Bear markets usually involve a massive price drop, with values remaining at the bottom for years before they end. The last one (2018) was like this, followed by the 2020 black swan event, the COVID-19 macro market crash. In November 2022, when FTX had problems and Bitcoin hit $16,000, we experienced a 50% price drop similar to 2018. We are about to face a second similar crash.
2018 = 2022，2020 = ?
There are unsettling similarities between the 2018 and 2022 market crashes, which were triggered more by the crypto industry itself than by macroeconomic reasons. This was a distinctly crypto event that was not caused by a market-wide collapse. Yes, the crash was preceded by a Fed rate hike, but the final blow was delivered by our own Sam Bankman himself.
The crashes in 2018 and 2019 were the first “shocks” after the all-time highs were reached. Both crashes were followed by a rebound that gave people the false impression that “the market was back,” but in reality there was usually some kind of retest before the bear market truly ended.
In the last bear market, this “retest” was the COVID-19-induced market crash. I believe we are heading into something similar now, awaiting the 2020 equivalent event.
For the second crash, I noticed some characteristics:
Prior to the crash, there was a rebound and a “things are back” sentiment in the market. Not only were prices rising, but developments like institutional adoption (e.g. Blackstone’s Bitcoin ETF) were also in this mood.
The seeds of the next bull run have already been planted. It was the "DeFi Summer" of 2019-2020. And now, anything resembling the DeFi Summer is the "Infra Summer". I believe restaking will play a huge role in it.
More importantly, unlike the first crash, the second crash was influenced by large macro events that were completely out of the control of the cryptocurrency industry.
The US stock market rally will stop
On that last point, the beginnings of those macro influences are already here. The Nasdaq has shown its fragility over the past year, recently posting its worst performance since February. Curiously, cryptocurrencies have not followed the rally, perhaps suggesting that traders are more skeptical of Nasdaq’s “dead cat bounce.”
It’s like the digital asset doesn’t believe in this rally. It’s conceivable that if the Nasdaq drops, then the already skeptical cryptocurrency prices won’t react well either.
Recessions often occur when interest rates are cut
Moreover, higher interest rates should have an effect. In the past, recessions did not occur when the Fed raised rates, but when they started to cut them.
As you can see in the chart below, the grey overlay marks recessions, and you can see that they always occur during periods of rate cuts. This was true both in 2008 and during the dot-com crash in 2000.
Second quarter results
We are also approaching the second quarter of 2023 earnings releases. We can expect volatility in the market, and Bitcoin price has been flat in recent weeks to prepare for it. This means volatility is approaching, although this indicator alone cannot determine the direction of price.
The debt crisis is emerging. Now, due to rising interest rates, the US interest payments have soared to $1 trillion. How the government will pay this huge expenditure without cutting spending elsewhere is unclear, but it is worth watching.
U.S. government spending rises 15% in June
How to prepare?
For all the potential doomsday events, the more pressing question is how we, as individual market participants, should respond to the potential volatility. I have a few suggestions, the most important of which are:
1. Don’t lose money by trading low-quality coins
What is different about this bear market is that we are still inundated with shitcoins, inferior projects that are popular for a short time. From the Azuki trend similar to 2022, to the recent craze for "memecoin", the market has been trying to scam you out of your last penny.
As I write this, yet another very unhappy project called “Worldcoin” has launched their token. If I were to name some of the money stealing projects that have gained popularity on social media recently, I would include Rollbit, Hamstercoin, and Arkham Intelligence on the list of scams for June-July 2023.
There seems to be no end to the attempts to get you to give up your money. Never fall into their trap.
2. Income-generating assets
I know you'll think that even if Ethereum has a 5% yield, it won't offset the loss when the digital asset plummets by 50%. But just looking at the yield is not enough. For me, the biggest benefit of "harvesting" my digital assets is that once the assets are safely stored in the DeFi vault, I will become too lazy to intervene. For example, it may take 7 days to unlock some tokens. It can help prevent panic selling when the price drops sharply.
It’s more to prevent hand shaking than to say it’s because of the yield.
3. Observe loan levels
Some people are starting to get more aggressive with borrowing (backed by assets that have temporarily appreciated in value). I'm not a big fan of this. The market volatility of the past year really isn't ideal for managing loans. The price swings are so big that it makes you nervous. Unless you love the excitement, I think lending is just too much trouble, too much risk, and too little benefit.
4. Relax... and watch the world burn
When I tweeted that I love bear markets, it wasn’t an exaggeration. The recent ETHCC event in Paris and all its side events showed that the crypto community is more vibrant than ever after the tourists leave. Development doesn’t stop, and there are more projects to help you not be distracted.
In addition, the chaos in the traditional financial sector seems worth watching. We will see how the old way of traditional finance ends its weaknesses, and if it collapses, crypto will rise as a new generation of financial system. I suggest that we all grab some popcorn and wait and see.
It sounds grim, but think of this as "relax and don't worry too much." Things may get worse before they get better. Human societies have their own mysterious ways of evolving, and this may just be one of those processes.
The most important thing is to keep the money and stay alive.