A look at the most devastating bear market in digital asset history by the numbers

As the crypto market grows and matures, macroeconomic factors are having an increasing impact on the crypto market, with the prices of bitcoin, ethereum and other major cryptocurrencies falling on Monday as the Federal Reserve is expected to raise its benchmark interest rate by 0.75 percent, the largest rate hike in nearly 30 years. The total market capitalization of all cryptocurrencies has fallen to $1 trillion from $1.08 trillion last Wednesday, according to data provided by CoinMarketCap.

Indeed, like traditional markets, the cryptocurrency space is cyclical, but the industry is currently experiencing what analysts are calling the "worst bear market" in its history compared to previous bear markets. Although President Joe Biden has stated that there will not be a recession in the U.S., macro-level inflation and interest rate hikes, as well as potential market expectations of a recession, continue to have a profound impact on the crypto market.

The most destructive bear market in history

Bitcoin has always been a "cyclical asset" and historically, Bitcoin has typically fallen 80% to 90% from all-time highs to bottoms. In a bear market, most cryptocurrencies will go to zero in the long run, and only the strongest cryptocurrencies will survive.

In general, a market crash will have disastrous consequences for companies in the sector, but at the same time, when the market moves is a bubble burst may also bring new opportunities.

Looking back at past bear markets: In the first crypto market cycle, Bitcoin reached a high of $32 in June 2011 and fell all the way to $2 in November 2011. This was essentially a 90% price drop from high to low , and it took about 5 months for Bitcoin to find its bear market bottom.

In the second crypto market cycle, Bitcoin reached a high of $1,100 in November 2013 and fell all the way to $180 in January 2015. This led to a price drop of over 80% from high to low , which took over a year for Bitcoin to find a bottom.

In the third crypto market cycle, Bitcoin reached a high of $20,000 in December 2017 and fell all the way to $3,200 in December 2018. With prices falling more than 80% from high to low, it took Bitcoin a year to find its bear market bottom.

Last year, Bitcoin reached $69,000 in November 2021, which marked a new all-time high for the last bull market. Grayscale notes that the realized price of bitcoin (i.e., the sum of all purchase values divided by the number of BTC currently in circulation) was below the market price on June 13, 2022, marking the beginning of the bear market.

Based on Bitcoin's historical data, an 80% decline means Bitcoin could fall to $10,000 to $14,000, with a bear market bottom likely later this year or early next year. Cryptocurrency investors may have to wait about eight months for the next bull market, according to Grayscale's findings.

Glassnode released a report stating that many on-chain and market performance metrics have reached historically and statistically significant lows. On a statistical basis, the market has achieved the largest monthly decline in its history. This is supported by selling behavior that has locked in absurd relative losses that are so large that only 3.5% of historical trading days have seen greater capital outflows. The ratio between losses and transfers of profits has reached an all-time high and is synonymous with deeply distressed investors.

In addition, many countries are under the weight of inflation and other economic conditions in 2022. Some analysts see a cloudy outlook for digital currencies as a direct result of macroeconomic uncertainty and Bitcoin's strong correlation with stocks and fiat currencies. And as the crypto market develops and grows, coupled with its emergence of a stronger connection to macro factors, it will suffer even more in a bear market. Given the extensive duration and size of the current bear market, it is reasonable to assume that 2022 is the most destructive bear market in the history of digital assets.

Data progressively shows strong destructiveness

The entire crypto economy became $1 trillion after losing over $2 trillion in the last eight months. The top 10 major crypto assets (excluding stablecoins) have all lost more than 65% or more of their dollar value.

From Aug. 2, 2020, to Jan. 1, 2022, the supply of stablecoins in circulation grew 8.7 times to $165 billion, according to Arcane Research data. However, the amount of stablecoin across the network fell to $151.3 billion as of July 1, including a $35.1 billion, or 18.8%, decline in the second quarter, the largest quarterly pullback in stablecoin history.

The data shows that NFT trading volume reached $4 billion in May across markets, compared to $1.04 billion in June, a 74% drop from the previous quarter. The 74% drop is reportedly the largest YoY drop in NFT market trading volume to date, followed by a 48% drop in NFT market trading volume that occurred between February and March of this year.

As of July 6, the number of global cryptocurrency exchanges stood at 500, down from the highs of previous months. According to CoinMarketCap, Finbold determined that the industry lost 25 exchanges in 30 days by using a web archiving tool, considering the June 6 figure of 525.

In addition, the number of active cryptocurrency users at the U.S. bank fell by more than half due to the prolonged downturn in the digital asset market. The bank's cryptocurrency users dropped from more than 1 million in November 2021, when bitcoin hit a record high, to below 500,000 in May this year.

The size of crypto investment product assets under management (AUM) hit an all-time low in June 2022, according to Cryptocompare data, which showed that crypto exchange-traded funds (ETFs) saw the biggest drop, with AUM falling 52.0% to $1.31 billion. On the other hand, trust products, which account for 80.3% of the market, fell 35.8% to $17.3 billion for the month. Exchange-traded commodities (ETCs) and exchange-traded notes (ETNs) fell 36.7% and 30.6% to $1.34 billion and $1.61 billion, respectively.

Cryptocompare said all four product types hit record lows, with trusts hitting their lowest AUM since December 2020 and ETCs reaching their lowest AUM since October 2020.ETNs and ETFs followed, hitting their lowest AUM since January 2021 and April 2021, respectively. size.

Differences in the current bear market and the direction of the breakout

The current crash began earlier this year due to macroeconomic factors, including rampant inflation that led the Federal Reserve and other central banks to raise interest rates. These factors were not present in the previous cycle.

In addition, Bitcoin and the broader cryptocurrency market have been trading in a manner that is closely correlated with other risk assets, particularly stocks. Bitcoin posted its worst quarter in more than a decade in the second quarter of the year. During the same period, the tech-heavy Nasdaq fell more than 22%. The sharp reversal in the market caught many in the industry, from hedge funds to lenders, off guard.

Another difference, says Carol Alexander, a professor of finance at the University of Sussex, is that in 2017 and 2018, no large Wall Street players used "highly leveraged positions.

Of course, there are parallels between today's crash and past crashes - most importantly the huge losses suffered by novice traders who were lured into the cryptocurrency space by the promise of high returns.

But based on broader macro factors, one can see how much things have changed since the last major bear market. This explains the larger scope and scale of this bear market, along with the huge losses.

Crypto investors have accumulated a lot of leverage due to the emergence of centralized lending schemes and so-called "decentralized finance" (DeFi). Not only retail investors, but the bear market has exposed many crypto companies to risky bets that are vulnerable to "attacks", including terra.

It is unclear when the market turmoil will finally die down following the broader market crash. However, analysts expect more pain ahead as crypto companies struggle to pay off debt and handle customer withdrawals, and James Butterfill, head of research at CoinShares, said the next dominoes to fall could be cryptocurrency exchanges and miners. More top-tier investors have even said that the crypto bear market could last for two years.

So what needs to happen for a price rebound? Some say we need to see an upturn in the stock market before real capital flows back into bitcoin, based on the strong influence of macro factors. "Don't go against the Fed" is a common expression used by investors to explain one of the most influential forces in global financial markets. With the Fed still adhering to its policy of raising interest rates and global risk asset prices falling all the time, it's hard to see a broader recovery or even a flow of money into the cryptocurrency ecosystem.

And purely for the crypto market, some are banking on a successful ethereum merger, approval of a spot bitcoin ETF, adoption by more large companies and more countries using bitcoin as a legal tender. While such a trend exists, it doesn't seem to be easily achievable and the current bear market will remain in place for some time.