Has the Crypto Winter Began to Thaw?
The year of 2022 has been brutal for crypto investors so far, but is this "crypto winter" about to begin thawing? Well, we can really only go on the past to start to predict the future and we look for repeating patterns to tell us the answer. So what patterns exist and what are they telling us?
Before we begin, when analyzing the crypto market I often look to Bitcoin (BTC) as a generally good indictor of the overall market. With around 40% of the overall market capitalization rate, as BTC trends so does the rest of crypto. Also keep in mind that none of this is financial advice, so please always do your own research when it comes to investing. The more you know, the better you are equipped to invest in crypto or any other asset for that matter.
Despite the trends presented below, major economic news will always impact the markets and most of the news cannot be predicted too far in advance. If you saw the pandemic coming along with the war in Ukraine, wellNostradamus you probably don't need to read any further. Despite what the US government might tell you, we are clearly in a recession as previously defined by two consecutive quarters of decline. Of course the government is always "moving the goalpost" on definitions to try to make things sound better than they actually are.
We are, however, not yet in a depression. By definition, that would require the current economic conditions to continue for some time - into 2024 according to most.
Duration and losses of a typical crypto bear market
A typical crypto bear market last just over 300 days looking at the prior four downturns and crypto prices decline an average of just over 60%. Here is a look at the last four crypto bear markets.
2011-2012 = 185+ days with a loss of 40%
2013-2015 = 415+ days with a loss of 83%
2017-2018 = 365+ days with a loss of 84%
2019-2020 = 260+ days with a loss of 62%
It is hard to measure the exact start and stop of the bear markets as they typically trade sideways for awhile after searching for positive direction towards the end. Considering the crypto markets peaked in November of 2022, from a length of time perspective we seem to be hitting the year mark which signals the end could be near. Given Bitcoin plummeted to more than 70% below its all-time high, we also may be at a bottom from a price decline perspective as well. So examining both the time frame and losses involved so far, we should be at or near the bottom of the current down cycle.
Relative Strength Index (RSI)
One of the most commonly used technical indicators is the RSI. If we compare the RSI now to previous bear cycle bottoms, we can see some serious correlations. Essentially the RSI measures both the speed (velocity) and the change (magnitude) of price movement direction. The RSI is represented by a line graph that ranges from 0-100. A RSI of 70 or above signals the asset in question is overbought and due for a possible correction. A RSI of 30 or below indicates the asset is oversold and could rally.
The current RSI for Bitcoin (BTC) sits around 40 which basically matches the low point for the last few bear market bottoms. In fact, we have gone slightly under the previous cycles in terms of the low point for RSI.
Fibonacci Charts
Fibonacci Charts are based on the key numbers identified by mathematician Leonardo Pisano, nicknamed Fibonacci, who mastered his craft way back in the 13th century. Fibonacci's sequence of numbers is not as important as the mathematical ratios that exist between the numbers in the series and it is a popular tool used by traders today.
Using technical analysis, a "Fibonacci retracement" happens when looking at the two farthest points on a chart and dividing the vertical distance between the two by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. Many traders view 61.8 as the “ golden ratio” among the group to analyze and asset.
While not my favorite analytics tool, given its complexity and resulting subjectivity to consider, many analyst who use these figures are indicating we may be heading into a new bull market based on Fibonacci analysis. I won't go into all the gory details, but feel free to research further if this sort of market trend assessment intrigues you.
Sideways Trading Markets
Due to the pain associated with bear markets, it usually takes time for investors to emotionally turn the corner and start plowing capital back into the markets. Given that scenario, most markets will "tread water" for some time before heading up and to the right again. If you have paid any attention to the market lately, you have seen crypto trading in relatively narrow windows. In-other-words, we have been trading sideways.
Bitcoin has been holding steady around the $20K mark for quite some time now despite macroeconomic uncertainty and raising interest rates. This sideways trading price action is pretty typical at the end of a bear market cycle so it could be signal that the crypto winter is indeed beginning to thaw.
This Bear Market is Different
Actually it is in a number of regards. First, this is the first crypto bear market actually taking place in a traditional bear market. Will this make a crypto recovery more challenging? It could, given the correlation between crypto and stocks if the stock market continues to struggle. If that is the case, then crypto could have a hard time turning green anytime soon.
We have also had a lot of issues with various coins and platforms. The collapse of the Terra ecosystem, TerraUSD and LUNA in particular, along with Celsius has made even "safe" crypto havens seem perilous. The significant losses suffered by crypto investors in these coins and projects have left scars that will take a long time to heal potentially leaving their investment capital on the sidelines for some time to come.
Conclusion
While I don't expect all the pain to be over, baring some major unforeseen economic news we could be near the end of the current bear market cycle. Then again, "this time could be different." I believe we could remain in a sideways trading crypto market for the next three months with the start of 2023 being optimum time for an upturn.
It could well come down to positive macroeconomic news driving all markets higher, including crypto. When investors believe the threat of war has subsided, inflation is under control, and interest rates will stop rising, expect the market to begin to rise. The shift of capital to "high risk" assets like crypto could be quick when the economic conditions are right.
So what is an investor to do? Well, there is money to be made in bear markets - more than in bull markets. It is the time for accumulation and that is the strategy I have been focused on the past few months or so and will continue to focus on for the remainder of 2022. Call it "dollar cost averaging" with a little more emphasis on investing than when the markets are booming.
What are your favorite indictors of market cycles? Please share in the comments below.
