Will the next crypto bear market be like the last one, down 80% from its highs?
Editor's note: The author Jason Choi is the general partner of The Spartan Group and one of the early investors in the encryption industry. He gave his own views on recent market changes, and the translation is as follows.
In 2017, the cryptocurrency bull market boom was triggered by ICOs. At that time, the biggest feature of this encryption cycle was that retail funds entered the market very quickly, but they also left the market very quickly. After a year of false recoveries and lows, all remaining capital has been burned.
Presumably everyone knows what happened three years ago, when Bitcoin lost more than 80% of its value. In fact, the sharp shrinkage of the crypto market in 2018 was very different from the short-term corrections that are common in bull markets, because in the following year, the entire cryptocurrency industry showed a downward trend and stayed at the lowest point for nearly 4 months . As for cryptocurrencies other than Bitcoin, most have fallen by more than 90%, and many of them have not recovered yet.
Many people around are conditioned to think that "some asset" in our portfolio is going to shrink badly in the short term and then face a multi-year decline. But I can't say - although bear markets are always inevitable in every cycle, I do feel that the next bear market will be different from the previous ones.
Many people analyze the market from the perspective of macro developments and the Fed's quantitative easing policy, and frankly, I don't think I am qualified to express an opinion in this regard. However, if this point is put aside, I think that some internal factors that lead to the sharp shocks in the encryption industry are indeed different from the past.There are three main aspects:
Amount of funds
participant type
The development of the encryption industry
The first is the amount of funds. When this bear market comes, the most surprising thing is that the scale of funds attracted by the encryption industry is astonishing. While crypto market capitalization in general is up 4x since its last peak, I think the amount of capital currently looking to invest in the crypto industry is at least 10-20x that of the last market peak, and possibly more .
Second, let's see what's changed in the type of market participants this time - not just Binance, but many venture capital funds under management, trading asset managers are pouring money into the cryptocurrency space.
If you thought 2017 was already a big year for cryptocurrencies — look at the year-to-date 2021, 2017 really pales in comparison.
Quite frankly, the opportunities in the crypto market today have increased significantly. Compared with Layer 1, which has not developed for a long time, the scale of funds deposited through DeFi protocols has reached 300 billion US dollars (compared to 0 US dollars in 2017).
Prior to May 2018, the crypto community had spent approximately $23 million on CryptoKitties, a “digital kitty” released as an NFT. So what is the current state of the crypto game industry? Let's look at a small example, YGG, a game guild in the NFT/P2E industry, now controls over $800 million in assets.
It is no exaggeration to say that the public acceptance and adoption of cryptocurrencies are getting higher and higher, but at the same time, the risks in the encryption field have reached the level of hundreds of billions.
Judging by the current level of valuation in the crypto space, even the most aggressive investors are beginning to realize that the risk/reward ratio is becoming increasingly disproportionate. In fact, we have seen investment activity in the crypto space start to taper off, and with it: a new round of valuations in the space—perhaps a sign of the beginning of a “bear market.”
When investment activity disappears, so does popular confidence. Since the entire encryption industry only relies on token prices (and does not build many practical products), this is also doomed to the ups and downs of the encryption market over the years.
However, with a lot of "dedicated capital" ready to jump in, and the center of gravity of the industry starting to emerge clearly...I think that in the next wave of bear market, the decline of Bitcoin may be relatively small, and the correlation between cryptocurrencies will be significantly reduced.
When your NFT value starts to shrink, the bear market may have arrived! We shouldn't think of encryption as a single asset class, you will find that the encryption asset class is becoming more and more strange, because the bear market and the bull market seem to be happening in tandem, and the line between the two has become blurred. Led by mature capital and competitive quantitative funds, the bull market and bear market in the encryption market are polarized, and the market correlation is gradually weakening.
For example, when the "Play to Earn" business model was all the rage, the DeFi industry experienced a year-long bear market in the early days, and the trend changes can be seen at a glance through the following token rise and fall data (Note: These token increases are based on ETH trading pairs):
Examples of asset gains for “Play to Earn” assets: $AXS +4242%; $YGG +192%; $ILV +896%.
Examples of declines in DeFi assets: $SUSHi -80%; $SNX -90%; $CREAM -98%.
The last thing I want to say is that the bear market has nothing to do with the industry itself. In the past year, the decentralized finance industry has continued to fall by 80%. In contrast, as of May this year, Bitcoin experienced two consecutive months of decline. A 50% drop, a phenomenon that could herald the next crypto bear market.
To put it simply, I think that in the near future, the bear market of the entire encryption market will end and usher in a recovery. This is because capital will gradually realize that there is no other way but to continue investing. However, once capital starts to flow to other areas (even if for a short time), the encryption industry will be reshuffled.
It’s worth mentioning that some of my friends with far more experience in the non-crypto market space than I do generally agree that there must be more on the web around the current topic of “tapering rates” , More accurate comments, welcome to correct my point of view.
