The most destructive bear market in digital asset history, according to the data

As the crypto market develops and matures, the impact of macroeconomic factors on the crypto market is gradually increasing. As the Federal Reserve is expected to raise its benchmark interest rate by 0.75%, the largest rate hike in nearly 30 years, the prices of Bitcoin, Ethereum and other major cryptocurrencies fell on Monday. According to data provided by CoinMarketCap, the total market value of all cryptocurrencies has fallen from $1.08 trillion last Wednesday to $1 trillion.

In fact, like traditional markets, the cryptocurrency sector is cyclical, but compared to previous bear markets, the industry is currently experiencing what analysts call the "worst bear market" in history. Although US President Biden has stated that the United States will not experience an economic recession, the impact of macro-level inflation and interest rate hikes, as well as the market's potential expectations of an economic recession, still have a profound impact on the crypto market.

The most destructive bear market in history

Bitcoin has always been a "cyclical asset". Historically, the decline from its all-time high to its bottom is generally 80% to 90%. In a bear market, most cryptocurrencies will return to zero in the long run, and only the strongest cryptocurrencies will survive. Generally speaking, a market crash will have disastrous consequences for companies in the industry, but at the same time, when the market trend is a bubble burst, it may also bring new opportunities.

Looking back at past bear markets: In the first crypto market cycle, Bitcoin reached a high of $32 in June 2011 and fell all the way to $2 in November 2011. This was basically a 90% drop in price from high to low, and it took Bitcoin about 5 months to find its bear market bottom.

In the second crypto market cycle, Bitcoin reached a high of $1,100 in November 2013 and fell all the way to $180 in January 2015. This resulted in a price drop of more than 80% from high to low, and it took more than a year for Bitcoin to find its bottom.

In the third crypto market cycle, Bitcoin reached a high of $20,000 in December 2017 and fell all the way to $3,200 in December 2018. The price fell more than 80% from high to low, and it took Bitcoin a year to find its bear market bottom.

Last year, Bitcoin reached $69,000 in November 2021, marking an all-time high during the last bull run. Grayscale noted that Bitcoin's realized price (i.e., the sum of all purchase values ​​divided by the number of BTC currently in circulation) fell below the market price on June 13, 2022, marking the beginning of the bear market.

According to Bitcoin's historical data, an 80% drop means Bitcoin could fall to $10,000 to $14,000, with the bear market bottom likely to be later this year or early next year. According to Grayscale's survey results, cryptocurrency investors may need to wait about eight months for the next bull run.

Glassnode reports that many on-chain and market performance indicators have reached historically and statistically significant lows. On a statistical basis, the market has achieved the largest monthly decline in history. This is supported by selling behavior that locks in absurd relative losses, which are so large that only 3.5% of historical trading days have seen greater capital outflows. The ratio between loss and profit transfer volume has reached an all-time high, a synonym for deeply troubled investors.

In addition, many countries are under the weight of inflation and other economic conditions in 2022. Some analysts believe that the outlook for digital currencies is cloudy, which is a direct result of macroeconomic uncertainty and Bitcoin's strong correlation with stocks and fiat currencies. As the crypto market develops and grows, coupled with its stronger connection with macro factors, the losses in the bear market will be greater. Given the extensive duration and scale of the current bear market, it is reasonable to believe that 2022 will be the most destructive bear market in the history of digital assets.

Data gradually shows strong destructive

The entire crypto economy is now worth $1 trillion after losing more than $2 trillion over the past eight months. The top ten major crypto assets (excluding stablecoins) have all lost 65% or more in USD value.

According to Arcane Research data, the supply of stablecoins in circulation increased 8.7 times to $165 billion from August 2, 2020 to January 1, 2022. However, as of July 1, the number of stablecoins in the entire network fell to $151.3 billion, of which $35.1 billion fell in the second quarter, reaching 18.8%, the largest quarterly retracement in the history of stablecoins.

Data shows that NFT trading volume in various markets reached $4 billion in May, while the trading volume in June was $1.04 billion, a month-on-month decrease of 74%. It is reported that the 74% drop is the largest month-on-month drop in NFT market trading volume so far, followed by a 48% drop in NFT market trading volume from February to March this year.

As of July 6, the number of cryptocurrency exchanges worldwide stood at 500, down from the highs of previous months. Considering the number on June 6 was 525, according to CoinMarketCap, Finbold determined by using a web archiving tool that the industry lost 25 exchanges in 30 days.

In addition, due to the long-term downturn in the digital asset market, the number of active cryptocurrency users of Bank of America has fallen by more than half. The bank's cryptocurrency users fell from more than 1 million when Bitcoin hit a new high in November 2021 to less than 500,000 in May this year.

According to Cryptocompare data, the asset management scale (AUM) of crypto investment products hit a record low in June 2022. The data showed that crypto exchange-traded funds (ETFs) fell the most, with the asset management scale falling 52.0% to US$1.31 billion. On the other hand, trust products, which account for 80.3% of the market, fell 35.8% to US$17.3 billion that month. Exchange-traded commodities (ETCs) and exchange-traded notes (ETNs) fell 36.7% and 30.6% to US$1.34 billion and US$1.61 billion, respectively.

Cryptocompare said all four product types hit record lows, with trust products’ AUM hitting its lowest level since December 2020, while ETC’s AUM reached its lowest level since October 2020. ETNs and ETFs followed closely behind, hitting their lowest AUM since January 2021 and April 2021, respectively.

The differences of this bear market and the direction of breakthrough

The current crash began earlier this year due to macroeconomic factors, including rampant inflation that caused the Federal Reserve and other central banks to raise interest rates. These factors did not exist in the previous cycle.

Moreover, Bitcoin and the broader cryptocurrency market have been trading in close correlation with other risk assets, especially stocks. Bitcoin posted its worst quarter in more than a decade in the second quarter of this year. During the same period, the tech-heavy Nasdaq fell more than 22%. The sharp reversal in the market caught many industry insiders, from hedge funds to lenders, off guard.

Separately, Carol Alexander, a professor of finance at the University of Sussex, said another difference was that in 2017 and 2018, no large Wall Street players were using "highly leveraged positions."

Certainly, there are similarities between today’s crash and those of the past — not the least of which is the huge losses inflicted by novice traders who were lured into the cryptocurrency space by the promise of high returns.

But based on the broader macro factors, we can see that a lot has changed since the last major bear market, which is why this one is larger in scope and size, and the losses are huge.

Due to the emergence of centralized lending programs and so-called "decentralized finance" (DeFi), crypto investors have accumulated a lot of leverage. Not only retail investors, but also many crypto companies have been exposed to risky bets that are vulnerable to "attacks" in this bear market, including terra. At the same time, a more obvious problem is that cryptocurrency companies rely on each other for loans, and the bankruptcy of Three Arrows Capital is based on this.

Following the broader market crash, it’s unclear when the market turmoil will finally subside. However, analysts expect more pain to come as crypto companies struggle to repay debts and process customer withdrawals. James Butterfill, head of research at CoinShares, said the next dominoes to fall could be cryptocurrency exchanges and miners. More top investors even say the crypto bear market could last two years.

So what needs to happen for prices to rebound? Some say that we need to see a turnaround in the stock market before real capital flows back into Bitcoin, based on the strong influence of macro factors. “Don’t fight the Fed” is a common expression used by investors to explain one of the most influential forces in global financial markets. The Fed is still adhering to its policy of raising interest rates, and the prices of risk assets around the world have been falling, making it difficult to see a broader recovery or even capital flows into the cryptocurrency ecosystem.

As for the crypto market alone, some people hope for a successful Ethereum merger, approval of a spot Bitcoin ETF, adoption by more large companies, and more countries using Bitcoin for legal tender. Although such a trend exists, it does not seem easy to achieve, and the current bear market will still exist for some time.