Crypto crashes $1 trillion in five months, but it’s ‘not game over yet’, experts say

What is causing the “fear-driven” crypto crash? Do investors need to tread more cautiously? Will Bitcoin and Ethereum bounce back? Experts talk to Arabian Business about all this and more!

With the total crypto market cap falling by $1 trillion on a year-to-date basis, the future of cryptocurrencies as the “new age digital asset” has been called into question by numerous experts.

Top cryptocurrencies such as Bitcoin and Ethereum are down between 45 percent and 55 percent ahead of other significant altcoins such as Cardano that are down by more than 60 percent.

While rising inflation and geopolitical instability caused by the Ukraine war “could be partly to blame”, there’s a lot more behind the crypto crash.

Market panics leads to recent selloffs

The global market is also witnessing a move away from risk-on assets such as tech stocks and cryptocurrencies due to the actual and perceived increase in interest rates by central banks around the world.

“Within the cryptocurrency market itself, the recent collapse in the value of Terraform Lab’s algorithmic stable coin and the Luna Guard Foundation’s inability to protect its dollar peg have frightened the broader cryptocurrency ecosystem,” said Amir Tabch the CEO of Securrency Capital.

In addition to the macro-economic factors, “the most recent selloff has also been influenced by the fall of various stablecoins. These are cryptocurrencies that support their crypto assets by controlling the equivalent in real world assets, meaning they should never really trade for under $1,” Mohammed Shaheen, the CEO of Seven Capitals, added.

The chief investment officer of Century Financial, Vijay Valecha, said: “With Nasdaq 100 down by 25 percent year-to-date, the ongoing drawdown in US tech stocks has created an atmosphere of fear and panic. To make matters worse for the crypto markets, the Terra Luna stable coin debacle has spotlighted the major cons of using blockchain and cryptocurrency as the new age asset.”

Impact of inflation and corresponding rise in interest rates

Does this mean that investors have begun to question the basic fundamentals of blockchain and smart contracts that underpin the blockchain ecosystem?

Christopher Flinos, the CEO of Hayvn, added: “Rising interest rates since increased size of the crypto market has led to increased correlation.”

The UAE Central Bank (CBUAE) decided to increase interest rates for the second time this year, following the US Federal Reserve’s move to increase the interest on reserve balances (IORB) by 50 basis points for the first time since 2000 in order to curb rampant inflation.

While on one hand this move has raised concerns around the volumes of crypto due to its impact on liquidity and the opportunity cost of investing in volatile assets, the market is also witnessing investors reacting to the negative sentiment around higher borrowing costs affecting the risk-reward of crypto investments.

Responding to whether this “panic” in the crypto market is likely to continue, Flinos said: “Yes it will. We expect a difficult few months ahead which gives our asset managers an amazing opportunity to trade off this volatility.”

Keep a ‘cool head’ through the ‘fear’

This brings to the forefront the possibility of untapped opportunities for those who can keep a ‘cool head’ in the midst of the frenzy.

Shaheen explained: “This asset class has always been volatile and such crashes have happened before – in 2021 and in 2017 – and it has bounced back to all-time highs. Investors should hold on to their investments and focus on long-term goals.

“Whether the crypto slide continues remains to be seen. However, there are chances the bear market will continue as investors remain cautious about buying on dips.”

One of the major precursors for crypto price stabilisation and recovery would be a recovery in US tech stocks. Currently, the trend visible across these assets is “sell on rise”, experts said.

Valecha said: “Markets have very well not yet reached the stage of peak fear. This likely implies more volatility and possible correction across these risk assets.”

Will crypto such as Bitcoin and Ethereum pull off another comeback?

Clearly confidence is shaken and people are in no mood to take on risk, but will the market weather the storm, and rise again?

Shaheen responded: “It is not game over yet. Bitcoin has survived corrections of 70 percent to 80 percent in the past. The cryptocurrency rebounded at the tail end of last week to top $30,000. On Monday, it was trading at $30,279.13. Some big players could take advantage of the recent dip, as an opportunity for institutions to build positions at better levels.”

Yet, this is not necessarily good news for cryptocurrencies either. From their November 2021 peak, Bitcoin and Ethereum are down by more than 60 percent.

From a significantly broader time perspective – from the start of the bull cycle, March 2020 to date, Bitcoin is up by 650 percent, whereas Ethereum is up by 2,300 percent.

“These cryptocurrencies are already discounting the major negatives often associated with cryptocurrencies. The entire notion of it being an inflation hedge and acting as a digital gold has been negated. Due to its ongoing correction cycle, bottom fishing and dip-buying could go against the investor’s average buying positions,” Valecha said.

“Chart technical and underlying crypto market trends point towards a bleak outlook. While the amount of drawdown currently being seen in Bitcoin and Ethereum suggests an excellent opportunity to enter, investors in this space are well advised to watch out for any signs of stabilisation in US equity indices and the broader crypto markets before entering into any major positions.”