The market bottom, the war and what comes next

Thursday, July 7, 2022

For anyone investing in crypto, times like these can require some inner strength. Prices are in freefall, every day brings more sensational headlines and it can feel like there’s no end in sight. To make sense of the crypto markets and better prepare for what could come next, we need to cut through the noise and understand more than just the state of crypto itself. Here’s how we’ll do it: 

First, we need to understand why Bitcoin behaves the way it does.  Then we’ll look at the bear market and see if we’ve seen the worst of it yet. Finally, we’ll examine the global economic outlook and how it could affect the market cycle.

Understanding Bitcoin: Cycles and the Halving

No one can tell you exactly what the markets will do. But Bitcoin’s behaviour isn’t actually as unpredictable as you might think.  

Bitcoin goes through regular price cycles. These are periods in which the asset behaves in a fairly consistent way. To break this down, we need to understand a few quick basics about Bitcoin:  

Bitcoin is created by mining. 

Miners are rewarded with a fixed amount of Bitcoin, known as the Bitcoin issuance rate.

Every four years, the Bitcoin issuance rate is cut by 50% in a so-called “halving event”.  

This four-year period between each halving is known as a cycle.  Bitcoin has distinct behavioural patterns depending on the stage of the cycle. Each price cycle is made of an approximately two-year period of increasing prices leading up to the halving, a year of sustained high prices and then one year of low prices. Until now, these cycles have always repeated themselves.  


Bear Market Historical


Why this bear market hits differently

All bear markets are unique in their own way. This time the downward pressure was very strong and at some point, the price even dropped below the previous all-time-high of 2018. This is most likely due to another characteristic of Bitcoin that has changed throughout its history: correlation to stock markets.  

Several years ago Bitcoin used to expose negative correlation. This meant that it behaved in a different way to the wider financial markets. If stocks were down, Bitcoin could still be up. However, the cryptocurrency market has evolved into a sophisticated industry of technology companies building on blockchain technology.  In this sense, cryptocurrency is already integrated as a sector of a token-based stock market.  

As a result, it’s only natural that the correlation with the financial markets is growing. As stock markets plunged in February through June, they kickstarted the bear stage of Bitcoin’s price cycle early. Part of the reason why the dip in prices was so sharp is because companies like Terra that grew to be major players in the industry collapsed and the associated contagion risk took down a major hedge fund and other DeFi platforms like Celsius, Voyager and BlockFi.  

Will prices drop further? 

Glassnode recently published a market intelligence report that tried to get to the bottom of whether we’ll see a floor within this cycle’s price range or whether we’ll drop even further. Various models exist to work this out. 

These models look at different variables to try and work out the lowest floor price, but all we need to look at for now are their estimated figures, rather than how they got there:


Charting the depths


What’s striking about this is that Bitcoin already plunged to $17,600 on June 18th, leaving only the Delta Price model unbroken. This means we are into already fairly deep valuation territory with Glassnode reporting that only 13 out of 4,360 trading days (0.2%) have ever seen similar circumstances.  

Bear Market Floor


Despite this, Glassnode research shows that we’re now seeing investors of all sizes starting to buy more Bitcoin, which points to a period known as accumulation. Accumulation is when investors buy more of an asset that they think is undervalued and will grow in price.   

But it’s not necessarily the new investors that will help form the market floor. Because of the deep market drop, most new investors are already underwater or have sold their assets at a loss. In fact, after the recent dip to $17,600, a whole 50% of the market was at a loss.  

That just leaves older investors that bought low and held their assets for a long period of time. These investors are typically marked by a strong conviction that Bitcoin’s price is undervalued and will still rise significantly. 

This kind of situation might sound depressing, but it’s not unusual:  

“All previous bear market floors have all bottomed out at a Percent Supply in Profit of around 40 to 45%. In other words, more than half of the coin supply was underwater.” 

What does this mean for the market?

Even though the prospects might look grim when you compare today’s price to the ATH, when we look into the fundamentals, there are some positive signs:  

Older Bitcoin holders are dominating the market after low prices flushed out less experienced investors.  

June witnessed the beginning of accumulation behaviour. 

This point is occurring within a reasonable range of the figures shown by pricing models above.  

In any normal circumstances, these factors would be a strong signal for the formation of a market floor and Bitcoin responding in a way that is not entirely uncharacteristic for this stage of the price cycle.  

However, this positive outlook depends on the iron-clad conviction of long-term Bitcoin holders. If these investors also throw in the towel, the market could shrink back to its previous support level, hovering around $10,000, which is in my opinion less likely.  

But this analysis only takes into account the crypto world itself. What’s different about this bear market is that crypto is no longer an isolated ecosystem that plays according to its own rules.  

The bigger picture, crypto and the recovery

Outside of the crypto world, the economic outlook is tense. The global economy is failing to grapple with rising inflation and the Russia-Ukraine war shows no sign of stopping.  

These events are far from trivial. The International Monetary Fund has slashed its projection of World GDP from 6.1% to 3.1% and sees even “higher commodity prices, disruption to supply chains, and tighter financial conditions.” Almost all countries will experience negative effects from the war, with Europe bearing the greatest brunt. Without a solution to the war, the IMF predicts that inflation will increase until the end of 2024. 

So how does that affect crypto?

Crypto has transformed from a significant but niche industry that operated outside of the mainstream financial world into a booming ecosystem of private and public companies that are now part of the global economy. That means when it’s tough out there, it’s tough for crypto too.   

So, in order to map out the prospects for cryptocurrency, we need to establish an outlook that includes three important factors: 

  • Indication of market bottom conditions given data and previous bear markets 
  • Assessing this information against the stage of the Bitcoin cycle 
  • Analysing the macroeconomic climate and its ability to impact on Bitcoin 
  • With this in mind, it’s possible to see the fallout from possible stagflation and the Russia-Ukraine war affecting the world and the crypto markets in three ways.  

Scenario No.1 - The war ends soon and we head into v-shaped recovery 

Major powers agree that greater benefits will come from cooperation.  

The world economy experiences a deep recession, followed by a sharp recovery.  

Global trade is up, inflation is down.  

The crypto markets share in the world economy’s growth and are on time for the two year rally period before the next halving.  

Scenario No.2 - Conflict in Ukraine enters a prolonged stalemate stage + u shaped slow recovery  

Bigger disruption to supply chains, deglobalization and a more isolated China.  

Longer global recession that sees global trade stagnate and inflation increase.  

Recovery begins in the second half of 2024, based on IMF scenario data.  

Crypto winter is extended but there's still enough time for significant growth prior to the halving.  

Scenario No.3 - The political situation escalates

Conflicts flare up in other political hotspots. 

Trade is disrupted, governments face supply shocks and higher inflation.  

Deep, prolonged global recession, economies localise. 

Macroeconomic factors suppress the upward potential of Bitcoin halving - crypto winter enters the next cycle.  

From these scenarios, it’s clear that the world economy is facing serious challenges. The impact of any of these scenarios will undoubtedly have a noticeable impact on the cryptocurrency markets, but my outlook is still bullish when we take into account the current stage of the Bitcoin cycle and the recovery data put forward by the IMF.  

Yes, the markets will take a hit in two of these scenarios and we could see a longer bear market than usual. But the positive correlation with the greater world economy will help recovery in either 2023 or 2024, before the next halving is due to take place.  

What does this mean for crypto investors?

When we examine both cryptocurrency and global markets, it can be hard to reconcile with the same assets you have in your wallet. But these issues still filter down to each and every one of us. What all of this boils down to is your investment horizon.  

For most of the scenarios we explored above, even a relatively short investment horizon could see results. If your horizon stretches into mid and long term, then whether or not you catch the market floor at its lowest point isn’t really that important. Even if there is no significant improvement in the global economy until the middle of 2024, Bitcoin could still experience price growth ahead of the halving event that year.   

Even though the markets can feel like absolute chaos, when I wake up and see a wall of red, I don’t panic. What I see is a digital asset with unrivalled powers for creating a better financial system, as well as wealth for ordinary people around the world, trading at a discount price.  

The bear markets aren’t always fun for long term holders to experience, but for new investors and people looking to buy in again after selling, this might be your ticket to the best ride in history. As Warren Buffet famously said: be “fearful when others are greedy, and greedy when others are fearful.” 

Disclaimer: The data provided in this blog is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. SMART VALOR believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. SMART VALOR has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data.

Risk Disclosure: Cryptocurrencies can fluctuate widely in prices and incur permanent loss of capital and are therefore not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework. Past performance does not guarantee future results. Trading history presented is less than 5 years and may not suffice as basis for investment decision. More information is available under Risk Disclosure.