Bitcoin, Ethereum, and other cryptocurrencies enjoyed enormous growth throughout 2020 and 2021. After enduring a bear market that began in early 2018, long-term cryptocurrency holders were rewarded with prices which soared far above previous all-time highs. But with the value of most cryptocurrencies falling through the first months of 2022, there is much talk of this year marking the beginning of another bear market in the cryptocurrency space.
The cryptocurrency market cycle has followed certain patterns since Bitcoin was launched in 2009. All previous all-time highs in Bitcoin’s price have been followed by deep collapses which would cause complete panic in any other market. Regular halvings of Bitcoin mining rewards have then repeatedly heralded a rapid rise to new highs.
Is the same pattern repeating itself for cryptocurrency in 2022? Or does the increased mainstream attention and institutional investment in cryptocurrency mean we are entering a new phase in the maturation of the crypto market?
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The Pandemic Bull Market
The past two years have been some of the weirdest most of us have ever experienced. While the COVID-19 pandemic has seen borders closed and businesses shut down, investments such as stocks and real estate have gone from strength to strength. But few investment vehicles have seen the kind of explosive growth enjoyed by the cryptocurrency market.
Cryptocurrency seemed to be emerging from a multi-year bear market at the beginning of 2020. Bitcoin was leading the way, having fallen from its previous all-time high of around $20,000 in December 2017 to lows of less than $3,500 in December 2018. This was followed by growth spurts from the summer of 2019 onward that saw Bitcoin break the $10,000 mark several times, though these gains repeatedly failed to be stabilized. As the world reeled from the news of lockdowns and panic buying in March 2020, Bitcoin fell back below $5,000. The months that followed saw steady growth turn explosive. Bitcoin obliterated its previous all-time high of $20,000 and soared to a peak above $64,500 by April 2021. A few months of falling prices was reversed as 2021 drew to a close, with Bitcoin setting a new all-time high above $67,500 in November.
Bitcoin’s growth between 2020 and 2021 was enormous, but it wasn’t necessarily a surprise. Long-term Bitcoin watchers have noticed a price cycle surrounding the regular havling of mining rewards built into Bitcoin from its inception. This halving of mining rewards is a deflationary measure, resulting in a halving of the number of bitcoins regularly entering circulation. These Bitcoin halvings typically occur once every four years. So far, all Bitcoin halvings have been followed around a year later by a surge in price to levels multiples higher than Bitcoin’s previous all-time high. In the year following the first Bitcoin halving in November 2012, Bitcoin’s price shot from $12 to $1,217. The second halving in July 2016 saw the price move from $647 to $19,800. The third Bitcoin halving occurred in May 2020, with Bitcoin then valued at $8,787. By May 2021, Bitcoin was at $54,276, having fallen slightly from its high of $64,507 in April 2021.
While Bitcoin was leading the charge, other cryptocurrencies enjoyed even more explosive growth between 2020 and 2021. Dogecoin rose to new levels of name recognition thanks to backing from Elon Musk, who incidentally traded places with Jeff Bezos for the position of the world’s richest man throughout the pandemic. Musk made frequent references to Dogecoin in tweets and media appearances throughout 2020 and 2021, including during his hosting gig on Saturday Night Live. This attention saw Dogecoin rise from a value of less than half of $0.01 in December 2020 to a peak above $0.68 in May 2021.
A rising tide raises all ships and most cryptocurrencies saw a huge growth in value throughout the pandemic. Ethereum moved from around $136 in March 2019 to an all-time high above $4,812 in November 2021; Binance Coin similarly went from less than $20 in the summer of 2019 to an all-time high above $675 in March 2021. Many so-called “memecoins” followed Dogecoin’s trajectory to offer truly insane rewards for early investors. The Dogecoin-inspired Shiba Inu Coin saw its market cap grow from around $100 million in spring 2020 to more than $14.3 billion by October 2021.
But all of these cryptocurrencies saw significant drops in the first quarter of 2022. With all-time highs becoming an increasingly distant memory, is 2022 the beginning of a new cryptocurrency bear market?
Bears on Parade
Bitcoin shed close to half its value between November 2021 and the end of January 2022, falling from an all-time high above $67,500 to a low of $35,030. Ethereum similarly fell from a high above $4,800 to a low below $2,500. Both leading cryptocurrencies have recovered somewhat since then, but are still a long way from the highs of late 2021.
This pattern will be eerily familiar to anyone who survived previous cryptocurrency market cycles. While Bitcoin was already falling back from its December 2017 all-time high in early 2018, many lesser known cryptocurrencies were still seeing explosive growth throughout January 2018. These were mostly tokens launched through Ethereum and other established cryptocurrency networks. Most of the ERC-20 tokens that exploded in value during the 2017/18 bull run have never come close to matching their previous market cap. The memecoins of the 2020/21 bull run are likely similarly destined to fall back into the obscurity from which they emerged.
After the fanfare of rising prices fell away, many of the Initial Coin Offerings (ICOs) which fuelled the mania of the 2017/18 bull run were derided as scams. Some proved to be quite literally scams: the pseudonymous creator of the Oyster Pearl ERC-20 token minted a wave of new coins in October 2018, then sold these immediately on the KuCoin exchange, before disappearing, leaving the price of his cryptocurrency to collapse behind him. Similarly, the developers of the Netflix series-inspired Squid Game Coin disappeared with $3.38 million in a so-called “rug pull” in November 2018, leaving Squid Game Coin holders with a literally worthless cryptocurrency.
Euphoria at rising prices followed by panic at retractions; the pattern of market movements and investor sentiment in early 2022 seems very similar to that marking the end of the last bull run in 2018. But are the reasons to think this time could be different?
Reasons to be Optimistic
So far, the fall in value of Bitcoin, Ethereum, and other major cryptocurrencies has not been as sustained or dramatic as that which marked the end of the last bull run in 2018. And the cryptocurrency space has certainly evolved since the last time bears were in the ascendancy.
Bloomberg reported on data from PitchBook in July 2021 which tracked $17 billion from venture capital funds pouring into cryptocurrency in the first half of 2021 alone. A Fidelity Digital Assets survey reported by Forbes in August 2021 found 70% of institutional investors either held cryptocurrency or were planning to invest in it. Institutional investment has long been touted as being the stabilizing influence which the volatile cryptocurrency space would need to move past the era of rapid rises and similarly swift collapses.
There are other signs of an increased mainstream acceptance of cryptocurrencies. In September 2021, El Salvador became the first nation on Earth to recognize Bitcoin as legal tender. Non-fungible tokens (NFTs) have proved a hugely lucrative market for entities including the National Basketball Association (NBA). Major video games developer Ubisoft announced the creation of a NFT marketplace for in-game items in December 2021. While Ubisoft’s announcement met with a furious reaction from many gamers, the writing may be on the wall for the incorporation of blockchain-enabled NFTs into the video game space.
These developments may suggest that the fall in cryptocurrency prices in early 2022 will not be as brutal or sustained as previous bear market movements.
The Outlook for Cryptocurrency in 2022
Many cryptocurrency veterans will have seen the bull/bear cycle play out often enough to be convinced that we are entering into a new prolonged bear market. This may be tempered by the maturation of cryptocurrency as an asset class and the adoption of blockchain tech into real-world use cases, such as NFTs.
The next Bitcoin halving is likely to occur in early 2024. The old investing adage that “past performance is no indicator of future performance” is worth bearing in mind for both bears and bulls, but there will be plenty of hardened crypto vets looking to 2025 as the next major milestone in Bitcoin’s price growth. If history repeats itself with another bear market until then, these veterans of the crypto space will be loading up on as much crypto as possible in the run up to this.
Cryptocurrency may be a much more mature space than it was in the depths of the last bear cycle, but the price volatility of cryptocurrency can still shake even the most experienced of investors. Whatever happens next, the past two years of increased interest in the space has guaranteed there will be plenty watching cryptocurrency’s price movements closely.
