support demand. During this period, the Fed purchased $6.5 trillion in government-backed Treasury bills and mortgage-backed securities. This suppressed rates in an effort to encourage risk taking, increase asset values ​​and stimulate demand through wealth gains.

The bulk of those Fed purchases — $4.5 trillion — came after the coronavirus lockdown cratered the economy in March 2020. Along with several rounds of fiscal stimulus, the ultra-easy policy of the Fed has worked all too well. All that monetary fuel supercharged the vaccine-enabled economic reopening and sparked the biggest surge in inflation in 40 years.

Today, the reversal of the Fed’s unprecedented stimulus is deflating most asset values. The surge in the 10-year Treasury yield particularly affected growth stocks. Their future income streams are worth less when discounted at a higher risk-free rate of return. This helps explain why the tech-heavy Nasdaq underperformed the broader market.

But when it comes to valuing Bitcoin and other cryptocurrencies, there are no future cash flows to discount.

Bitcoin Crash Shows It’s Not Digital Gold

Bitcoin’s crash has “debunked” the idea that it offers a hedge against inflation, like digital gold, Deutsche Bank economists Marion Laboure and Galina Pozdnyakova wrote in May. Rather than trading like gold, cryptocurrency price ups and downs have been correlated with the Nasdaq to a “staggering” degree, they wrote.

Still, the cryptocurrency roller coaster makes Nasdaq volatility seem tame. Through June 23, the Nasdaq is down nearly 31% from its November 22 intraday high. Bitcoin, which peaked on November 10, fell 70%.

Fed rate hikes and other tightening measures

Just days before Bitcoin began its retreat, the Fed announced that it would reduce its monthly asset purchases by $120 billion. The timing doesn’t seem like a coincidence. In fact, the history of bitcoin’s peaks and valleys mostly coincides with changes in Fed asset purchases.

Bitcoin’s first crash began in June 2011, just as the Fed ended its second round of asset purchases during a financial crisis. The second coincided with the spring 2013 crisis regarding a possible tapering of a new round of asset purchases. The start of the effective reduction at the end of 2013 coincided with Bitcoin’s third crash.

The crash at the end of 2017 coincided with Federal Reserve rate hikes that took place as the Fed began to gently roll back asset purchases. Yet none of these cases have seen anything like today’s crunch.

At the end of 2018, when monetary tightening helped trigger a rout in financial markets, the Fed’s key rate only reached 2.5%-2.75%. It was the highest in Bitcoin history. Yet once the S&P 500 decline approached the 20% bear market threshold, Fed policymakers signaled a change in course. In the fall of 2019, the Fed was cutting rates and buying more assets.

Read also What is Bitcoin Trader?

But last week, although the S&P 500 and Nasdaq had already entered bearish territory, policymakers moved to accelerate their tightening plans.

The Fed does not target any particular asset class. However, the wipeout of $2 trillion for the cryptocurrency markets is on plan.

“We have seen financial conditions tighten and rightly so,” Fed Chief Jerome Powell said on June 15.

Bitcoin price has crossed this line

In recent days, this Bitcoin price drop has crossed a line that previous cryptocurrency price bear markets have not even approached.

Bitcoin fell 75% from the November high of $68,990.90 to the June 18 low near $17,800. This briefly undermined its last major peak near $19,600 in December 2017. At its worst, in early 2015, Bitcoin’s low was nearly 40% higher than the previous peak.

Bitcoin bounced above $21,000 late last week, but drifted below $21,000. That’s just below the average purchase price of $21,000, Mizuho’s Dolev says.

Clearing Bitcoin’s gains over the past 4.5 years challenges the idea that long-term holders cannot lose. This will test the faith that ultimately determines the value of all cryptocurrencies.

This faith probably has limits, but it is clearly deep. Nearly 50% of bitcoin traders on Coinbase say they won’t sell no matter how low the cryptocurrency prices go, Dolev wrote on May 19. “For the remaining ~50%, the tipping point is around $9,000,” a survey from Mizuho revealed.

Despite the cryptocurrency price carnage, Silicon Valley venture capital firm Andreessen Horowitz announced a $4.5 billion crypto fund on May 25. In 2021, venture capital funding for blockchain companies was $33 billion.

Cryptocurrency price hangover

If you’re wondering if cryptocurrencies are a good bet at recent crypto prices, keep in mind that the mania has only just begun to flare. While Bitcoin peaked in November, the Luna cryptocurrency which was supposed to keep the dollar pegged TerraUSD only peaked in April – before crashing to zero the following month.

The unwinding of excessive leverage, increased regulatory scrutiny, and a Federal Reserve tightening cycle meant to quell speculative fervor suggest a long crypto winter. Many business models that seemed viable and investments that seemed rational when crypto never suffered a long losing streak are facing their first major reality check.

For some Bitcoin believers like the CEO of MicroStrategy (MSTR), Michael Saylorwhich has bet $4 billion of company funds on cryptocurrency, the debacle is overdue.

“What you have is a $400 billion cloud of opaque, unrecorded securities transactions without full and fair disclosure, and they’re all cross-collateralized with Bitcoin,” Saylor said in an interview hosted by the Northman Trader market analysis site.

The implication is that shady practices in the crypto sphere and the cascading margin calls they caused are responsible for Bitcoin’s latest crash. All of these other cryptos also undermine Saylor’s notion that Bitcoin is a scarce resource. Bitcoin’s market capitalization is now around 45% of the total crypto value, up from 90% at the start of 2016.

What will come after the Ice Age in cryptocurrency prices

Saylor’s prospect could undermine the role of Fed tightening and the extent to which the need for collateral to fuel crypto speculation has helped boost Bitcoin’s price.

However, inflation will eventually recede and the Federal Reserve will end its tightening cycle. But the central bank is unlikely to return to extremely accommodative monetary policy anytime soon.

A new crypto spring will eventually arrive. Don’t expect it to look like the previous ones.

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“This storm is on a whole new level” – Here’s why this Bitcoin and cryptocurrency crash is different from previous ones – The ₿log

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