This article was produced in collaboration with FBS.

During the past year, Bitcoin lost over 75% of its capitalization. Many investors prophesize imminent liquidation of the entire cryptocurrency market, while the rest use this opportunity to buy the dip. In this article, FBS analysts discuss the reasons for the crypto selloff and forecast when the market will reverse.

Reasons for the crypto market dump

 First, let’s go through the principal sources of trouble.  

Unstable geopolitical and macroeconomic environment

When the pandemic was gaining momentum at the beginning of 2020, the US Federal Reserve decided to support the economy by lowering interest rates and providing the population and businesses with cheap money by increasing the supply of dollars. Through this, US businesses and citizens weathered the pandemic, and some selected sectors even thrived during this time. Retail traders, flush with cash from stimulus cheques, invested in stocks and cryptocurrencies. This same situation unfolded largely the same way across the globe as governments sought to combat the effects of the pandemic on their domestic economies. This inflow of funds pushed crypto prices to historical highs.

 However, by the beginning of 2021, the downside effects of so much monetary injection into the economy began to show. Cheap money made inflation spiral almost four times above normal target levels. As a result, the Federal Reserve has begun raising interest rates (i.e. constrict monetary supply) in order to combat inflation. This is generally accepted as a bad sign for risk-on assets such as equities and crypto, and investors began to pull back.

Global inflation effects were compounded by the sudden conflict between Russia and Ukraine. Both countries are key exporters of commodities, and the conflict and subsequent economic sanctions had almost immediate knock-on effects on the global economy, particularly on the price of essential commodities such as oil and wheat. The ongoing conflict is expected to have sustained effects on the global economy as long as it continues. 

Terra-Luna crash

Another blow to the crypto industry came from an algorithmic stablecoin called TerraUSD (UST), which used to have a market capitalization of over $18 billion before its spectacular implosion in April this year. Stablecoins are crypto assets that are meant to be low volatility and of stable value – they act as a store of value for crypto investors by providing a stable value relative to other tokens. The UST, however, was special as, in addition to stable value, it purported to offer a 20% “risk-free” yield for investors, so they piled in. 

However, the mechanics behind UST was not sound, and the yield was unsustainable, which resulted in the whole scheme quickly unraveling. Terra’s collapse wiped out billions of retail savings. Terraform Labs’s (the company behind TerraUSD and Luna) decision to backstop TerraUSD’s peg to the US Dollar with their Bitcoin reserves was insufficient and could not retain the market’s confidence. 

What is more, the contagion was not just limited to individual users. CeFi platforms like Celsius and BlockFi were farming the 20% yield with their customer deposits, eventually leading to their insolvencies when the UST crashed. Meanwhile, there were also huge lenders and investors involved with Terra (e.g. Three Arrows Capital and Jump Crypto), all of which saw their Terra holdings go to zero. Consequently, over $40 billion was wiped from the crypto market. 

Regulatory challenges

Governments are trying to regulate crypto on the back of its extreme volatility. In January 2022, Russia’s central bank proposed banning the use and mining of cryptocurrencies on Russian territory, and in March, India introduced a 30% tax on transfers of any virtual digital asset. Increased regulatory scrutiny only serves to spook investors, discouraging them from investing in the crypto industry.

The industry was also rocked by more recent regulatory actions taken by US authorities. The banning of Tornado Cash by OFAC and subsequent censorship of its related crypto addresses sent a chilling effect throughout the industry. US SEC and CFTC also took several high-profile enforcement actions against crypto-related projects. While not all of this is bad for the industry (some impacted firms are outright scams), this “regulation by enforcement” approach only sowed more uncertainty amongst industry players, while efforts for clearer regulations seem to have stalled.  

FTX crash

On November 11, FTX, one of the largest cryptocurrency exchanges, filed for bankruptcy. The entire tragedy wiped $200 billion off the cryptocurrency market in just three days.

 FTX has always had massive ambitions. As a CEX, most of their earnings came from trading fees and market making. Tying their ecosystem together was their cryptocurrency token — FTT. 

Before launching FTX, however, Sam Bankman-Fried (SBF), the founder of FTX, had his own trading firm called Alameda Research. When FTX grew, SBF stepped down from his Alameda position. Still, as the saga unraveled, it became clear that FTX and Alameda, through separate legal entities, were both one and the same under SBF’s control. 

SBF’s house of cards flourished until CoinDesk, a crypto news media company, reported that Alameda’s balance sheet was full of illiquid FTT and had $8 billion worth of liabilities. In other words, if the price of FTT crashed, Alameda, along with FTX, would be in great trouble. There was also speculation that FTX illegally lent customer deposits to Alameda while accepting FTT as collateral (later confirmed to be true). Once people realized the potential danger, withdrawals escalated. 

However, the real nail in the coffin was when CZ, founder of Binance, announced that they would sell off all of their FTT tokens on November 7. This drew the attention of the entire market, forcing everyone to scrutinize the CoinDesk article while simultaneously crashing the price of FTT. A full bank run from FTX ensued.

Consequently, FTX, along with other platforms like BlockFi, ran out of liquidity to honor customer withdrawals. Any assets part of FTX’s balance sheet became part of the chopping block to shore up liquidity. Every fund or party who invested in FTX/Alameda or recorded FTT as an asset on their balance sheet had to now mark it down to zero. Any business that utilized FTX for storage had now lost access to their funds. Anything that FTX/Alameda invested into/promised to invest in was at risk from a reputational and financial standpoint. Lenders to FTX/Alameda or anyone who was part of the contagion were now facing unrecoverable debts. In short,  FTX/Alameda’s shenanigans turned into another cataclysmic event for the entire crypto market.    

What will drive the crypto market from now on?

FTX is undoubtedly crypto’s 2nd Mt Gox moment. Although it’s worth monitoring the falling market for buying opportunities, the overall situation points to further crypto decline. There are two reasons for that. 

First, the macroeconomic conditions remain unfavorable for riskier assets such as crypto. Inflation is 5% above the US Federal Reserve’s target, and more rate hikes are expected to follow. Moreover, a cold winter might push up energy prices, causing another inflation spike in the United States and Europe and sending markets even deeper down. 

The most important reason, however, is the loss of trust from institutional investors due to the collapse of Terra-Luna and FTX. Without “smart money,” the market is unlikely to return to all-time highs. While the primary goal of smart money is to save and not waste capital during periods of economic uncertainty, large players will avoid significant risks that the cryptocurrency market carries.

Retail’s appetite for crypto has likely disappeared, too after many have lost their savings in either Terra-Luna or FTX or both. 

What to expect?

Increased volatility provides plenty of opportunities for day traders. Thus, it may be wise to stay within the H1 timeframe for trading crypto and consider closing trades at the end of the day.

FBS analysts expect a further decline in the crypto market over the middle term.

 Source: TradingView (Crypto Total Market Cap $, weekly timeframe)

The total cryptocurrency market capitalization seems to be consolidating above the 2018 high inside a descending bearish triangle. A breakout below $740B could open the way to $400B and $120B levels, which would be a 44% and 83% decline, respectively.

Source: TradingView (BTC/USD, weekly timeframe)

Bitcoin has already broken below the 2018 high, the primary support in the previous two months. In FBS’s view, a decline to the $9,800 – $11,500 range seems probable. A pullback to $18,700 might occur if the price holds these levels. Otherwise, BTC might keep falling toward $5,900 and $3,500.

Though there is a wide range of opinions, the FBS community largely agrees with the overall negative sentiment. Our poll indicates that 24% of traders believe Bitcoin will find the bottom at $13,000, 24% are looking for a reversal at $10,000, and 17% expect BTC to slide below $3,000. Another 32% voted for Bitcoin to hold above $17,000, but the price lost this support on November 9 following the collapse of FTX.

FBS community expectations regarding Bitcoin’s bottom in the current downtrend

When will the crypto winter end?

The short answer is that it’s hard to say. On the one hand, blockchain is an innovative new technology with immense potential. On the other hand, the industry has huge regulatory and industry obstacles to overcome. 

There are so many things that need to be fixed, given the recent events. Developers need to improve the security of crypto projects. Financial audits must be prioritized to avoid repeating the Terra-Luna and FTX debacles. Regulators must develop and enforce laws to punish business owners who illegally risk clients’ funds. Perhaps most importantly, investor trust and confidence must be re-earned following recent events.  

FBS analysts, however, believe that after a long period of consolidation, better times will come for the crypto market. Like all markets, crypto has its own cycle. Historically, BTC always leads the market where the rewards for mining Bitcoin transactions are cut in half. Moreover, the next Bitcoin halving event is in 2024, which coincides with forecasts that the US Federal Reserve will start cutting interest rates by that time. Both these factors are bullish for crypto. Combined with the growing adoption of cryptocurrencies, these drivers could kickstart the next bull run.

The only question at hand is how high Bitcoin will soar. According to the FBS community, Bitcoin will reach $1,000,000 at some point. However, 46% believe that will never happen. Which side are you on? 

FBS community expectations regarding Bitcoin’s future price

The FBS CFD-trading platform is the brainchild of investors from Western Europe interested in trading research and technical analysis. Founded in 2009, FBS had to provide global markets with transparent and trusted applications for professional and semi-professional CFD traders.

Today, FBS is an international brand present in over 150 countries. The brand unites several independent companies offering their clients opportunities to trade Margin FX and CFDs.

The companies include FBS Markets Inc. (licensed by IFSC), Tradestone Ltd. (licensed by CySEC), Intelligent Financial Markets Pty Ltd. (licensed by ASIC), and TRADE STONE SA (PTY) LTD. (licensed by FSCA).