How Crypto Bear Markets Work

Bear markets are no fun, but neither are they the end (usually).

The big picture: The crypto market is still very new. There are risks and fragile technologies, many of which are failing spectacularly and eye-catchingly this week. But at the same time, the industry is on stronger footing today than it was during Crypto Winter 2018, the last bear market.

  • A bear market is traditionally thought of as a time when an asset is trading below its previous high by 20% or more, usually accompanied by a lot of pessimism about the short-term future.
  • But that’s an absurd way to think about crypto. A 20% drop could just be a weird Tuesday.

Nevertheless, we may have arrived at the bear. The mood has to change, and we may be there.

  • bitcoin fell less than half of its most recent all-time high of $69,045 from Nov. 10. That alone is probably enough to call it a bear, but if it drops below $20,000 (the all-time high of the previous bull), it will be symbolically powerful.

Data: CoinGecko; Table: Axios visuals

But in crypto, it’s not really a bear market until there are real consequences, such as:

  • Closing of funds,
  • Startup shutter or
  • ‘Established’ Crypto Companies Start Announcing Layoffs

Be smart: This is where things are different this time. Billions of dollars are committed to developing the industry. This year alone, venture capital funds with over $1 billion under management have been announced, including Haun Ventures, Electric Capital, Andreessen-Horowitz’s new fund, FTX Ventures and others.

  • That’s enough to launch many businesses and shore up their best bets in tough times.

Brady’s thought bubble: Crypto won’t be “dead” after a severe downturn, but it could once again disappear from the national conversation. Either way, the sector will continue.

  • One of these days something will get people excited again and the market will rally.

The context: In 2018, the bear market began when rumors started circulating that the United States Securities and Exchange Commission was knocking on the doors of startups funded through initial coin offerings (ICOs).

  • Back then, it was hard to buy anything other than bitcoins with dollars. So enthusiastic investors bought bitcoins, exchanged them for ethers, and then bought ICOs. It drove up the price of everything.
  • ICO demand was basically total cryptocurrency demand, so when it dried up, the whole industry dried up.

Today, there is no such clear single cause, in part because the cryptocurrency market has more use cases and more operational businesses now.

  • Having learned from 2018, crypto companies were prepared.
  • As early as 2021, projects began to hedge their volatile cash holdings by moving some of their funds into dollar-backed stablecoins, so they could ride out a downturn.

The bottom line: Bear markets are familiar. No one likes them, but they come around often enough that established rulers know how to take them down.

Go further: Teach yourself crypto in 10 steps with $100

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