Bankless Founder: The Crypto Market Cycle Has Changed, 2022 Will Be a Turbulent Year
"Crypto is inevitable."Author: bankless/David Hoffman
Source: The Path of DeFi
Entering 2022, the pace of the crypto market became difficult.
BTC fell below $42,000, leading to nearly $1 billion in liquidations. ETH dropped all the way to $3,000, causing significant damage to the DeFi market.
Looking at the Bitcoin price chart, market participants generally believe that its pattern looks… strange.
After reaching an all-time high, ETH also experienced this strange sharp decline, which occurred after the peak.
If the crypto market had died after the peak in May, no one would be surprised. Instead, we consolidated and recovered the upward trend, then set a new all-time high, establishing a strong bullish trend for a broader crypto bull market.
But this trend is facing death, as a large bearish candle appeared after eight weeks of price declines. Bitcoin's famous "S2F" pricing model has clearly deviated from the track (although many did not initially consider it to have any rationality).
It seems that market participants have become pessimistic; the fog is thick, and the outlook is unclear.
What is even more confusing is that the stock market is still at historical highs. Why has the crypto market turned into a bear market while traditional markets are hitting new highs?
What caused these phenomena?
Macroeconomic Inflation
Faster-than-expected inflation has led the Federal Reserve to take a tough stance. The Fed must choose between full employment and price stability. The market seems to worry that the Fed's goal is price stability rather than full employment, which means interest rates will exceed expectations to curb inflation.
Last Wednesday, the Fed released the minutes from the December meeting. The Fed discussed shrinking its balance sheet to continue efforts to more aggressively reduce the loose monetary policy from the pandemic.
I think Alex Krüger's perspective on the Fed's change in stance is very useful:
In short: it's not just about rising interest rates; it's about a rapidly changing stance, namely a more aggressive reduction of the balance sheet.
"Thus, in less than six months, the Fed went from expecting no rate hikes in 2022 (the party continues) to expecting three rate hikes, accelerating tapering, and discussing speeding up 'balance sheet normalization.' 'Balance sheet normalization' was not on anyone's radar for a long time. This is not only a possibility in the short term, but the Fed is also discussing achieving this faster than in 2018.
This is why crypto assets fell 15%-30% in just two days last week.
The market always trades based on what it thinks the Fed will do. It seems the market has become convinced that the Fed is serious about reducing the balance sheet.
The crypto market relies on capital inflows. For prices to rise, the market needs new funds flowing into the industry. When the Fed shifts from injecting $120 billion monthly into the global market to withdrawing $80 billion from it, all types of risk assets in the world will be affected.
It doesn't matter how optimistic some fundamentals of the industry are. If market sentiment leads to insufficient funds flowing in to sustain those prices, people will sell.
If people believe this will lead to price declines, they will sell, causing prices to drop.
Bond Market Trends
Former podcast guest Jim Bianco posted a brilliant tweet explaining the significance of the market turn that occurred last week, which is largely consistent with Alex Krüger's explanation.
In short, the bond market experienced its worst week in history as bond market participants finally "understood" that the Fed would end liquidity. This triggered a major scramble, and when the Fed's money printing machine shuts down, they will rush to exit rather than become "bondholders."
Jim made an argument that the stock market's ATH does not mean any safety, as it has a clear lag:
Therefore, perhaps the stock market is not a safe place right now, but if we are indeed in a market downturn, it would be interesting to see the crypto market bring the stock market into a bear market (regardless of how short or long the bear market is). Perhaps crypto investors are more astute than stock market investors.
If the stock market does indeed turn due to the aforementioned influences, the outlook for crypto assets may not be optimistic.
Changes in the Crypto Cycle
I believe the crypto market is also undergoing a broader change.
The crypto market is experiencing a phase transition from a niche speculative degen market to a global market with a significant amount of responsible capital.
We are moving from a market characterized by regular hype cycles to one with sustainable, stable, and orderly market behavior.
Bitcoin was a household name a few years ago, but now Ethereum, NFTs, and DeFi are as well. The market is trying to price in a new level of global acceptance while also punishing more effectively those who have gone too far ahead of the curve and priced too quickly.
I believe that the transition from an unstable and tumultuous market to a more stable and sustainable market will bring about a new period of volatility.
What happens when we put degens and hedge funds in the same room? How do hedge funds respond to market volatility and cascading liquidations? How do degens handle strong support levels and ATH sellers?
This new interaction is generating new market behaviors, confirming the theory that the typical "4-year crypto cycle is over," while something new is unfolding before us.
What could that be? It remains to be seen.
Living in 2022
As of now, the 2020s have been a chaotic decade, with no signs of a diminishing uncertain trajectory.
- Why is there such a labor shortage?
- How will we solve the broken global supply chain?
- How severe is inflation? Will it get worse or stabilize?
- Has crypto actually achieved meaningful adoption, or are we all just JPEG degens?
The market absolutely dislikes uncertainty, and this decade has produced more uncertainty.
But fortune favors the brave, and there is enough room in this world for those with long-term beliefs to withstand any test of certainty.
So, if you are uncertain, double down on the assets you are most confident in, reduce your leverage, expand your time horizon, and choose to hold.
Because through all this uncertainty, we are confident of one thing:
"Crypto is inevitable."
