There are good reasons to be afraid. Previous bear markets have seen declines in excess of 80%. While the stingy hodling might have wisdom among many Bitcoin (BTC) maximalists, altcoin speculators know that delivering diamonds can mean near (or total) annihilation.
Regardless of one’s investment philosophy, in risk-averse environments, holdings flee space in a hurry. The purest among us might see a silver lining as the devastation clears the forest floor of weeds, leaving room for the strongest projects to flourish. Although, to be sure, there are many lost suckers that would grow to great heights given the chance.
Investment and interest in the digital asset space are water and sunlight for the fertile ground of ideas and entrepreneurship. Less severe falls serve the market better; Better a garden than a desert.
A Brief History of Crypto Bear Markets
To solve a problem, we must first understand its catalyst. Bitcoin and the broader digital asset space have survived a number of bear markets since their inception. By some accounts, depending on the definition of one, we are currently at number five.
The first half of 2012 was plagued by regulatory uncertainty culminating in the closure of TradeHill, the second largest Bitcoin exchange. This was followed by the hacks both Bitcoinica and Linode, resulting in tens of thousands of Bitcoin being lost and the market falling by 40%.¹ However, the price recovered, albeit briefly, finding new highs above $16 until that new attacks, regulatory fears and Bitcoin Savings breaches occurred. and Trust Ponzi Scheme crashed in price yet again, down 37%.¹
Enthusiasm for the new digital currency didn’t stay suppressed for long, as BTC rallied back up to find equilibrium at around $120 for most of the next year before soaring above $1,100 in the last quarter of 2013. And, just as dramatically, the DEA seizure of the Silk Road, the China Central Bank ban, and the scandal surrounding the closure of Mt. Gox plunged the market into a brutally prolonged pullback. of 415 days. This phase lasted until early 2015 and the price dropped to just 17% from previous market highs.¹
From there, the growth was steady until mid-2017, when the hype and market mania sent Bitcoin price into the strata, peaking in December at almost $20,000. Eager profit-taking, more hacks and rumors of countries banning the asset once again crashed the market and BTC languished in stagnation for over a year. 2019 brought a promising rally to nearly $14,000 and largely hovered above $10,000 until fears of a pandemic drove BTC below $4,000 in March 2020. It took a staggering 1,089 days, almost three full years, before of the crypto market recovering its 2017 high.²
But, then, as many in the space have said, the money printer went “brrrrrr”. Global expansionary monetary policy and fears of fiat inflation fueled an unprecedented rise in asset values.
Bitcoin and the larger crypto market hit new heights, peaking at nearly $69,000 per BTC and over $3 trillion in total asset class market capitalization by the end of 2021.²
As of June 20, pandemic liquidity has dried up. Central banks are raising rates in response to worrying inflation numbers, with the largest cryptocurrency market carrying a relatively meager $845 billion in total investment.² More worryingly, the trend is for deeper and longer crypto winters, not shorter, in line with a more mature market. . This is undoubtedly due primarily to the inclusion and speculative mania around high-risk startups that comprise 50% to 60% of the total digital market capitalization.²
However, altcoins are not entirely to blame. The crash of 2018 caused the price of Bitcoin to drop by 65%.⁴ The growth and adoption of the main asset of cryptocurrencies has generated regulatory alarms in many countries and has followed questions about the very sovereignty of national currencies.
How to mitigate risk in the market?
So it is risk, of course, that drives this undue volatility down. And we are in a risk-averse environment. Therefore, our young and fragile garden withers first among the more entrenched classes of conventional goods.
Portfolio managers are well aware of this and need to balance a portion of cryptocurrency investment with a larger portion of safe haven assets. Both retail and professional investors often abandon their stocks entirely at the first sign of a bear, returning to conventional markets or cash. This reactionary strategy is seen as a necessary evil, often at the expense of incurring short-term capital gains taxes and at the risk of missing out on significant unpredictable reversals, which is preferred over the devastating and prolonged dips of crypto winter.
Must it be so?
How does an asset class so driven by speculative promise reduce risk enough to keep interest and investment alive in the worst of times? Bitcoin-heavy crypto portfolios perform best as they comprise a higher percentage of less volatile core assets. Still, with a correlation of over 0.90 between Bitcoin and the altcoin market, the wake of crypto’s most dominant currency often serves as a turmoil for smaller assets caught in the same storm.
Many turn to stablecoins in tough times, but as the recent Terra disaster demonstrates, they fundamentally carry more risk than their fiat currency. And, commodity-paired tokens are fraught with the same concerns inherent in any other digital asset: trust, whether in a market or its organizational entity, regulatory uncertainty, and technology vulnerabilities.
No, simply tokenizing safe haven assets will not provide the stable yang to the volatile yin of the crypto market. When fear is at its highest, an inverse price relationship, not just neutrality, must be achieved to retain investment in crypto and with a return that justifies taking on this inherent risk.
For those willing and able, the inclusion of Bitcoin inverse exchange-traded funds (ETFs) offered by BetaPro and Proshares provides a hedge. However, like short positions, accessibility hurdles and fees make these solutions less likely to sustain the average investor through the bear market.
Additionally, increasingly regulated and supported centralized exchanges are making leveraged accounts and crypto derivatives unaffordable for many in the larger retail markets.⁵
Decentralized exchanges (DEX) suffer from the limitations of anonymity and the solutions offered to shorten the mechanisms on such have largely required a centralized exchange to work collaboratively. And, more specifically, both solutions do not functionally support value retention in the crypto market directly.
Are safe haven crypto assets enough?
The solution to the massive investment exodus in the crypto bear market must be found in the assets themselves, not their derivatives. Escaping the inherent risks mentioned above could be, in the medium term, impossible. However, regulatory clarification is promised and debated around the world. Centralization and technical risks are finding new mitigations through decentralized autonomous strategies and the commitment of an increasingly demanding expert cryptocurrency investor.
Through many experiments and tests, crypto entrepreneurs will continue to bring real solutions to the forefront. Applications of blockchain technology that find substantial adoption in low-market “defensive” industries such as health care, utilities, and the purchase or production of consumer staples would provide an alternative to leakage. Such development must be encouraged in these uncertain times. Rather, by the wisdom of the market, these uncertain times should encourage this development.
However, ingenuity should not be limited to merely tokenizing the weak solutions of conventional markets. This is a new world with new rules and possibilities. After all, programmatically incentivized reverse mechanisms are feasible.
Synthetix reverse synths aspire to do just that, but the protocol sets a minimum and maximum price and in such a case the exchange rate is frozen and can only be traded on their platform.³ Definitely an interesting tool, but it is unlikely to be used by the large crypto market. True solutions will be widely accessible both geographically and conceptually. Instead of simply providing a dry place to wait out the downside market storm, crypto solutions must provide a return to justify the risk still inherent in our developing asset class.
Is there a silver lining to the bear market? Will the survivors of the crypto winter emerge in a more rewarding market for application and adoption than for speculation? Healthy pruning may be just what our young garden needs; a prolonged drought is surely unnecessary. Falling markets are simply a problem, and with the clever application of blockchain technology, it is hopefully solvable.
Disclaimer. Cointelegraph does not endorse any product content on this page. While our goal is to provide you with as much important information as we can obtain, readers should do their own research before taking any action related to the company and take full responsibility for their decisions, and this article cannot be considered investment advice.
Trevor is a technology consultant, entrepreneur, and director of Positron Market Instruments LLC. He has consulted with corporate planning teams in the United States, Canada, and Europe and believes that blockchain technology holds the promise of a more efficient, fair, and equal future.