Can Crypto Fall Any Further?

Investors in stocks, as well as crypto, are making it very clear over the past month that crypto is in a risk-off environment. Individual markets, such as cryptocurrencies, stocks or commodities, and the economy as a whole, experience cycles of expansion and contraction. It is like the economy is breathing. There are periods when practically everything goes up and others when almost everything goes down.

Bitcoin, Ethereum, and the other leading cryptocurrencies all fell further over the weekend, erasing mild gains made during the week prior. The global crypto market cap is down to $1.03 trillion, a 7.5% drop in just 24 hours, according to CoinMarketCap.

Bitcoin is down 18% in the past seven days and has fallen below $26,000 to $25,513, its lowest point of 2022 and a 12-month low. Ethereum has fared even worse, down 28% in the past week, even after a mostly successful merge test drive on Wednesday on the Ropsten testnet. (On Friday, Ethereum core devs shared their decision to delay the “difficulty bomb,” a crucial step in The Merge, for another two months, which may not have helped sentiment around ETH.)

It wasn’t just BTC and ETH. Every single one of the top 20 coins by market cap has fallen double-digit percentages in the past seven days.

BNB is down 22% in the past week, Cardano (ADA) down 24%, XRP down 18%, Solana (SOL) down 31%, Dogecoin (DOGE) 28%, Polkadot (DOT) 28%, Avalanche (AVAX) 35% and Polygon (MATIC) 25%.

The crypto market has not looked steady all year after a huge bull run in 2020 and 2021, but the current Crypto Winter began in earnest in the first week of May when major coins fell along with the stock market. Then the Terra ecosystem (UST and LUNA) went down in flames (though a Chainalysis report this week linked Bitcoin’s decline more to the broader tech stock selloff, not to Terra). Since then, tech stocks have continued to take a beating and crypto has fallen further. The slide intensified this past week along with the CPI reading for the month of May, which showed consumer goods prices rising 8.6% compared to May 2021, the highest year-over-year inflation figure since 1981.

For years, Bitcoin was pitched as a hedge against inflation, but it has not behaved that way in 2022, and in January of this year hit its highest level of correlation with the S&P 500 and Nasdaq since 2020.

For the moment, crypto and tech stocks are going down hand in hand. Add to the mix the COVID-19 hangover, geopolitical uncertainty, and continued negativity from prominent lawmakers about crypto and you have the likely makings of a prolonged bear market—for crypto and equities.

Bitcoin has gone through multiple cycles in the past and has always bounced back, with a vengeance. In fact, in history, 100% of the people who have bought and waited 4 years or more, have seen their investment grow. History does not have to repeat itself, but it is a very good precedent.

The investment horizon is key. It is very difficult to know what will happen tomorrow. On Wall Street, there are physicists and mathematicians who try and almost always fail. But as we extend the time horizon, the trend is easier to predict.