Factors Leading to a Crypto Bear Market
- Over the past couple of weeks, investor confidence has been dropping in both the crypto and stock markets.
- A couple of potential reasons have contributed to the downfall of the crypto market, such as the TerraUSD stablecoin collapsing and the possibility of an economic recession.
- Avichal Garg, managing partner of a crypto investment firm, believes the bear market will continue for around one to two years. Still, then again, this is speculative and subject to change depending on economic conditions.
Over the past couple of weeks, investor confidence has been dropping in both the crypto and stock markets. Moreover, with the current economic climate, many investors have begun offloading most of their investments as there are rising concerns about a potential recession, leading to a crypto bear market.
Reasons Behind a Crypto Bear Market
Before listing the reasons behind the crypto bear market, it is essential to know what ‘bear market’ means. A bear market is defined as when an individual financial/digital asset or index drops by more than 20% in value for a prolonged period.
TerraUSD Coin Collapse
One of the first main causes of the crypto bear market was the collapse of stablecoin TerraUSD. A stablecoin is defined as a digital asset whose price is tied to a currency, making them more stable and less risky investments than other altcoins. Therefore, crypto investors who wish not to follow the generic route of investing in Bitcoin and Ethereum felt that these stablecoins presented a profitable opportunity while minimizing the risk.
Unfortunately, despite having its value tied to the United States Dollar (USD), TerraUSD still collapsed, causing many investors to lose a decent portion of their investment. Consequently, this collapse caused Binance, the company on which TerraUSD was trading, to be at the cornerstone of a class-action lawsuit in which they are getting sued for falsely advertising TerraUSD as a stablecoin.
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Consequently, in fear of other coins following a similar sequence to TerraUSD, investors began selling their positions. This panic from investors led to many cryptocurrencies plummeting in value and caused the crypto market to enter a bear market.
In 2022 Q1, the Gross Domestic Product (GDP) dropped. The GDP determines the value of goods and services produced in one year. When GDP increases annually, it means the economy is growing rapidly, but people cannot afford to spend more money, that is when the economy begins slowing down.
The current United States (U.S.) economy is experiencing an increase in GDP. As rising prices have led to consumers spending less; the economy has begun slowing down. However, as of right now, the economy is not in a recession, as there has only been one-quarter of negative growth.
But, if Q2 data shows negative economic growth as well, then the National Bureau of Economic Research (NBER) will officially declare that the U.S. economy is in a recession.
When the COVID-19 pandemic hit, non-essential services were stopped due to the restrictions imposed by the government. As a large portion of people were not working, they had to use their savings to pay for their living expenses. With the rising unemployment rate, COVID-19 relief packages were made to prevent the economy from collapsing, and this led to high inflation rates as people were attaining free money from the government via stimulus checks. The free money earned by people caused the cost of living to gradually increase over the course of the last couple of years.
At the beginning of the pandemic, the low-interest rates made it easier for more people to receive a mortgage and buy a home. However, with the uncertainty caused by COVID-19, the demand for housing increased, causing prices to rise. Furthermore, the fixed number of homes on the market also drove prices up, causing many to look at other living alternatives, such as renting.
How long will the Crypto Bear Market last?
Avichal Garg is a managing partner of Electrical Capital, a crypto investment firm with over $1 billion in assets. He mentioned that he speculates that the current crypto bear market will last around one to two years.
His reasoning behind this timeline is that since a recession may be coming soon, many people will be looking to save money, which means they will be liquidating their investments. As a result, the trading price also lowers when there is a sudden surge of people looking to sell off most of their assets.
Ultimately, no one knows how long the recession will last or if there will be one, so until some key pieces of the puzzle become clear in the future, no accurate timeline can be determined on how long this bear market will last.
The Money Wrap-Up
Each quarter will experience bear and bull markets at one point or another. Despite the current fear from Wall Street and retail investors, all markets experience times of fluctuation. Therefore, the current short-term downfall in the crypto and stock markets should not be overly concerning. After all, investments are typically long-term and for retirement, so short-term losses should not be too worrying.
Disclaimer: The mentioned remarks regarding cryptocurrency should not be considered financial advice. Should you invest in cryptocurrency or any other business endeavors, do your due diligence prior to investing. CapWay is not liable for any losses made from investments based on the above information.
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