The Real Reasons Behind Cryptocurrency's 2018 Crash
According to recent research by Coinbase, the state of the cryptocurrency market during a massive downturn in 2018 was primarily caused by macroeconomic factors.
It's not surprising that the current crypto bear market is caused by worsening macro-factors. Coinbase confirmed this in a blog post on July 5, adding that the other third was caused by a negative outlook for cryptocurrencies.
Coinbase said that the correlation between crypto and traditional markets has risen sharply since 2020. This was also the year when pandemic lockdowns were enforced across the globe.
“Thus, the market expects crypto assets to become more and more intertwined with the rest of the financial system.”
According to the article, crypto assets have a risk profile similar to that of oil and tech stocks.
The End of Cheap Money Is Nigh
The crypto market has lost around 70% from its all-time high in November. Bear markets have previously seen drops of over 80%.
The current economic cycle is the first one in which macroeconomic conditions have played a role.
Enduring two consecutive quarters of negative GDP is how economists identify a recession.
The U.S. GDP was -1.6% in Q1, the figure for Q2 will be published by the Bureau of Economic Analysis (BEA) on July 28, and it is not predicted to be any better. A recession is negative news for crypto markets, as is high inflation.
On July 13, the U.S. Bureau of Labor Statistics will release June's consumer price index (CPI), which is expected to be 8.7%. This is worse than May's 8.6%, and it makes spending and investing, especially for high-risk assets such as crypto, difficult.
When interest rates go up, the economy tends to slow down.
The Federal Reserve is expected to raise interest rates again later this month, which will further discourage lending and borrowing and encourage saving in traditional financial channels. This will increase the amount of money that must be paid back by those who have debts, putting more pressure on the available funds for investment.
Coinbase pointed out that the present situation is similar to what happened during the 2000–2001 dot-com recession. The S&P 500 fell 29%, but the riskier Nasdaq composite index, which is mainly composed of tech stocks, dropped 70% from peak to trough.
Therefore, there could be more bad news for the crypto market, which is unlikely to see the light of day until those macroeconomic factors return to normal levels.