No sugarcoating it this week: It’s ugly out there. The S&P 500 is firmly in bear market territory, having notched its worst week since March 2020; Bitcoin sank as low as $17,567 on Saturday (before retaking $20,000 to start the week); crypto’s global market cap has retreated under $1 trillion for the first time since January 2021; and crypto firms like Celsius and Three Arrows Capital are facing liquidity issues.
All of this is further exacerbated by the U.S. Federal Reserve’s increasingly drastic moves to combat the country’s highest inflation spike in 41 years — moves that could induce a recession.
Like we said, it’s ugly at the moment. But it’s not all bad news this week. Let’s break it all down.
- Bitcoin crashed below its 2017 peak of $19,783 — the first time the cryptocurrency has ever sunk below a previous bull run’s high-water mark. While this price reversal is unprecedented, it’s not as steep a decline as the 85% slide BTC saw in the year after 2017’s peak (or the 99% nosedive BTC survived in 2011). Still, last weekend’s low placed more than 50% of BTC holders in the red, according to Glassnode, and left even veteran HODLers with sober outlooks about the emerging crypto winter. As Kraken exec Dan Held put it this weekend: “We are on the path of maximum pain.”
Inflation, and the Fed’s efforts to fight it, are putting pressure on both stock and crypto markets. After May’s historic 8.6% year-over-year spike in consumer prices, the Federal Reserve responded with an “unusually large” 0.75% interest rate hike last Wednesday, stoking fears that the Fed’s efforts to combat inflation would tip the U.S. into a recession. This marked a faster-than-expected reversal of the pandemic-era rate cuts and stimulus that previously boosted riskier assets like tech stocks and crypto with excess consumer cash. After the announcement, BTC and ETH dropped as much as 16% and 20%, respectively, before both rallying to start the week.
The crypto downturn has also prompted liquidity issues for several digital asset firms, including Celsius, Three Arrows Capital, and Babel Finance.Last week, crypto bank Celsius, which manages $11 billion in assets for 1.7 millions users, cited “extreme market conditions” as the reason it was pausing all withdrawals, raising questions about the source of its notably high 18% yield on crypto deposits. In a similar move on Friday, Hong Kong-based crypto lender Babel Finance halted service, citing “unusual liquidity pressures.” Meanwhile, crypto hedge fund Three Arrows Capital is reportedly facing potential insolvency after failing to meet capital demands from lenders.
Sheesh, so what about those silver linings? A Bank of America survey from this month indicates that 91% of respondents plan to buy crypto in the next six months, despite the downturn. And according to a Deloitte survey, 85% of U.S. retail execs think digital currency payments will become “ubiquitous” in the next five years. Meanwhile BTC’s mining power (or “hashrate”) — often cited as a proxy for network health and security — recently hit a new all-time high above 230 million terahashes per second. And this month, Ethereum transitioned to proof of stake on its Ropsten test network, a key milestone for its long awaited, energy-efficient upgrade.
Why it matters… This may be the first crypto winter to coincide with extensive macroeconomic setbacks, but it’s crucial to zoom out and take the long view. Since Bitcoin’s invention in 2009, the crypto market has survived numerous winters (with even more severe drops in BTC’s price) and each downturn actually produced key innovations — Ethereum, DeFi, and collateralized stablecoins were all largely developed during down cycles and became critical technologies during subsequent bull runs. So, what can we expect from this crypto winter? As billionaire crypto-enthusiast Mark Cuban put it: “Disruptive applications and technology released during a bear market, whether stocks or crypto … will always find a market and succeed.”
Moneyish 