How a bitcoin market ‘in extreme fear’ compares with the past, and what to expect next

Stablecoin USDTerra, or UST USTUSD,
+12.09%
once in the top 10 largest cryptocurrency by market capitalization, it lost its 1 to 1 peg against the US dollar, falling to just 6 cents on Friday, according to CoinDesk data. LUNA LUNAUSD,
12.50
another cryptocurrency backing UST fell nearly to zero from over $80 in early May, with its market cap dwindling by more than $40 billion as of early April.

It marks “the biggest wealth destruction event in the short history of crypto markets” since bitcoin was created in 2019, crypto trading firm QCP Capital wrote in a Friday note.

explained: Why does UST, LUNA crash? Collapse of an Ever-$40 Billion Cryptocurrency, Explained

Meanwhile, bitcoin BTCUSD,
-0.94%
on Thursday it fell to $25,402, its lowest level since December 2020, before returning to around $30,000 on Friday, according to CoinDesk data. The Bitcoin Fear and Greed Index is currently at one of its lowest points, indicates extreme fear.

Tether USDTUSD,
-0.05%
the largest stablecoin, briefly fell to 96 cents against the dollar on Thursday before rebounding to $1.

More than $400 billion has been wiped out of the crypto market for the past seven days, according to CoinGecko. All sectors within the crypto world have suffered double-digit losses over this period, with cryptocurrencies related to Web 3, the so-called next generation of the Internet, posting the biggest loss averaging 41%, according to analysts at Messari.

The chain of events could herald the beginning of a new “crypto winter”, an industry participant said, following a … common theme this week on Twitter

Some are more optimistic. “It’s a pattern. If we look back at what happened in 2014, the crash happened and there was great panic. People say oh, crypto is dead. It’s not coming back. But of course it has come back,” Mike Belshe, founder and chief executive at crypto infrastructure provider BitGo, told MarketWatch in an interview.

To be sure, the industry is still in its infancy and lightly regulated, while the crypto market remains volatile with high risks.

Bitcoin withdrawal

At a Thursday low of $25,402, bitcoin fell 63% from its all-time high of $68,990 in November. The drop rate is larger than the 54% drop from the cycle high in July 2021, but smaller than that seen in other bear markets.

The chart below shows bitcoin’s past decline from each cycle high.

glass node

According to Glassnode data, bitcoin had fallen to 77% from its cycle high in March 2020. In the bear markets of January 2015 and December 2018, bitcoin capitulated at lows of 85.5% and 83.8%, respectively, from local highs, according to Glassnode data.

Market bottom?

Some said bitcoin is approaching a “generational cyclical bottom”.

Bitcoin’s low on Thursday is close to realized price, investors’ aggregate cost base on-chain, which currently stands at $24,000, Will Clemente, chief insights analyst at bitcoin mining company Blockware Solutions, wrote in a note Friday. “Any price below realized price should be considered extreme value,” Clemente wrote.

Historically, when bitcoin’s price approached its realized price, it indicated a buying opportunity, Clemente told MarketWatch in a recent interview.

It’s also worth checking out bitcoin’s 200-week moving average price, which usually indicates a cyclical bottom, Clemente said. It is currently just above $21,500.

However, significant uncertainties remain in the financial markets, as evidenced by share price action.

Read: Despite the bounce, the S&P 500 is hovering dangerously close to a bear market. This is the number that counts

“I think this is just the beginning of an ongoing decline in crypto,” Jay Hatfield, chief investment officer at Infrastructure Capital Management, told MarketWatch in a recent interview.

Hatfield attributed bitcoin’s high returns in 2020 and 2021 in part to the Federal Reserve’s quantitative easing policy. “We had an unprecedented surge in Fed liquidity, buying $120 billion a month in securities. And now we’re going to have an erratic shift to a $95 billion a month reduction in liquidity,” Hatfield said.

“The Fed hasn’t even started quantitative tightening yet. They just said they’re going to do that,” Hatfield said.

Hatfield estimated that bitcoin could fall to $20,000 by the end of this year, saying that in the worst-case scenario, it could fall back to pre-pandemic levels, which were around $10,000. “I’m not predicting we’ll get there, but $10,000 would be a reasonable target,” Hatfield said. Hatfield compared bitcoin to Cathie Wood’s flagship Ark Innovation ETF ARKK,
+11.82%
that’s more than 70% below its peak and at roughly the same level in March 2020.

Read: While Ark’s flagship fund plunges 76% from its peak, Cathie Wood still considers its stocks to be in ‘deep value territory’

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