Decoding The Crypto Market Crash: Is it Different This Time?

In one of our previous blogs about cryptocurrency, The surge and beyond – what lies ahead for Cryptocurrencies, we talked about how it had witnessed explosive growth in the preceding few months. We also talked about how different companies such as Microsoft, Wikipedia, and AT&T have allowed their customers to pay using BitPay, a cryptocurrency wallet and that the growing popularity of the cryptocurrencies attracted countries such as Venezuela, El Salvador, Paraguay, Colombia, and Mexico to also allow its use. Fast forward to today – can we still say that cryptocurrencies are and will be good-to-hold assets?

The prices of the cryptocurrencies rose considerably in 2020 and the year 2021 was considered the best time for investors in crypto. The price of bitcoin rose to as high as $58K in Mar 2021, but two separate events resulted in bitcoin prices to crash to $35K in May 2021. First, Elon Musk, CEO of Tesla, did a volte-face on his decision to accept bitcoin to buy Tesla cars and second, Beijing banned banks and payment firms from providing cryptocurrency related transaction services.

Later, in Nov 2021, Bitcoin prices skyrocketed to $68K and the overall market capitalization (all cryptocurrencies) stood at ~$3 trillion. Bloomberg Analyst and crypto evangelist, Mike McGlone, even predicted that Bitcoin would cross the $100K mark before the end of 2021. However, grimmer situations were yet to come. Since then, crypto prices have plummeted and have stayed range bound. From its stellar heights in 2021, Bitcoin is now hovering at around $20K since Jun 2022.

In Jan 2022, the cryptocurrency market capitalization dropped below the $2 trillion mark. In May 2022, Bitcoin dipped to its lowest rate in 16 months and the Terra Luna stable coin lost 99% of its value, while other tokens like Dogecoin, Avalanche, and Solana, among others, had taken hits of up to 90%.

Several theories and reasons have been propounded the fall in cryptocurrency prices. We list a few major ones here:

• Surging global inflation coupled with rising interest rates are driving investors away from ‘risky’ asset classes including cryptocurrencies
• Increased volatility in global stock markets due to the Ukraine-Russia conflict, with crypto markets showing higher correlation to stock markets due to more mainstream adoption
• China’s prohibition on financial institutions and payment platforms to transact in cryptocurrency
• Increased government oversight to counter the decentralised and unregulated nature of cryptos
  • In Apr 2022, India announced a flat 30% tax on the sale of all Virtual Digital Assets (VDAs) including NFTs, with no deductions or exemptions, while also disallowing any crypto related expenses as deduction. India has also disabled UPI transfer feature for crypto wallets.

Although the current crisis of sorts appears to be harsh, history stands testimony to the fact that such crashes have had a pattern to themselves. And each time crypto assets have crashed, the fall has lingered for a longer duration, and it has taken considerable time to recover.

The average dip during crashes was 87%, with the average time to bottom at 303 days (10 months) and the average time to new-high at 945 days (~2.6 years). Applying the logic to the current ‘crypto-winter’ which had its last peak in Nov 2021, a plausible extrapolation would be that it will take another month or two (Aug – Sep 2022) to reach the bottom and then another two years (~Jul 2024) to reach a new high.

But tarry a little and ask yourself – is that a prudent thought? Given the uncertainty for future value and the volatility of crypto assets, it is widely believed that the cryptocurrency market will face greater regulation from many countries and governments. It seems that cryptocurrencies are struggling, and the truth is that their long-term potential cannot be fully ascertained. Few remain positive about the outlook, while others are of the opinion that cryptocurrencies might never reach a new high again.

But regardless of whether they attain a new high, governments worldwide have understood that cryptocurrencies are here for the long haul. Ten countries have already launched their own digital currency and China is expected to follow in 2023. And 100 countries, which account for 95% of global GDP, are exploring the idea of launching their own digital currencies. India has decided to levy taxes on digital currencies but has not yet recognised cryptocurrencies as ‘legal’. In March 2022, US President Joe Biden signed an executive order to provide a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.”

The usual story of the crypto rebounding after a slump might still play out in a similar fashion, however, the extent of the jump might differ. On one hand, tighter regulations might encourage retail investors and offer the much-needed protection against unpredictably high losses in cryptos and help weed out bad actors, scammers, and nefarious entities from the market. Regulations will also help create transparency for the overall investment class just like stocks, insurance etc which is important for institutional investors as well as for mainstream adoption of cryptos. On the other hand, cryptocurrencies being regulated by a central body is against the very premise on which they were built, and the idea might not go down well with many people.

Uncertainties persist and opinions differ when it comes to cryptocurrencies. But with time, as more countries work towards accepting them into the mainstream, and as various classes of investors move in and move out, the market might eventually mature in the longer run. And it will take concerted efforts from governments, central bodies, as well as investors to create a conducive environment for greater adoption of cryptocurrencies.

Author: Prachi Singh,

Senior Analyst, Strategy Consulting