The cryptocurrency asset class is no stranger to bear markets. Although the booming investment category has had its fair share of corrections in its short history, the crypto winter that is currently gripping the market is unlike any other.
Cryptocurrency got its start when Bitcoin (CRYPTO: BTC) was established in 2009. Since then, the market has grown from a single cryptocurrency to an assortment of tokens, stablecoins, smart contract platforms, and more. Since their humble beginnings, cryptocurrencies have often lost more than two-thirds of their value with each downturn.
What the past tells us
In 2014, the asset class experienced one of its first corrections. Its collective market capitalization reached a new high of just under $16 billion in December 2013.
It took until May 2015 to hit bottom, when it plummeted to $3.2 billion – a steep drop that wiped out 80% of the market’s recent peak value.
From that low, it took the market a tedious 18 months to recoup all of its losses, when it hit $16 billion again in December 2016.
In January 2018, the crypto hit a new all-time high when the collective market capitalization reached over $821 billion. These highs were short-lived and the market fell throughout 2018. It bottomed out in December 2018, but not before losing over 87% of its value. It would take almost two more years before the market regains its previous all-time high in January 2021.
And now we find ourselves in a similar situation. The collective market capitalization of cryptocurrencies fell from a new all-time high of $2.9 trillion in November 2021, but has since fallen nearly 70%. This crash is clearly not new, but still excruciating.
Looking at the time it took to hit previous lows, we are historically getting closer to the typical timeline for the start of rallies in the past.
Additional pressures build
However, to the dismay of investors, this time around might be a little different. In the past, crypto winters occurred when the economy was in better shape overall. Since Bitcoin’s inception, the stock market has seen one of the largest and most prolonged bull markets in history. But not anymore.
This year the scholarship entered bear market territory for the first time since 2009 (we will not count the crash of March 2020 since it was the shortest in history). And talk of a recession continues to loom as macro factors such as inflation and rising interest rates hamper hopes for economic growth.
Although crypto advocates argue that the larger economy and the stock market are uncorrelated with crypto, there is ample evidence to show that the two actually become positively correlated during times of economic uncertainty. As the costs of daily consumer goods rise, mortgage rates and house prices rise, and layoffs ensue, investors are given less of a priority to spend money on things like cryptocurrencies. .
As the stock market and the economy continue to struggle, it will be difficult for the crypto to return to its previous highs. Due to the factors the economy is currently facing, investors should expect this crypto winter to be a bit colder and last a bit longer than previous ones.
Development of a game plan
On average, it takes the crypto market about three years before it can regain its previous high. But now the economy is in a bear market and the possibility of a recession grows.
The average recession lasts about 11 months, and it has only been a year since crypto hit a new all-time high. If this winter follows a similar path to previous ones and we take into account the potential for a simultaneous recession, it would be safe to assume that it will be another two to three years before a particular cryptocurrency recoups all of its losses. .
Although this does not leave investors with much confidence in the foreseeable future, there is a silver lining.
Despite a relatively short history compared to the stock market, the crypto has shown that it is able to recover from the losses it suffers. Looking back, investors who continued to build their portfolios regardless of price ended up reaping the best returns.
If it takes two to three years for prices to recover, investors have a lasting opportunity to buy crypto at historically low prices. If the day comes when the crypto is able to gain momentum, then those who stick to their allocation will be positioned to benefit the most.
Above all, remember to keep a long time horizon. Investing is a marathon, not a sprint.
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