Crypto Bear Market to Last 8 Months

[TL; DR]

A crypto market cycle consists of troughs and booms.

A bear market is a period in which the price of a cryptocurrency falls by at least 20% from its previous high.

A crypto bear market begins when the realized price crosses below the market price.

In the current crypto market cycle the bear market started on 12 July when the realized price crossed below the market price.

Keywords: Bear Market, Cryptocurrencies, Bitcoin, market price, realized price, market cycles

Introduction

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The crypto market oftentimes creates uncertainty with down turns and booms alike, creating opportunities for massive profit or losses. Investors who keep track of market dynamics usually run projects that excel. Thus, they should learn about market behaviors if they are to contain anxieties as well as boosting their confidence in cryptocurrencies and other digital assets. Generally, most people who work in the blockchain sector should understand trends and events that take place. For example, digital entrepreneurs need to study the crypto cycles. This is because cryptocurrencies undergo cycles similar to recessions and booms, in the form of bear runs and bull runs. This article gives an overview of the current bear market.

What is a bear market?

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A bear market is a period in which the price of an asset such as a cryptocurrency has fallen with at least a 20% margin from a previous high. In addition, the price of the cryptocurrencies will keep on falling for a long period. As such, a bear market can go for months or years depending on the prevailing market dynamics. One of the contributing factors to long bear periods is low confidence in the cryptocurrency sector.

In most cases, each bear run has a trigger such as war, hacking events or government regulations. Changes in macro-economic variables such as interest rates can also lead to bear markets. In terms of cryptocurrency bear markets, some investors may sell their assets in panic while others may hold them in anticipation of a change of fortune. Lower trading volumes, low investor confidence, high cryptocurrency supply and unsustained low demand are key signs of a bear market. The following chart shows how prices behave in such a market.

Source: Upsmag

As you note, the prices are in a general downtrend, with temporary upward and down swings.

Understanding the crypto market cycles

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Similar to the behaviour of traditional asset markets, the crypto sector has peaks and troughs, which last for varying periods, depending on the causes of the bearish market conditions. Grayscale investigated the behavior of cryptocurrencies and revealed insightful information that helps us to understand their performances. For example, Grayscale concluded that a crypto market cycle lasts for approximately 4 years or 1 275 days. Grayscale defines a cycle as a period in which the market price is higher than the realized price. To arrive at some of these conclusions, the firm used changes in bitcoin prices to estimate the possible length of the current bear market. As a result, it concluded that the bear market will take approximately 8 months. However, Grayscale did not take into account the realized price crosses below the market prices that occurred in March 2021 since they were a result of the market’s response to the Covid-19 pandemic.

The Market Price vs. the Realized Price

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Grayscale defined the realized price as, “the sum of all assets capitalized at their purchase price or realized market, divided by the supply of how many positions are in profit or loss.” We can present this as a formula, in the following manner.

Realized Price = Realized Total Market Cap / Current Supply

If the market price is higher than the realized price it means that the value of the cryptocurrency is higher than the market price at which the investors purchased it. On the contrary, if the realized price is higher than the market price, it means the value of the cryptocurrency is lower than the price at which the investors bought it. When prices of most assets are above their purchase prices the market is recovering from a bear run and vice versa.

Nevertheless, from 12 June, the realized price crossed below the market price, marking a possible start of a bear market. In other words, the average price of Bitcoin falls below the realized price. Considering these facts, investors still have 250 more days to buy the cryptocurrency, since the market conditions will be favourable.

Source: Grayscale

The table shows the average price of BTC, periods and number of days of the previous cycles. Through evaluating these cycles, Grayscale observed that the lengths of the cycles have been increasing over the years. This has helped it to estimate the length of the current cycle. For example, it established that the current cycle will take a longer period to reach the peak than the previous one. In 2012 the market peak occurred after 603 days. As such, it took 180 more days than the preceding cycle to reach the peak. Such calculations lead us to 786 days in 2016 and 952 days in 2020.

It took BTC 4 years to move from peak to trough in 2012 and 2016. Therefore, in the current cycle, as of July 12, we had 1 198 days, implying that there are still 4 months before the realized prices crosses over the BTC market price.

Source: Grayscale

The chart shows the crypto market cycles we experienced since 2009. Thus, we can easily track where we are in the current cycle.

Since BTC is 222 days below its all-time high (ATH), there could be another 5 to 6 months of sideway or downward price movements. In 2012 and 2016, BTC took another additional year to reach its all-time high. We observe these trends in the charts below.

Source: Grayscale

In respect of the ups and downs, it seems that the 2020 cycle is taking longer than before. The reasons could be the maturing crypto market and the proliferation of decentralized applications (dApps).

According to Grayscale, the main driver of the current bear market is leverage. The leverage started after governments increased their spendings after the peak of the covid-19 pandemic. The aim of the governments was to bolster their economies that suffered immensely during the period of the pandemic. Also, the collapse of TerraUSD exacerbated the problems which some centralized DeFi businesses that were using leveraging finances were facing. For example, the lenders were forced to repay loans when they least expected that to happen.

However, Grayscale emphasized that each market cycle will leave the cryptocurrency market stronger than before. Therefore, it encouraged people to buy cryptocurrencies as the market will experience an uptrend at the end.

Conclusion

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In summary, BTC and other cryptocurrencies may continue in a period of price decrease for about 5 to 6 months . Considering this, Grayscale concluded that there are still about 250 days when investors can purchase Bitcoin and other cryptocurrencies as the realized price will be below the market price. As of 13 July, our current market cycle, which began in 2020, had 1 198 days. Interestingly, the 2020 cycle had more days than the previous one because it had two peaks. The reason for this is that the market is more mature now than before.

Author: Mashell C., Gate.io Researcher

This article represents only the views of the researcher and does not constitute any investment suggestions.

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