How an ‘extreme fear’ bitcoin market compares to the past and what to expect next

Bitcoin was created in 2009, not 2019 as an earlier version of this article stated. The bug has been fixed.

Stablecoin USDTerra, or UST USTUSD,
-9.28%,
once among the top 10 cryptocurrencies by market capitalization, it lost its peg 1-to-1 against the US dollar, falling as low as 6 cents on Friday, according to data from CoinDesk. MOON MOONUSD,
9.09,
another UST-backing cryptocurrency, fell to near zero from over $80 in early May, with its market capitalization down by over $40 billion since early April.

It marks “the largest wealth destruction event in the short history of crypto markets,” since Bitcoin was created in 2009, crypto trading firm QCP Capital wrote in a note on Friday.

Explained: Why is UST crashing, LUNA? Collapse of a $40 Billion Cryptocurrency, Explained

Meanwhile, bitcoin BTCUSD,
-3.99%
on Thursday it fell to $25,402, the lowest level since December 2020, before recovering to around $30,000 on Friday, according to data from CoinDesk. The bitcoin fear and greed index is currently at one of its lowest points, indicating extreme fear.

TetherUSDTUSD,
+0.01%,
the largest stablecoin, briefly fell to as low as 96 cents against the dollar on Thursday, before recovering to $1.

More than $400 billion has been removed from the crypto market for the past seven days, according to CoinGecko. All sectors within the crypto space have seen double-digit losses during this period, with cryptocurrencies related to Web 3, the so-called next generation of the internet, posting the largest loss of 41% on average, according to analysts at Messari.

The series of events may herald the start of another “crypto winter,” an industry insider said, echoing a Common topic this week on Twitter.

Some are more optimistic. “It’s a pattern. When we look at what happened in 2014, the accident happened and there was a huge panic. People say, oh, crypto is dead. Will not return. But of course it’s back,” Mike Belshe, founder and CEO of crypto infrastructure provider BitGo, told MarketWatch in an interview.

To be sure, the industry is still nascent and lightly regulated, while the crypto market remains volatile and high risk.

Bitcoin reduction

Hitting a Thursday low of $25,402, bitcoin is down 63% from its all-time high of $68,990 in November. The percentage decline is larger than the 54% drop from the cycle high in July 2021, but smaller than in other bear markets.

The chart below shows bitcoin’s previous drawdown from each cycle high.

glass node

In March 2020, bitcoin was down as much as 77% from the cycle high, according to data from Glassnode. In the bear markets of January 2015 and December 2018, bitcoin capitulated to lows of 85.5% and 83.8% from local highs, respectively, according to data from Glassnode.

Market below?

Some said that Bitcoin is approaching a “generational cyclical bottom”.

Bitcoin’s low on Thursday is close to its actual price, the aggregate cost basis of on-chain investors, which is currently $24,000, Will Clemente, principal insights analyst at bitcoin mining firm Blockware Solutions, wrote in a statement. friday note. “Any price below realized price should be viewed as outlier,” Clemente wrote.

Historically, whenever the price of bitcoin got close to the actual price, it indicated a buying opportunity, Clemente told MarketWatch in a recent interview.

Also worth watching is bitcoin’s 200-week moving average price, which generally indicates a cyclical bottom, Clemente said. It is currently slightly above $21,500.

Still, large uncertainties remain in financial markets, as evidenced by price actions in stocks.

Read: Despite the bounce, the S&P 500 hovers dangerously close to the bear market. Here’s the number that counts

“I think this is just the beginning of a continued decline in crypto,” Jay Hatfield, chief investment officer at Infrastructure Capital Management, told MarketWatch in a recent interview.

Hatfield attributed bitcoin’s strong performance in 2020 and 2021 in part to the Federal Reserve’s quantitative easing policy. “We had an unprecedented increase in liquidity from the Fed, buying $120 billion a month in securities. And now we’re going to have an erratic shift towards a liquidity squeeze of $95 billion a month,” Hatfield said.

“The Fed hasn’t even started to make quantitative adjustments. They just said they were going to do it,” Hatfield said.

Hatfield estimated that Bitcoin could drop to $20,000 by the end of this year, saying that in a worst-case scenario, it could return to its pre-pandemic level, which was around $10,000. “I’m not predicting we’ll get there, but $10,000 would be a reasonable target,” Hatfield said. Hatfield compared bitcoin to Cathie Wood’s flagship Ark Innovation ETF ARKK,
+11.82%,
which is down more than 70% from its peak and roughly the same level in March 2020.

Read: As Ark’s flagship fund falls 76% from its peak, Cathie Wood still sees its shares as residing in “deep value territory.”

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