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Is Crypto Poised for a Huge Bull Run When Bearish Conditions End?

Crypto is no stranger to bear markets and downturns. The famous late-2017 bull run ended in a bear market that lasted for well over a year, with the price of bitcoin sinking from a then-high of $19,783  to as low as $3,000 by December 2018. This represented a fall of around 84%, and while the current downturn hasn’t seen bitcoin fall as dramatically, it could potentially last more or less as long as its predecessors.

While the cryptocurrency market is more mature and bigger now than it was back in 2017 and 2018, it’s arguable that it currently faces much bigger macroeconomic headwinds. Russia and Ukraine are embroiled in a major military conflict that has enormous financial implications, while the global economy was already facing high inflation and rising interest rates, dampening investor appetite for risk. At the same time, the cryptocurrency sector continues to encounter regulatory uncertainty, something which is deterring institutions from entering the market in a big way.

Taken together, these factors are dragging down the market, meaning that crypto will go back up only when they’re resolved. However, with plenty of positive news for crypto continuing to fly under the radar, it could witness another bull market once negative macroeconomic conditions are cleared.

Is crypto set for a massive rebound?

This is What’s Causing a Bear Market

Taking a closer look at each negative factor highlights just what a serious situation the cryptocurrency market finds itself in right now, and just why we may not see an end to the current bear market for a while.

The Ukraine-Russia War

First off, the Russia-Ukraine conflict has offered no clear signals that it’s going to end anytime soon. Despite the fact that Russia’s incursion into Ukraine has resulted in widespread condemnation and numerous international sanctions, Russian leader Vladimir Putin seems determined to capture all of its neighbor’s territory. This means that fighting could continue for a long time, not least because numerous allies are supplying Ukraine with military equipment and resources that enables it to maintain its own defense.

More negatively for financial markets, the conflict has resulted not only in damaging sanctions, but has sent the price of oil and gas through the roof. Oil has reached its highest price since 2008, with some analysts predicting the possibility of $200 per barrel. Such a high level has been made more likely by agreement among the US and the UK (and likely the EU) to ban imports of Russian oil.

Rising oil and gas prices are bad for a simple reason: they massively increase costs for businesses, which see falling profits as a result. By extension, investors become less willing to invest in stocks, because they believe economic growth will be slowed, and so on. And because rising costs and falling profitability reduce investor appetite, we see a knock-on effect on cryptocurrency markets, which have become increasingly correlated with stocks in recent months.

“The market’s on increasingly shaky ground,” said Fiduciary Trust’s Hans Olsen, speaking to the Wall Street Journal. “When you combine the price shocks that we’re seeing in the energy complex on one hand and the galloping inflation that we’re dealing with on the other hand, that’s a really tough mix for an equity market to hold valuations where we are right now.”

Inflation and Interest Rates

And yes, inflation had been rising prior to the Russia-Ukraine conflict anyway, meaning the market is facing a double-whammy of surging costs and plunging profitability. Inflation also means that the market will soon face one of its most feared specters: rising interest rates.

The Federal Reserve has indeed indicated that it will be increasing its base rate, with at least three hikes penciled in for 2022. Other central banks are following suit, in the UK, the EU and elsewhere.

Basically, rate hikes dampen investor appetite for riskier financial assets, such as cryptocurrencies. They make borrowing money more expensive, and they tend to reduce consumption, both of which make it less likely that investors take a punt on speculative assets such as bitcoin.

The threat (and arrival) of higher rates is one of the reasons why the market has been stagnant for several months now, even before the Ukraine-Russia crisis. And with this  crisis exacerbating inflation fears, we may end up seeing even steeper rate hikes, which may be phased in throughout much or all of 2022.

In other words, 2022 could be a write-off as far as the cryptocurrency market is concerned. Indeed, the Nasdaq officially entered a bear market when the price of oil reached $130, with more pain set to come.

Ongoing Regulatory Uncertainty

And in the case of crypto, it has one more major factor that’s pulling it down right now. Basically, many of the world’s powers are in the process of formulating substantial and specific regulatory frameworks for cryptocurrencies, with the market waiting to see just how favorable or unfavorable such frameworks will be.

This is what we’re seeing in the United States, for example, where President Joe Biden is set to sign an executive order requiring numerous governmental bodies to study crypto and outline future directions. Each department will be asked to report back in 180 days with their findings, which will ultimately determine the shape of US cryptocurrency regulation.

Given that some members of the Biden administration, including Treasury Secretary Janet Yellen, have signaled their willingness to introduce strict legislation, it’s not certain just firm any incoming regulation will be. This uncertainty discourages institutional investors (in particular) from taking big leaps into the cryptocurrency market, meaning that we continue to see the relatively weak stagnation of the past few months.

An indication of just how important the regulatory picture is for crypto was provided recently, when the aforementioned Yellen appeared to leak a Treasury statement suggesting that it would support ‘innovation’ in the digital asset sector. This helped the price of bitcoin to rise by around 8%, suggesting that the market would rise even higher once the US finishes implementing a — favorable — regulatory system for crypto.

When is Crypto Going Back Up?

This leads to the all-important question: when is crypto going back up? Well, as suggested in the previous paragraph, the introduction of positive regulations in the US and other areas will be one important step towards resuscitating the cryptocurrency market.

Seeing as how the incoming executive order will give US governmental bodies half a year to report back, we might expect the regulatory picture to improve by the end of 2022.

As for the Ukraine-Russia crisis and inflation, things are more uncertain. While no end is in sight for the conflict between Russia and its neighbor, harsh international sanctions likely mean that Russia cannot continue its intervention indefinitely. On top of this, the country has recently signaled its willingness to end its offensive if Ukraine meets certain conditions. At this moment in time, it’s unlikely that Ukraine will accede to such demands, but it at least hints that Russia has begun eyeing an exit strategy.

With regards to inflation, we’ve already mentioned that the Federal Reserve has at least three rate hikes planned for the year. So we may not see an end to the adverse effects of inflation on the market until these hikes have been introduced and the market/economy has adjusted to them.

Again, this suggests that most of 2022 will be a turbulent year for crypto, and that won’t be until it draws to a close that we’ll see the market consistently surge again. But make no mistake, with more territories accepting Bitcoin as legal tender, with crypto-based exchange-traded products enjoying higher volumes, and with major banks preparing significant custody services, the market is ready for a big rally once macroeconomic conditions permit.

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CryptoVantage Author Simon Chandler

About the Author

Simon Chandler

Simon Chandler is a journalist based in London. He writes about technology, markets and politics, and has bylines for Forbes, Digital Trends, CCN, Wired, TechCrunch, the Verge, the Sun, the New Internationalist, and TruthOut, among many others. His Twitter handle is @_simonchandler_

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