Cryptocurrency often splits public opinion like marmite: you love it or you hate it. Those who believe it’s a scam or fad will decry that crypto is already dead while crypto experts and communities continue to hype up its endless potential. So who’s right?
No one has the ability to know whether crypto will be dead in a year or go on to thrive for decades to come. But historical patterns and evidence can give us insight to make a sound judgement to buy or sell. As with any investment, we weigh up our options and roll the dice if we like the odds.
The state of crypto
The crypto market tends to follow the performance of bitcoin, the dominant leader. Bitcoin took a beating in 2022 plummeting around 60% in value, but it’s a big stretch to claim that it is dead given that the price has still increased over the last 5 years. And while there’s no guarantee the price will bounce back this time around, as you’ll find out shortly, there is reason to believe this is a ‘crypto winter’ rather than its death. However, first it’s important to understand why the market has crashed as this is a novel circumstance during a key transitional phase in crypto.
Over the years, 99Bitcoins has recorded the death of bitcoin 467+ times by people and publications, which brings such hyperbolic claims into question, however, there’s no ignoring the industry’s ongoing reputational damage with the collapse of the crypto exchange FTX, legal probes from government, and dwindling confidence of investors who could pull the rug out from other struggling coin exchanges at any second. Even key players like Binance are under scrutiny within a contracting global economy. People, businesses and government are being financially squeezed and so a clamp down on the unregulated flow of money or malpractice was inevitable. Crypto platforms are trying to weather the storm by cooperating more with financial institutions and law makers to help ensure they still have a future. It’s not clear how this will impact attempts to destroy the space or demoralise advocates of decentralisation who champion DeFi crypto as a means for relying less on traditional banks.
Why the crypto market crashed
Unless you’re new to crypto, it won’t come as a surprise experiencing a steep price crash in what has always been a volatile market. It has bounced back each time so far, but is this time different? Well, in a way it is. The fundamental value of bitcoin was driven by demand from communities of long-term hodlers and believers in decentralisation. In a thriving bull market crypto exchanges started spending big bucks on marketing; enough to buy naming rights for sports areas and feature in Super Bowl ads. With the popularity of cryptocurrency reaching the mainstream it has attracted cautious new investors including large investment firms who are willing to sell large quantities at the first sign of trouble. Sizable sell offs can create a domino effect spurred by panic. This has also contributed to crypto coin price fluctuations being more closely tied to the wider stock market, especially during an economic downturn.
Ultimately, a combination of factors caused the crypto market crash in May 2021, then November, and again around March 2022. Here’s the timeline for what happened.
The first major crash took place after the first bubble of exponential growth popped going into 2018. Crypto was declared dead and struggled over the next few years but managed to continue growing overall.
It wasn’t until the Covid pandemic hit that everything changed. Economies around the world seized around March 2020 due to lockdowns. Everything momentarily crashed but as vaccines rolled out in 2021 business started to boom and crypto prices shot up to record highs.
This was the latest bubble waiting to burst, of which we’re seeing the effects right now. Because in spite of massive economic expansion, supply chains were backlogged, businesses had collapsed, and governments printed up to trillions for vaccination programs and financial aid. The pandemic chaos caused high inflation rates, and people and finance institutions were taking notice of rising prices for essentials like food and fuel. Wall Street speculators already expected upcoming stock market corrections from the covid pandemic but it was difficult to know exactly when to sell, leading to massive volatility throughout 2021.
May 2021 crash
In May 2021, JP Morgan released a report stating that institutional investors were dumping bitcoin in favour of gold. This helped bring the market to high alert as top firms moving to safer assets indicated a potential upcoming slump in the economy. This shook confidence in the market and led to a ripple effect with others selling their assets. However, the ~30% crash in bitcoin price also came shortly after Elon Musk’s announcement that Tesla would no longer accept bitcoin as payment, citing environmental concerns. This was a significant blow as bitcoin infrastructure and mining would require massive change to reduce emissions.
November 2021 crash
Prices began recovering in July until it reached a historical high of ~$65,000 in November and dipped once again. Then it went from bad to worse. The November crash didn’t come from any one event. With such rapid crypto price spikes leading up to this point at the same time as growing economic instability, there was an inevitable pull back on the purchase of bitcoin. Meanwhile, China continued cracking down on bitcoin mining, extending pressure to state-owned firms. And a new highly contagious South African Covid-19 variant was expected to spread across the globe and cause more lockdowns.
March 2022 crash
Bitcoin began 2022 valued at ~$47,000 and put up a good fight to remain that way. But the Ukraine-Russia war was escalating, which was a huge concern for investors. Russia is a key exporter of oil, wheat and other important commodities with many European countries relying on it to meet energy needs. The West hit them with economic sanctions and Russia retaliated, sending crypto into another period of decline.
May 2022 crash
Barely a month later, TerraUSD imploded causing many crypto investors to lose their life savings. This was a stablecoin considered to be a less risky asset but it de-pegged from the dollar and Terra’s coin LUNA lost almost all of its value overnight. This catastrophe gained widespread media attention and no doubt scared away millions of people from reinvesting in crypto for the foreseeable future. Bitcoin dropped from ~$38,000 to $29,000.
June 2022 crash
Inflation rose to ~9%, up from the average 2.56% and households everywhere were feeling the effects of a recession, albeit unannounced. The U.S federal reserve stepped in to raise interest rates and projected high rates over the next year. This resulted in people paying out more each month to meet debt obligations and that increased the likelihood of crypto sell-offs.
Now bitcoin was under the $20,000 threshold where it remains today ($16,284 as of 24 Dec 2022).
Is crypto going to recover?
Based on the historical growth of bitcoin, it’s very likely that crypto will recover in due time. We have entered a bear market in 2022, which could lead to a few years of stagnation. The crypto industry is worth trillions so there is a lot of vested interest in keeping it going. Although many big firms have sold their coins (for now), plenty of tech juggernauts like Elon Musk and Jack Dorsey remain advocates of bitcoin. Crypto is more tied to the stock market than ever and with regulatory cooperation to help avoid further blows to the price of bitcoin, we may see a rebound at a similar time to the wider market. However, too much major reputational damage in the near future could create long-term distrust and sink bitcoin to below $10,000. If too many people pull out throughout the recession, prices may never return to previous levels. Because there isn’t currently much real-world application it is reliant on demand from future perceived value. The vast majority of crypto investors just hold their assets so there is less risk of oversupply keeping prices too low. The main concern would be if the current recession ends up more like an economic depression, in which case investors would likely be forced to sell in order to survive.
Bitcoin has moved beyond a fad. The blockchain it’s built on has created a new, more efficient way to securely transfer and keep track of digital currency and assets. We have already seen this with NFTs and the rise of Web3, an idea for a new iteration of the World Wide Web that incorporates this technology. All this points to a future with crypto in it. The Metaverse, if it ever catches on, could also use crypto creating more demand than ever.
Bitcoin price history (date: 24 December 2022)
Should I invest in crypto?
It’s never a great idea to put all your money into a market as volatile as cryptocurrency. As an investor, it’s important to spread your money across various stable, low risk investments and only reserve a small percentage for higher risk options like crypto. Many investors don’t go above 10% of total allocated funds. As a general rule of thumb, only invest what you’re comfortable (and able) to lose. You may want to learn about trading in the industry and then test the waters with an initial £100 investment. Monitor your portfolio over a few months and decide if it’s for you from there. Day trading with crypto is extremely risky, especially during a bear market, however, one of the best times to invest in crypto is when prices are low. Many altcoins won’t survive this recession but bitcoin and Ethereum are the two market leaders which remain the safer bets for long-term growth. Prices are unlikely to experience a massive jump in the first half of 2023 as economic conditions get worse so you have time to save money before deciding to invest. And remember, if you believe crypto has a future, you could always follow the tried and tested strategy so simple that it’s hard to believe it offers some of the best return on investment – just buy bitcoin and forget about it for several years.