There is good reason to be afraid. In the past down markets have seen a drop of over 80%. While there may be wisdom in the tight grip among many bitcoin (BTC) maximalists, speculators in altcoins know that handing over diamonds could mean near (or total) destruction.
In a risk-free environment, regardless of one’s investment philosophy, participation tends to run out of space with haste. The purest of us may see a silver lining as devastation clears forest floor, leaving room for the strongest of projects to flourish. However, undoubtedly, many plants have been lost which, if given the opportunity, themselves will reach great heights.
Investment and interest in the digital asset space is water and sunshine for ideas and a fertile ground for entrepreneurship. Less severe downtrends serve the market better; A better garden than the desert.
A Brief History of Crypto Bear Markets
To solve a problem, we must first understand its origin. Bitcoin and the wider digital asset space have survived several bear markets since its inception. By some accounts, depending on one’s definition, we are currently at number five.
The first half of 2012 was filled with regulatory uncertainty, which culminated in the closure of Tradehill, the second largest bitcoin exchange. This was followed by the hacking of both Bitcoinica and Linode, resulting in the loss of thousands of bitcoins and a nearly 40% drop in the market. And the defaults of the Bitcoin Savings and Trusts Ponzi Scheme caused the price to drop again, down 37%.¹
Enthusiasm for the new digital currency did not last long, as BTC rose again to find a balance at around $120 for the better part of the next year, before reaching over $1,100 in the last quarter of 2013. And, dramatically, the seizure of the Silk Road by the DEA, the China Central Bank embargo and the scandal surrounding the closure of Mount Gox plunged the market into a prolonged retracement of 415 days. This phase lasted until early 2015, and the price dropped to just 17% of the previous market high.¹
From there, growth was steady until mid-2017, when excitement and market frenzy launched the bitcoin price into Stratos, which peaked at around $20,000 in December. Eager to take profits, rumors of further hacks and asset banning countries, again crashed the market and BTC remained depressed for over a year. 2019 brought a promising rise to around $14,000 and was largely above $10,000 until BTC dropped below $4,000 in March 2020. It was a staggering 1,089 days – almost three full years – before the crypto market hit its 2017 highs.
But, then, as many in the space have recalled, the money printer went “Brrrrr”. Global expansionary monetary policy and fears of fiat inflation led to an unprecedented rise in asset values.
Bitcoin and the greater crypto market found new highs, reaching nearly $69,000 per BTC at the end of 2021 and the total asset class exceeding $3 trillion in market capitalization.²
As of June 20, the pandemic liquidity has dried up. Central banks are raising rates in response to worrying inflation numbers, with the greater crypto market holding a relatively low total of $845 billion. More worrying still, the trend indicates a deeper and longer crypto winter, no less, suitable for a more mature market. Undoubtedly, this is mainly due to the inclusion and speculative frenzy around high-risk start-ups, which comprise approximately 50% to 60% of the total digital market cap.²
However, altcoins are not entirely to blame. The crash of 2018 saw the price of bitcoin drop by 65%. The growth and adoption of crypto’s top asset has raised regulatory alarm in several countries and followed questions about the sovereignty of national currencies.
How to reduce risk in the market?
So, it is risk, of course, that drives this unreasonable downward volatility. And, we are in a risky environment. Thus, our young and delicate garden merges first of all into the deeply rooted property classes of convention.
Portfolio managers are acutely aware of this and need to balance a sliver of crypto investing with a sizable piece of safe-haven assets. Retail investors and professionals alike often drop their bags entirely at the first sign of a bear, returning to traditional markets or cash. This reactionary strategy is seen as a necessary evil, often at the expense of a short-term capital gains tax, and at the risk of significant unforeseen reversals, which is preferred to the disastrous and protracted decline of the crypto winter.
Should it be so?
How does an asset class driven by speculative promises carry interest and risk enough to keep investments alive in bad times? Bitcoin-heavy crypto portfolios outperform those consisting of a high percentage of the least volatile of the major assets. Nevertheless, with bitcoin’s 0.90+ correlation with the altcoin market, the awakening of crypto’s most dominant currency often serves as a churn for smaller assets caught in the same storm.
Many people rush to stablecoins in difficult times, but, as the recent Terra disaster shows, they are fundamentally more risk averse than their fiat peg. And, commodity-paired tokens are burdened with the same concerns inherent in any other digital asset: trust – whether in a market or its organizational unit – regulatory uncertainty and technical vulnerabilities.
No, merely tokenizing safe-haven assets will not provide a stable yang to the volatile yin of the crypto market. When fear is maximum, an inverse price relationship, not just neutrality, must be achieved in order to sustain investing in crypto and justify adopting this inherent risk.
For the willing and able-bodied, the inclusion of the inverse bitcoin exchange-traded fund (ETF) offered by BetaPro and ProShares provides a hedge. However, like the inclusion of short positions, accessibility constraints and fees make these solutions more unlikely to sustain the average investor through a bear market.
Furthermore, increasingly regulated and compliant centralized exchanges are making leveraged accounts and crypto derivatives in large retail markets out of reach for many.
Decentralized exchanges (DEXs) suffer from limitations of anonymity and as such the solutions offered for the shorting mechanism require a centralized exchange to operate in large-scale collaboration. And, more and more, both solutions do not functionally support direct price retention in the crypto market.
Are crypto safe-assets enough?
The solution to the mass exodus of investments in the crypto bear market must be found in the assets themselves, not their derivatives. Avoiding the underlying risks mentioned above may be impossible in the medium term. But, regulatory clarifications are promised and debated around the world. Centralization and technological risk are finding new mitigations through decentralized autonomous strategies and the engagement of a more discerning crypto-savvy investor.
Through numerous experiments and trials, crypto entrepreneurs will continue to bring real solutions to the forefront. Applications of blockchain technology that see substantial adoption in down-market “defensive” industries such as healthcare, utilities and the purchase or production of consumer staples will provide an alternative to flight. Such development should be encouraged in these uncertain times. Rather, with the understanding of the market, such uncertain times should encourage this development.
However, the ingenuity should not be limited to simply flagging the weak solutions of traditional markets. It is a new world with new rules and possibilities. Programmatically encouraged inversion mechanisms are possible, after all.
Synthetix, the inverse of Synthetix, wishes to do just that, but the protocol sets both a floor and a maximum price, and in such an event, the exchange rate is stable and only exchangeable on their platform. Certainly an interesting tool but it is unlikely to be used by the greater crypto market. The right solutions will be widely accessible, both geographically and conceptually. Rather than simply providing a dry place to wait out a down-market storm, crypto solutions should provide a return to justify the risk inherent in our developing asset class.
Is there a silver lining to a bear market? Will the survivors of the crypto-winter emerge a more profitable market for application and adoption than speculating? Healthy pruning may be just what our young garden needs; A long drought is certainly unnecessary. Down markets are simply a problem and, with clever application of blockchain technology, hopefully, a soluble one.
Disclaimer. Cointelegraph does not endorse any of the product content on this page. While our aim is to provide you with all the important information we can obtain, readers should do their own research before taking any action relating to the company and take full responsibility for their decisions, nor should this article be invested in can be considered as advice.
Trevor is a Technology Consultant, Entrepreneur and Principal at Positron Market Instruments LLC. He has consulted for corporate planning teams in the United States, Canada and Europe and believes that blockchain technology holds the promise of a more efficient, equitable and egalitarian future.
Brief History of the Bitcoin Bear Market | By Mosaic – Medium
Crypto Total Market Cap (Ticker: CRYPTOCAP): Calculated by TradingView
Travers, Garth (19 July 2019). “Inverse Synths Are Back”
Choudhary, Saheli Roy (January 11, 2018). “South Korea Is Rejecting The Idea That A Cryptocurrency Trading Ban Is Imminent”
Newbery, Emma (August 3, 2021). “Why aren’t so many crypto exchanges available in the US?”