The crypto crash: Have we truly reached the bottom?

This article is part of Crypto Insights, a segment by major crypto exchange Bybit that dives into the latest and most pertinent issues in the crypto space.

Written by Nathan Thompson

A ghastly tragedy hit the crypto markets last week when two top 10 assets, Luna and TerraUSD (UST), imploded, causing about US$56 billion in losses. But it could be the catastrophe that marks the end of a six-month downtrend. Why? One word: capitulation.

The UST implosion was apocalyptic enough to find itself near the top of a list of crypto’s worst capitulation events along with the collapse of Bitcoin exchange Mt. Gox in 2014, the popping of the initial coin offering bubble in 2018, and the March 2020 Covid dump. These three events have preceded the start of new and positive changes for crypto.

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Investopedia defines capitulation as “the dramatic surge of selling pressure in a declining market or security that marks a mass surrender by investors. The resulting dramatic drop in market prices can mark the end of a decline, since those who didn’t sell during a panic are unlikely to do so soon after.”

In 2016, a capitulation marked the end of a long crypto bear market. However, in January 2018, a capitulation inaugurated a bear market that saw Bitcoin lose about 80% of its value, and it didn’t reverse course until a second capitulation event in December of that year.

Putting the economy on a diet

So the massive red candle that stared back at crypto investors last week could either be the last kick in the teeth of a departing bear market or the start of a longer downturn before another sell-off finally signals the return of growth. Let’s consider the options.

It’s clear that crypto markets won’t rally as long as the poor macroeconomic environment continues. Now that inflation is a massive problem the world over, the Federal Reserve and other major central banks have taken their bloated, cash-stuffed economies and put them on the financial equivalent of a low-fat diet paired with brutal gym sessions. Until the inflation rate is curbed, there may be several more months of pain to come.

Image credit: Timmy Loen

On top of that, we have China still trying to maintain its zero-Covid policy by locking down its most important economic zones, massive shortages in fuel and wheat due to the war in Ukraine, and gangs of ill-informed bureaucrats looking to drown the crypto industry in red tape. People don’t sell at a loss during bear markets for no reason, and those are some pretty big ones.

You may think I’m clutching at straws, but the silver lining here is that we have probably run out of bad news. This is especially relevant for a forward-looking market like crypto because it prices in bad news fast.

Despite the string of misfortunes, we can see that Bitcoin is still holding important support lines. Investors may view this as a window of opportunity to buy quality assets at rock-bottom prices before things turn around. What is it they say? You can make money in a bull market, but you need a bear market to build wealth.