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Crypto Bear Markets – A Detailed Analysis

Bear markets are a natural part of crypto market cycles. This report delves into the bear markets’ specifics, analysing their characteristics, trends, and opportunities for investors.

Jul 26, 2022
July 2022 Feature Report Bear Market Cycle

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Key Takeaways

  • According to Grayscale Investment’s estimate, the current bear market has approximately 250 days to go. Although unpleasant, bear markets are part of the market cycle, are not crypto-specific phenomena, and pose opportunities for investors.
  • Market cycles lack a standard definition but typically last approximately four years, with bull runs being two to three times longer than bear runs. However, there is no consensus on their length, and different reports suggest that they may become shorter or longer.
  • We are advancing through the fourth largest drawdown in Bitcoin’s history, reaching -71.0%, while previous drawdowns have reached up to -86.9%.
  • Halvings seem to cause price surges and drops without erasing gains. In 2018, Bitcoin peaked at around US$20,000 and fell to US$4,000, but its pre-halving value was about US$600. It is possible that 2024’s halving may follow the same pattern.
  • Bear markets often breed fear, with clickbait-style news pronouncing Bitcoin ‘dead’ 35 times a year on average and Google searches such as ‘Bitcoin is dead’ booming.
  • Bear sentiment benefits the market’s health. Billionaire Mark Cuban and Ethereum’s creator Vitalik Buterin welcome bear markets as a Darwinian mechanism to thin out weak assets.

Highlights

  • Bear markets lack a strict definition and are described as prolonged price declines. Moreover, cycles within cycles and price corrections (e.g., the sharp drop in May 2021) blur boundaries further, leading to every report giving slightly different bear market periods. However, it is commonly accepted that we are currently advancing through the fourth crypto bear market.
Comparison Table of Layer 1 Solutions
  • Bitcoin experiences significant value gains between cycles. Specifically, the top and bottom of each cycle are manyfold greater than the previous one. For example, Cycle 4’s lowest price is 3.4 times greater than Cycle 3’s minimum. Although this trend seems to be declining, it could hint at investment opportunities.
Bitcoin's Value on the Peaks and Troughs of Bear Markets
  • Bitcoin’s mining rewards halve every 210,000 blocks (roughly four years). Historically, halvings cause a price surge followed by a significant drop. However, prices remain higher than before the halvings. For example, in 2018, Bitcoin fell to around $4,000, about five times lower than its $20,000 peak. Nevertheless, it significantly increased compared to its pre-halving price of about $600. If this pattern continues, a bull run may occur in the next halving (expected in 2024).
Bitcoin's Halvings Effect on Price
  • Crypto market cycles include a bull and a bear run. By examining the troughs and peaks of Bitcoin’s price, we can calculate the duration of each phase. Bull runs last about two to three times longer than bear markets. Note that these durations are subject to change and vary according to the method used.
Durations of Bitcoin Cycle Phases chart
  • Sensationalisation occurs during periods of low market sentiment. Specifically, Bitcoin has been pronounced ‘dead’ more than 400 times since its inception by various media outlets, averaging 35 obituaries per year. Nevertheless, Bitcoin and other cryptocurrencies remain very much alive and in active development.
Image18 1
  • It is no secret that cryptocurrencies are volatile assets. Volatility is often attractive since it can potentially generate significant gains in relatively short periods and facilitates portfolio diversification. Since its inception as a digital asset, Bitcoin has experienced drawdowns of more than 80% thrice. Note that the current drawdown does not even climb onto the podium, being the fourth largest historically and reaching -71.0%.
Bitcoin Historical Drawdowns (US$)
  • Despite price fluctuations, the total cryptocurrency market capitalisation and transaction volume grew multiple orders of magnitude in the past decade. These indexes demonstrate that bear markets do not stifle crypto adoption.
Crypto Global Market Cap and Volume in USD
  • Bitcoin and Ethereum have survived all the bear markets in their lifetimes. Additionally, they have maintained their positions as the largest and second largest cryptocurrencies by market capitalisation respectively while the rest of the top five tokens have experienced significant reshuffling. Billionaire Mark Cuban and Ethereum’s creator Vitalik Buterin welcome bear markets as a way to test projects and clear out weak assets.
Top Five Cryptos by Market Cap Through the Years table
  • When comparing cryptocurrencies with traditional markets (e.g., stocks and gold), it is apparent that common risk factors impact crypto prices. Currently, Bitcoin and the S&P 500 Index (SPX) have a positive correlation of 91.13%. Thus, the current bear market is not solely crypto-specific but also a natural consequence of a general market downturn affecting all risk assets.
Price and Correlation Comparison of Bitcoin, Gold, and SPX
DeFI TVL and the Top Five Protocols

Authors

Research & Insights team


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