We are again at a critical impasse for the cryptocurrency market. This week we saw bitcoin drop by nearly 10%, and altcoins were even at a negative. Market sentiment has turned bearish again; there is a lot of fear in the market right now. People are worried that potentially this bull market is coming to an end, and it could be years before we even think to start dreaming of new all-time high prices. From that point, will prices recover or will they fall even further? No one knows for sure, as it could honestly happen either way. But remember, in the cryptocurrency market and investing in general, this knowledge is power. And there are some things you need to know.
Let's dig into this more.
As you can see from the picture above, the market is in extreme fear. People are worried that the show is over and that they need to pack things in until the next bull cycle starts in a few years. To that I say not so fast. While it's perfectly normal to feel very bearish right now, even I had some bearish thoughts. But the point is that there are real reasons why crypto market prices are falling. Specifically bitcoin.
Although the US is not the only country in the world, the actions it takes have a huge impact on the rest of the world. This is largely because it is the biggest financial player in the game. And the decisions it makes will often influence other countries to follow and make the same decision. This week the Fed announced that it will try to control its balance sheet. Recognizing that inflation has exceeded their expectations and they need to manage it by raising interest rates. And that's why the price of bitcoin fell to around $42,000. This news made many people panic and feel that the next crypto crash is surely on the horizon. But interestingly, this is a move that everyone knew was going to happen. The Fed has already announced it will raise interest rates in 2022 to tackle inflation and help balance the bottom line. So essentially they were just reiterating the same intent yet again here. Even though they were just repeating that, it still caused panic and a drop in the financial markets. People live in their own worlds and have very short memories.
In fact, while ordinary people are just waking up to the fact that inflation is a real problem that can directly affect them. Finally noticing that the goods they buy have gone up in price. Bitcoiners have been screaming from the fences since its inception about the threat of inflation and also the damage the government was doing to the economy. We all hoped that bitcoin would be the SOV (store-of-value) option that would allow you to escape the system. Finally there is an asset that is not correlated with the rest of the market. Unfortunately, bitcoin has not yet reached that point in its life cycle. Although it will be soon. It just needs to grow some more first. The fact is, when there is any panic, the first move that takes priority right now is the move to cash. The real thing to watch is the follow through. What things recover and start to take off the most afterwords.
For example, look back to when all financial markets crashed in March 2020 due to the initial covid panic. The assets that crashed the hardest were bitcoin and cryptocurrency. The reason for this may be that bitcoin is extremely liquid and easy to sell. Or the other possible reason is that bitcoin is still quite young and has not yet been tested during any type of financial turmoil. Trust had not yet been established. But now look at what has happened since March 2020. The stock market is about the same, maybe it will double if you are lucky. Gold did almost nothing. But bitcoin is up more than 12 times that dropped price. Bitcoin and crypto reacted the best of any major asset class.
Now fast forward to today and the whole situation may just repeat itself again. Things may fall even further before they start to rise again. If the scenario should repeat itself and a rush to cash appears in the financial market. Yes, stocks will fall, but maybe cryptos will fall even more. I'd also bet that bitcoin is much more likely to see the biggest post-crash recovery of any major asset class. Just like in 2020.
What should you do with this knowledge?
Although this is not financial advice, I will tell you my personal story. Prior to 2020, I had been in cryptocurrency for a few years and had what I thought was a pretty decent portfolio. But it wasn't something that would be life changing. But after the crash in 2020 I literally got into bitcoin, ethereum, and a few other things. With the market recovering the way it did, it changed my financial situation forever. If the market drops further, this could become an equally awesome opportunity to change your life as well. However, it is not without risk. Nothing is guaranteed, especially when it comes to cryptocurrency. Always remember that coins may never recover and that's the risk we take. Only invest what you can afford to lose. With that said,
Take this with a grain of salt. After all, these bearish sentiments may just be a thing at the moment. Especially with the way the omicron variant is spreading. I wouldn't be surprised to see the Fed go back and change their plans or even print money again. Or, if the markets crash in a big way, I wouldn't be surprised to see them jump in again to try and save the day.
What are my thoughts on this?
In the short term, I am sceptical. I've been expecting for quite some time that the crypto market would see a drop in prices in January. This was expected in my opinion. Other experts like Raul Pal have also been expressing the same opinion for months. But after this short period of time of maybe a week, two weeks or maybe even the end of January, I see the market recovering in a big way. Long term, I'm bullish as always. I believe we're going to achieve these high price forecasts that could potentially change your life. The real question is when will that happen? This year, next year or even the year after? One thing is for sure, this bull cycle is different than all that have come before it and the game has changed forever.
My last thought is this. Always make sure you do your own research and build your own conviction. If the market is making you fearful and considering selling; you may be overreacting and investing too much in the crypto market. Or you are paying too much attention and it may be a good idea to take a step back and take a short break. If the market goes up or down, either way I'll be extremely happy. If prices fall, it will be an incredible chance to gain more. If it goes up, it will make my portfolio look much better. If you want to be successful in the crypto market, this is the mindset you need to have, and it will make life much less stressful in this environment.
What about you? What do you think will happen to bitcoin? Are you feeling bullish or bearish?