The cryptocurrency market in 2022 has been a sea of red, which many have gone as far as to compare the bloodbath witnessed in the market to that of the ‘red wedding’ episode of the hit series, Game of Thrones. Since the start of the year, the cryptocurrency market has been taking a beating but to those who are familiar with the volatility that comes with the market, to them, it really just feels like a regular Tuesday.
At the start of the year, the cryptocurrency market capitalization stood at approximately $2.25 trillion with Bitcoin trading at $47,833 per coin as at the time, according to Trading View. Today, just four weeks into the new year, we have the cryptocurrency market capitalization at approximately $1.58 trillion, losing approximately $670 billion in market capitalization. This means the market is down by approximately 30% from the start of the year.
As you would expect, a major contributor to this trend is Bitcoin, as it currently trades $34,875, a price point not traded since July 2021, losing approximately $13,000 since the start of the year. This represents a Year-to-Date (YtD) decline of approximately 27.15% as of the time of this writing.
Due to Bitcoin’s high capitalization and weight on the market, it contributed to $225 billion or 33.5% of the total market capitalization lost so far in 2022, as it started the year at approximately $877 billion to currently stand at $652 billion as of the time of this writing.
As many say, once Bitcoin sneezes, the entire cryptocurrency market catches a cold. This is evident because the altcoin market has seen significant declines with majority posting double-figure losses. The altcoin market capitalization has lost approximately 31.60% from $1.35 trillion at the beginning of the year, to currently stand at $919 billion, losing approximately $431 billion in market capitalization.
With this, many are wondering why the market is taking such a beating at the beginning of the year, which has been historically bullish for cryptocurrencies. Data would suggest that it is a combination of factors which we will dive right in.
U.S. Federal Reserve hawkish stance
A major factor will be the United States’ Federal Reserve (Fed). The US Federal Reserve, in 2022, is expected to hike interest rates multiple times through the year to curtail the rising inflation in the country. An increase in interest rate means that safer investments like bonds and commercial papers will give better returns than before. This then discourages investors from investing in risky assets like stocks and cryptocurrencies because they can get more guaranteed returns on safer assets.
So far, the Fed has stated it would hike interest rates at least 3 times this year however, JPMorgan CEO Jamie Dimon, predicts that the Fed will raise rates six to seven times in 2022. Although the rate hikes are expected in March 2022, the market is believed to be pricing in these dynamics. This questions the narrative of Bitcoin as an inflation edge.
Sell-off in Wall Street’s tech stocks
Asides from the expected stance and action of the U.S. Fed, another factor causing the bleed in the cryptocurrency market is the sell-off on Wall Street, particularly on technology and growth-related stocks. There is a strong correlation between the cryptocurrency market and the U.S. equities market, particularly the Nasdaq.
The Nasdaq, the tech-heavy index, posted a 2.72% loss for the week, its worst percentage drop since March 2020. It had earlier in the week confirmed it was in a correction, as it dropped over 10% from its November peak. The Nasdaq has now fallen 14.3% from its November peak. A major driver for this is the declines seen on stocks like Apple, Tesla and Amazon who are the highest capitalized companies. Also on Friday, Netflix shares tumbled 21.8%, weighing on the S&P 500 and the Nasdaq, after the streaming giant forecast weak subscriber growth.
Russia’s Central Bank’s call to ban crypto
Another factor weighing in on the declines seen in the cryptocurrency market is the proposal by the Russian Central Bank to ban cryptocurrency. The Central Bank of Russia stated it was proposing to the government that all use and mining of cryptocurrencies on Russian territory be banned and made illegal. The bank stated that the stance is taken due to the risks that cryptocurrency poses to financial stability, the sovereignty of monetary policy as well as the financial safety of its citizens.
Low Whale and funding activity
On-Chain Analyst William Clemente also revealed in a twitter trend that a factor causing the sell-off in the market is the lack of demand for the cryptocurrency asset, Bitcoin, which ultimately points to low funding in the market. He stated, “On-chain shows you the supply side. You can have all the holding in the world of an asset, but for a supply shock to occur you need demand. (Low available supply + demand) There has been none for months. So yes, this HODLing behavior has looked strong since July when I originally started pointing out the bull div then. There has been no demand though (likely because of macro uncertainty). On-chain still looks strong, which is a good thing to know, but not an end all be all.”
William also said in a tweet that whale entities (big money holders) of Bitcoin have had little to know participation in the market. He stated, “Whales still missing since November,” along with a chart titled “whales filtered for all known entities,” which shows a decline in whale activity in the market.
Data from Coinglass also reveals that there are a lot of leveraged longs in the cryptocurrency market which also contributed to the price melt down witnessed on Friday. A total of $1.14 billion liquidation was seen on Friday with longs accounting for 86.50% of the total liquidations on the day as Bitcoin’s price fell from the $40,000 support zone.
Is the Bull Market over? Expert opinion
Opeoluwa Dapo-Thomas, an international markets analyst, had this to say on the state of the cryptocurrency market, “I’m afraid the bull market has come to an abrupt end. Key support levels broken, a trillion dollars wiped off the entire crypto market value and with fundamentals pointing towards the end of easy money and tapering, a lot of investors are taking their profits and selling off as panic and fear has gripped the markets.
“Bitcoin, the mother of all cryptocurrencies has dropped 50% from its all-time high, if this happened in the stock markets, we would call it a stock market crash. So, no need to sugarcoat it, it’s an unregulated asset with no circuit breakers hence the free fall from bullish territory to bearish territory in a short time. Cryptocurrencies has always been a speculative, risky asset and these few days just confirmed it.”
Olumide Adesina, an analyst at Quantum Economics, had this to say, “When the market drops by 20% from a recent high, it is considered a bear market, thus Bitcoin market has definitely entered a bear market, as it has lost more than 50% from its record high in November, while the market also lost a much larger percentage, giving rise to the second-largest decline in dollar terms.
“The crypto market is responding to the same things that are affecting risk assets around the world, Furthermore, there is still some time to go before there is any sort of bullishness since a bottom hasn’t formed yet and confidence hasn’t returned.”
Although many are saying the bull market is over, however, a 50% crash in the cryptocurrency market is actually quite common.
In fact, this is the fourth time Bitcoin has dropped over 50% in the last 4 years and has seen its price rally to all-time highs after.
Investors are advised and reminded to trade cryptocurrency markets with caution as they are speculative assets and are very volatile.