Erik Weijers, 5 months ago

Is the bottom near?

After a week of extreme chaos and pain in the crypto markets, the dust seems to be settling a little bit. But a look at your portfolio is still by no means a nice feeling. What led to this carnage? And is the bottom in? For answers, we look at some historical parallels.

The current panic and fast drop in the price from $30,000 to $17,000 was a gut punch. But remember that this event is not a first: something similar has happened at least three times in Bitcoin's history. For example the crashes of March 2020 (8k to sub 4k), November 2018 (6k to 3k) and December 2013 - March 2014 (1100 to 400). While there are of course no guarantees, we know that in all those cases the price recovered and eventually printed new highs.

Perfect storm

What is going on now is a succession of unfavorable external and internal problems. Macroeconomic conditions are very unfavorable for all risky investments. Technology stocks have also fallen by tens of percents over the past six months. In the current climate of uncertainty about inflation, tight monetary policy/higher interest rates, and geopolitical instability, people are fleeing to the dollar. Just about every asset is falling in value - and crypto the hardest.

Because of this price drop, structural problems were exposed in the crypto market in recent weeks. Not with Bitcoin itself - that good old friend still neatly produces a transaction block every ten minutes - but with centralized lending platforms and hedge funds. Suddenly it became clear that these had taken positions with borrowed money that had become vulnerable to liquidation. Partly because of their exposure to the crashed Terra ecosystem of early May. Lending platform Celsius was one example. Left and right, institutions were forced to sell positions to cover their losses. It caused prices to fall and it fuelled uncertainty: will more dead bodies be uncovered?

Comparison with previous crashes

This price drop is in one sense different from the mentioned previous crypto crashes. In March 2020, it was the economic panic surrounding Covid. In 2013-2014, it was the failure of MtGox, then the single largest Bitcoin exchange. But currently, it is partly to blame on a new kind of failure, namely that of institutional players who took irresponsible risks. This is an eerie one and is reminiscent of the 2008 global financial crisis. It was when financial institutions had taken irresponsible risks, froze their credit lines to each other and had to be bailed out by governments.

It is to be seen how many more corpses will drop in cryptoland. What is clear, however, is that what is happening now is in some ways purifying: it is a forest fire that is filtering out the bad players. The downside is crypto's image problem for the outsider: it has not gotten any better. Regulators are sharpening their knives - which is by the way not necessarily a bad thing, especially as the problems were with centralized institutions.

Is the bottom in sight?

Has the bottom already been hit? Is it coming soon? The timing of the bottom will depend on the change in said 'weather conditions' of the current storm: after the current period of monetary tightening will be over its peak, risky investments can benefit again. And when it will be clear that the forest fire within crypto has died out, confidence will return in this area as well.

On a number of other points, we see that we are now close to a bottom - at least, if we go by previous crashes:

  • Gloating from opponents of crypto: 'you see, it's a ponzi, you guys are going to 0!'
  • A super-negative mood on 'crypto Twitter': people slagging off each other and each other's coins, stories of people who lost everything, statements like, 'you won't see me again, I'm out of this miserable market.'
  • After the collapse of institutions, there are loud calls for regulation.
  • Technical indicators are at 'bottom' levels, for example the weekly RSI: the extent to which Bitcoin is 'oversold' is similar to previous lows. Also, we are now below the 200 week moving average: that only happens once every few years.

Of course, no one knows exactly how low the bottom will be. The markets have entered a chaotic phase and there are no certainties. Your money is not safe anywhere, really.

Conclusion

As mentioned, there are indications that we are near the bottom. Don't let your bad mood confuse you: that's often an indication that the bottom is about to be reached. The feeling of "I'm quitting" even has an official name in financial markets: capitulation. That's the final panic sale towards the bottom. (Conversely, the euphoria of a bull market ("we're all going to get rich!") is a signal that the top is near.)

The key question is whether you believe in Bitcoin, Ethereum or other projects. Do they, in your opinion, have a good chance of being here to stay? If so, this might justify an investment, regardless of the daily prices.

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