Are we at the beginning of a crypto bear market?

The cryptocurrency market has been on a steady decline over the past few weeks, with total market capitalization dropping sharply by 8% today. This price action has some speculating that a bear market is beginning, while others remain optimistic that there are still a few months of bullishness to come. The truth is likely somewhere in between and could be related to the resurgence of COVID and the stock market panic.

Over the past eight years, the cryptocurrency market has been following a 4-year cycle. Typically, there is a year-long bull run, with most cryptocurrencies hitting all-time highs. This is followed by a 3-year bear market, with cryptocurrencies losing 50-75% or more in market value. This pattern has occurred twice before, in 2014 and 2017, and could happen again in early 2022.

At first glance, this analysis makes sense, as 2017 was followed by three years of lackluster price action, with Bitcoin falling to lows around $3,000, only to surge to over $60,000 in 2021. If history repeats itself, as it often does, then 2022 will resemble early 2018 and mark the beginning of a massive bear market that will last until 2025.

While this may be a plausible theory, it fails to fully capture the current state of the cryptocurrency market. Unlike 2018, 2021 has seen massive mainstream adoption and marketing that has attracted more investors to the cryptocurrency space, along with a growing public understanding of NFTs and Dogecoin. Some believe that this new adoption will help support the cryptocurrency market, so history will not repeat itself and cryptocurrencies will continue to climb. Additionally, whenever a pattern is discovered in the investment community, many people follow the trend to make money. However, this investment approach rarely works because investment patterns, once discovered and exploited, tend not to repeat. This optimistic view can help explain why the recent price drop was just a drop, and why Bitcoin is still expected to reach $100,000 in the short term.

The truth about the current state of the market is likely somewhere between these two views. While a pattern doesn’t repeat itself over and over again in finance, it’s also true that the perception of an impending bear market could scare off investors, causing prices to fall. On the other hand, the volume of development, venture capital, and adoption in the cryptocurrency space will also help ensure that the cryptocurrency market remains vibrant, even during periods of negative sentiment.

The recent price drop can be attributed to the spread of COVID-19, specifically the Omicron variant, across the globe. This highly contagious variant has led to a significant rise in infected people and ICU beds, resulting in a shortage of workers. Due to all these uncertainties around the world, both the stock market and the cryptocurrency market have taken a hit as investors have turned to safer assets and are unwilling to take high risks.

If Omicron turns out not to be a major problem and the world returns to normal soon, this decline could end quickly as investors regain confidence. However, if labor shortages persist and there is even a possibility of another stay-at-home order, investors will continue to lose confidence in the market and prices will continue to fall.

While it is impossible to predict with complete accuracy what the market will do, informed and well-researched decisions can help protect against downside risk. Any cryptocurrency investor should only invest in assets that are within their risk tolerance range and must accept the high volatility required to achieve the huge gains they ultimately want.