An asset class that relies on sentiment has now been completely engulfed by negative sentiment.
Source: The Economist
Compiled by: Chopper, Foresight News
Weeks of strong winds battered the U.S. East Coast, causing temperatures in some areas to plummet to their lowest levels in decades. But this pales in comparison to the crypto winter gripping the market. Bitcoin's price has plummeted from $124,000 in early October to around $70,000 currently, wiping out over $2 trillion in market capitalization across the entire cryptocurrency market. While the asset class has experienced crashes before, its supporters seem more disheartened than ever.
Their pessimism is somewhat perplexing. Bitcoin's 45% drop is not the deepest in history: after peaking at the end of 2021, Bitcoin's price plummeted by 77%, and it took the crypto industry's market capitalization approximately three years to reach a new high. And this bear market has only been underway for four months.
Looking at the performance of other asset classes makes this clear. In 2022, crypto investors could find solace in the fact that many other assets also suffered losses. That year, the tech-heavy Nasdaq 100 index fell by more than a third from its peak. Today, the index is less than 4% away from its all-time high reached just weeks ago. Crypto enthusiasts are saddened because they feel isolated.
The forces driving this highly volatile and speculative market have always been somewhat mysterious. But it is clear that leverage and liquidation play a key role . At the end of September last year, just before the crash began, the total amount of crypto-asset-backed lending was approximately $74 billion, more than doubling in the past 12 months and exceeding the level at the end of 2021.
Subsequently, starting October 10th, approximately $19 billion worth of leveraged crypto contracts were rapidly liquidated after a sharp decline. Following this, numerous smaller positions were subsequently closed. Market concerns about Strategy intensified, and the company purchased Bitcoin through lending and issuing new shares. Since July, Strategy's stock price has plummeted by nearly 70%.
The expansion of the crypto product market may be exacerbating the downturn. The introduction of crypto exchage-traded funds (ETFs) in 2024 was intended to support prices by expanding the pool of potential buyers. This did work for a time. The BlackRock Bitcoin Trust ETF (IBIT) became the fastest-growing ETF in history, reaching nearly $100 billion in assets under management by October. However, ETFs are now dragging down prices. IBIT has experienced $3.5 billion in outflows over the past 80 trading days, marking the first time the fund has seen sustained selling. Currently, most of the fund's investments are at a loss.
The last and most difficult factor to quantify affecting cryptocurrencies is the complete cooling of market sentiment. For a speculative asset class lacking fundamental value and revenue-generating capabilities, the intangible atmosphere is everything. The aura of excitement surrounding digital assets seems to have vanished completely.
Part of the reason is that they've lost their rebellious edge. How countercultural can an asset class be if the US president and his family are deeply involved? As Ethereum co-founder Charles Hoskinson aptly put it last month: "We've basically all become part of the system. And when you become part of the system, what does the system do? It makes it less cool."
For some companies, the loss of cryptocurrency's "coolness" has actually been beneficial. Institutionalization has bolstered stablecoin issuers, making digital payments more convenient. However, assets like Bitcoin, having lost their glamorous appeal, have yielded almost no returns; they appear to be part of the "system," but in reality, they haven't been truly embraced by it. Professional, conservative investors continue to shun cryptocurrencies. A Bank of America survey in September revealed that the vast majority of fund managers had no crypto assets at all. Digital assets accounted for only 0.4% of the total portfolio value of respondents.
Meanwhile, central banks are buying gold to hedge against inflation, geopolitical threats, and sanctions. Digital assets, once promised as an alternative to fiat currency, have been sidelined. The Czech central bank became the first to publicly announce cryptocurrency purchases last year, making only a tentative $1 million purchase of Bitcoin and has yet to announce plans to increase its holdings.
Digital assets have proven far more resilient than many financial columnists eager to write their "obituaries." Despite experiencing wave after wave of bear markets, they haven't completely collapsed as predicted, but there are good reasons why this Crypto Winter is exceptionally harsh. Don't expect a market recovery unless market sentiment improves.
