Is the bottom of cryptocurrencies near? How long will the volatility last?

Bitcoin and Ethereum have recently been dropping below the psychologically important $20,000 and $1,000 levels. This has left many wondering if the crypto bear market has bottomed out, and if not, how low can it go before the crypto market begins to stabilize? This article discusses a number of indicators that can help determine a bottom.

Bear market factors

The biggest factor affecting this bear market is the Federal Reserve's announcement in November last year that it would start raising interest rates to combat inflation. When interest rates are raised, a large amount of money is sucked out of the economy, which led to a massive sell-off in almost all markets.

Of course, other macro and crypto industry-related factors include: global supply chain shortages, rejection of spot Bitcoin ETFs, concerns about regulators’ crackdown on USDT stablecoins, liquidity crises, etc.

The biggest difference between this cycle and the previous ones is that Bitcoin is more strongly correlated with the stock market. This correlation is mainly due to the heavy involvement of institutions in the last crypto market cycle. These institutions see Bitcoin as a risky asset and trade it like a risky stock. Given this correlation, we can safely say that the stock market should bottom out before we see a sustained rise in the Bitcoin chart.

What matters most now is the macroeconomic situation and the movement of the CPI (Consumer Price Index), the inflation index. If inflation continues to rise, the central bank will have no choice but to raise interest rates, which will lead to further selling. However, when inflation starts to fall, the central bank may decide not to raise interest rates as aggressively as it is now, which will lead to more optimism for the entire stock market + the entire crypto market.

However, the recent situation is not optimistic. The hot inflation data released on July 14 further increased the possibility of rate hikes. Fed Bostic said that the June inflation report showed that the inflation trajectory was not moving in a positive direction, and sustainable job growth showed that inflation needed to be controlled. Former US Treasury Secretary Summers said that inflation is difficult to disappear. The fiscal outlook will deteriorate rapidly. If the unemployment rate does not reach 6%, we will not be able to get out of trouble. A significant slowdown is needed to return to normal.

When will the bear market end?

However, the market is cyclical, and looking back at the past few rounds of cyclical changes can reveal the general laws of Bitcoin's cyclicality. Looking back at the past few bear markets:

In the first crypto market cycle, Bitcoin reached a high of $32 in June 2011 and fell all the way down to $2 in November 2011. This was essentially 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 dropped 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 a record high in the last bull market. According to Bitcoin's historical data, an 80% drop means that Bitcoin could fall to $10,000 to $14,000, and the bear market bottom could be later this year or early next year.

Analysts' outlook

Meltem Demirors, chief strategy officer of Coinshares, said that Bitcoin has always been a "cyclical asset" and that historically, the decline from the all-time high to the bottom of Bitcoin is generally 80% to 90%. Therefore, Bitcoin still has room to fall further. At present, Bitcoin has only fallen by about 65% from its all-time high in November last year. Bitcoin will have a strong support level at $20,000 and is not expected to fall below $14,000. In addition, there is no "catalyst" for the rise of cryptocurrencies in the near future, and it will take some time for the trend to reverse. During the bear market, a large number of cryptocurrencies will be eliminated. From a long-term perspective, most cryptocurrencies will return to zero, and only the strongest cryptocurrencies will survive. Bitcoin will hit a new all-time high again in the next 24 months.

Adrien Treccani, CEO of Swiss cryptocurrency company Metaco, said that the market crash will have disastrous consequences for companies in the industry, and predicted that crypto startups may enter a new phase within six months. The current market trend is a bubble bursting, which may bring new opportunities.

According to data from blockchain analysis company Glassnode, during the course of May-June this year, the price of Bitcoin traded down to the $20,000 region, which became an important trigger point for investor capitulation and new buyers, and therefore became a node for Bitcoin to change hands. The Bitcoin that has just been resold is now in the hands of higher-conviction holders and needs to go through a process to mature, and while many bottom-forming signals are in place, the market still needs some time and pain to establish a resilient bottom, and Bitcoin investors are not out of the woods yet.

Yassine Elmandjra, an analyst at ARK Investment Management under Cathie Wood, said that due to the unfavorable macro environment (such as economic recession, continued interest rate hikes by the Federal Reserve, etc.), risky assets such as Bitcoin may continue to suffer losses. From the analysis of two indicators, one is the unrealized net loss (NUPL). The 17% drop in this indicator indicates that Bitcoin may suffer another correction. NUPL fell to about 25% at the bottom of the previous market cycle; the other is the 200-week moving average. Bitcoin fell below the 200-week moving average for the first time in this bear market on a short-term and long-term cost basis, indicating that the king of cryptocurrencies may be approaching another "generational bottom."

Giles Keating, director of Bitcoin Suisse, said: "We are approaching a point where some of the really excess leverage has now been driven out of the system and a bottom is starting to form. While there is still a risk of further liquidations, a lot of the really big liquidations have now been completed and a base is really forming."

Mike Novogratz, founder and CEO of Galaxy Digital Holdings and billionaire investor, said that cryptocurrencies are closer to the "bottom" than U.S. stocks. Ethereum should be around $1,000, Bitcoin is around $20,000, and cryptocurrencies are much closer to the bottom. However, now is not the time to deploy a lot of capital unless the Federal Reserve has to stop raising interest rates due to the bad economy or even consider cutting interest rates.

It is worth mentioning that according to Bloomberg's MLIV Pulse survey, many investors believe that the price of crypto assets will get worse. The survey was conducted from July 5 to July 8 and received responses from 950 investors. About 60% of respondents said that Bitcoin is more likely to fall to $10,000 than to rebound to $30,000.