In traditional finance and stock markets, a ‘bear market’ described a conditioning in which prices of securities in a market decline by more than 20% from their recent highs, often accompanied by negative investor sentiment and declining economic prospects.
In the crypto space, a ‘crypto winter’ is something that runs along similar lines. A crypto winter signifies negative sentiment and lower average asset values among a large swath of digital assets. Now, take a look at this chart.
Also read: What is Crypto Bear Market?
Simply speaking, a bull market, or bull run, is defined as a period in a market where the majority of participants are buying. It is a time when demand outweighs supply, market confidence is at a high, and prices are rising. If you see prices quickly trending upwards, it could possibly indicate that a large number of investors in the market are becoming more and more optimistic and thus ‘bullish’ about the price going higher still – and could possibly be looking at the start of a bull market.
The cause behind a bear market in crypto, or any bear market for that matter cannot be pinpointed to one or two reasons. It generally is a complicated mixture of a variety of reasons that can trigger a bear market. It could be something as simple as a bust that comes after a boom in the market or due to some financial debacle that might plague investors in a particular asset class.
However, in case of 2022 crypto winter, the reasons can be boiled down to a few crucial ones.
Quantitative tightening (QT) is a contractionary monetary policy tool applied by central banks to decrease the amount of liquidity or money supply in the economy. During the initial phases of Covid-19 – when government across the world were printing billions and billions of dollars worth of cash and pumping it into the economy in an effort to prop the economy up during a time of crisis, when all business had to be shut down.
While, the effort did help prop up the economy and ensure people were spending more and more – it created a different problem – the problem of easily available cheap cash. And thanks to cheap cash available in the economy – inflation began setting in. Prices of simple basis necessities began skyrocketing, along with valuations of assets classes, including cryptos. A part of 2021’s crypto bull run can be associated to such easily available cash in the system.
But now, through the process of QT, governments are working to cutting down the easily available cash in the market and essentially bring about a mini-recession to slash inflation. That is being done by increasing government interest rates. And interest rates typically have an inverse correlation with asset classes like stocks, and now cryptos too.
During a bull run, valuations also tend to skyrocket beyond reasonable measures at a given point in time. But such excessively high valuations don’t tend to last long and a price correction is almost always inevitable in any asset class, including cryptos. So the current bear market also as a little bit of value correction happening behind the scenes. Not-so-good crypto projects are being filtered out of the system while the good ones will see through it all.
Another reason behind bear runs in the market are poor investor sentiments. Investors looking at losses over 70-80%, even near 100% on their books will surely have troubles re-entering the market again. Confidence tends to be on the down-low during these phases, and understandably so. Thus following basic market dynamics, poor sentiment leads to poor demand which then leads to lower demand and thus value erosion in assets.
Poor sentiments are also derived from geo-political issues, like the current Russia-Ukraine war that has sent the world down the rabbit hole of inflation and continuous FUD (fear, uncertainty and doubt). Along with that, obscurity over regulatory action on the crypto segment across most major economies in the world has also put a major question mark in the short-term future for the crypto space.
|BULL MARKETS||BEAR MARKETS|
|Sustained price appreciation over time||Widespread price depreciation in the market|
|High demand, low supply||Low demand, high supply|
|Increasing trading activity across the market||Comparatively lower trading volumes across asset classes|
|Increased investor confidence in the market||Lack of investor confidence in the market|
|Certain (even bad) projects become overpriced||Bad crypto projects are weeded out of the system|
|High social media chatter, lots of excitement about cryptos||General distrust amongst experts and community members|
Bitcoin price began its trade with a double-digit figure and soon in no time surged magnificently. The price chart itself indicates the price inflated heavily since its inception, including a couple of pullbacks and crashes too. One such massive crash occurred soon after BTC’s price hit its ATH in 2017. The markets remained drained throughout 2018 and consolidated until they found their bottoms by the end of 2018.
Bitcoin during the 2018 bear market had plunged hard by nearly 81.39% to mark its lows at $3200. Similar price action was witnessed in recent times when the BTC price marked new highs at $69,000. A massive drop of nearly 74.23% has been carried out over the past 6 to 8 months.
While the 2018 bear market went on throughout the year, it appears that the current descending trend may continue until the end of 2022, slashing the price by another 10% to 12%. However, it was believed that the BTC’s realized price was somewhere close to $23,000. Therefore, the asset plunges below these levels only during the end of the bear market.
The claim currently does not hold good as the asset is trading below these levels for quite a long time, with fewer possibilities of a strong rebound.
Read more in detail on History of Crypto Bear Market
Well, there is no exact science to the subject. It is really more of an art. No person can accurately tell you when a market is going to bottom out and signal the end of the bear market. Rather, the best one can do is to figure out telltale signs that can indicate the oncoming of a changing tide.
It is something that comes with experience and practice – however here are a few things you can look at that can give you early signals of a possible market bottom.
One of the simplest ways to see whether a bear market is bottoming out is to look at the larger market sentiment. The crypto fear and greed index provides an insight into the larger market mood.
It is well known that crypto market behaviour tends to be very emotional. During a bull run, investors tend to get greedy, resulting in FOMO while during a bear run, those same investors can freak out and sell their holdings when they see red on their books.
Basically, the Fear and Greed Index works on the assumption that investors exhibit one of two emotions at any given time. Too much greed during a rally is bound to result in a correction while extreme fear during a bear run is bound to end, because at one point a large chuck of people would have sold their holders and are sitting on cash.
According to the definition from Glassnode, The MVRV-Z Score is used to assess when an asset is overvalued or undervalued relative to its “fair value”, as underlined by the deviation between its market capitalization and realised capitalization.
Hence, extreme deviations between market value and realised value can be used to identify market tops and bottoms as they reflect periods of extremes in investor unrealised profit and loss, respectively. Therefore, based on the historical performance, this metric suggests that there could still be more downside in the near future for Bitcoin, followed by an extended period of sideways price action.
Additional read: Bitcoin Crash: How Probable is a Recovery in the Flagship Token?
the Indian experience of the crypto bear market is slightly different from the rest of the world, Primarily because of the fact that we are now living in the reality of a 30% tax on crypto gains and a crippling 1% TDS on every crypto sale transaction. And top that off with no off-setting of crypto losses against crypto gains, or any other gains for that matter.
And undoubtedly, such tax practices have dampened the mood of Indian crypto investors – which could soon be one of the largest markets out there.
The highest tax slab of 30% tax became applicable from the 1st of April, 2022, while the 1% TDS came into effect on 1 July, 2022.
Additional Read: 30% Crypto Tax in India
On 1 July, 2022 – the new 1% TDS rule came into effect as it was outlined in the Finance Bill of 2022. With such a heavy TDS on every sale transaction that took place on Indian crypto exchanges severely impacted the profits (and losses) of traders and investors in the Indian crypto ecosystem. The rationale behind this TDS deduction is like any other TDS provision: one is to obtain information about the trades so that the government can collect the optimum tax and the second is a recurring revenue source before people pay their taxes at the end of every quarter or the year. However, market experts strongly believe that the implementation of this 1% TDS on crypto transactions will severely hamper the growth of the crypto industry.
Read more in our comprehensive guide on 1% TDS on Crypto
So in conclusion, these are a few metrics and indicators that help analysts assess whether the bear market is coming to an end. However, it must be noted that no indicator or metric can accurately point out market bottoms, and it’s best to do your own research and stay safe in a bear market.
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