By Peter Kris, CEO of Mangata Finance
Bitcoin has wiped out all the gains it made in 2021 and has been down by almost 72% from its all-time high of $69,000. The de-facto king of the cryptoverse nearly hit $20,000 during this ordeal, which was its 2017 all-time high.
With Bitcoin down 70% and Ethereum a whopping 79%, it's pretty apparent what to expect with altcoins. They are getting absolutely smashed to death. Numbers speak for themselves.
99.8% of the cryptocurrencies have already fallen by at least 70% from their peak. At the same time, 98.8% have lost 90% of their value, according to data from CoinGoLive.
Such carnage has wiped out more than $2 trillion from the cryptocurrency market. The worst is not over yet.
So, what happened?
For starters, a drawdown was expected after the insane bull rally we witnessed in 2020 and 2021. This wasn't the first time that the crypto market experienced such a meltdown. For instance, Bitcoin and crypto have gone through such cycles three times now. After all, what goes up, must come down.
In the last few weeks, several significant incidents rocked the crypto market. After the crash of stablecoin TerraUSD, one of the biggest lenders in crypto, Celsius, took the spotlight for being on the verge of insolvency, and now the rumors surrounding the blow-up of the fund Three Arrows Capital (3AC) have frightened the market and exacerbated the effects of the downturn.
This goes on to show that as an investor, no matter how small or big, proper risk management and a healthy plan which is not thrown to the wind during bull mania are extremely important for survival.
There's more at play
A lot is going on in the crypto market. However, the internal cryptocurrency dynamics aren't the only factor at play here. In fact, the macro has been playing a huge role since crypto prices tanked in March 2020 in tandem with the stock market. Then, central banks and governments' response to the market shock with unprecedented interest rate cuts, money printing, and stimulus kicked off a multi-year bull run for equities and crypto.
But all this money into the system has pushed the prices of goods to rise, with the consumer price index (CPI) hitting 8.6% in May, a 40-year high and the most significant year-on-year increase since December 1981.
Inflation makes everyone poorer. Now, to bring inflation under control, central banks are unwinding the same policies that propelled stocks and crypto to new heights in the first place. S&P 500 is also officially in a bear market as the index falls back at Jan. 2021 level.
The Federal Reserve has responded with a hike in interest rates. This makes it more expensive for banks to borrow from the Central Bank, which in turn charges customers more to borrow money resulting in less money in the economy.
Amidst these macroeconomic changes, the crypto market can't be expected to flourish with retail savings declining and inflation rising. Investors are now rushing for the safety of cash, running out of risky assets like stocks and crypto. Risk assets tend to carry high upside as well as high downside risk.
As we have been seeing, crypto prices are not immune to Fed policy, and the market is simply following the "Don't Fight the Fed" mantra. And this has the crypto crash mirroring the stocks.
What about the Future?
This crypto carnage has investors spooked, and several are cutting out their losses and moving out of the space. With so much going on, many have also begun to question their decision to enter the space in the first place.
Meltdowns in the crypto space are not uncommon, but if this is your first crypto market downturn, it can be scary. The market has been pronounced dead several times in the past — 2018, 2015 and 2013, only to come back stronger each time.
But, of course, with all this gloom and doom, many have begun to wonder if there's still hope for the cryptocurrency industry. The fact is interest in crypto is still strong.
Several surveys from this month show that the investors, wealth managers and hedge funds are still interested in crypto and planning to be involved in the sector.
The most important thing is, like the internet before it, crypto innovation continues regardless of how the prices are doing.
Over this past year, Bitcoin has gained global adoption and is now held by institutions, corporations, countries and millions of individuals. DeFi is building the foundation of a peer-to-peer financial system with no single party in control. NFTs, meanwhile, are taking crypto mainstream and leading to the birth of billion-dollar industries across art and gaming. As such, this is simply the time to focus on building.
At Mangata Finance, we are working on removing the obstacles to the mass adoption of crypto. The idea is to prepare the space for real-world applications, and for that, we are building a DEX app chain that prevents MEV, reduces costs for users, and brings unparalleled efficiency.
What can be done?
While the future may look bleak right now after so much pain and drawdown, opportunity comes to those who prepare for the long-term. After all, the ethos of the sector is as strong as ever, with the core of the cryptocurrency lying in decentralization, disintermediation and direct ownership rights.
With all the speculation and sky-high valuations diminishing, this would be an excellent time to start accumulating some coins slowly, especially for those who don't have any exposure to cryptocurrency and are waiting for the next bull run.
Crypto's inherent high volatility tends to scare investors, but this is not a bug but rather a market feature. Not to mention, despite its high volatility, the sector has survived and grown significantly over the past decade while making many millionaires along the way.
Throughout these cycles, the global crypto market cap, developer activity, user adoption, and social media activity have all only increased.
So, is 'buy the dip' the right step here?
While the low prices are a lucrative opportunity to buy some coins cheap, prices can very well continue to fall even further. The key is always to have dry powder to deploy when trend reversal looks sustainable and choose the coins to add to your portfolio wisely. Not every crypto asset will be able to survive the fight with bears, after all.
All in all, the fear hasn't abated yet. Thus, it is best to prepare for the worst while focusing on surviving the bear market. And don't forget due diligence is mandatory.
About the author:
Peter Kris is the CEO of Mangata Finance, a community-focused and secure decentralized trading for Polkadot and Ethereum. Peter previously served as CEO of European development studio Block Unison and has been working in crypto since 2012.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.