No one knows what the future holds, but we can use past trends and experience to predict it.
Here are three reasons why I am bearish on cryptocurrency (and equities markets in general) for 2022, and why you should be too:
1 — Federal Reserve Will Remove Money from the System
The Federal Reserve, or Fed, is the central bank of the United States.
The global asset markets are tied to the US stock market. Bitcoin and crypto are to a large degree correlated the US stock market. Since the Fed monitors and adjusts the volume of cash flowing through the economy, it has a strong influence on all of these markets.
For example, an economy with low interest rates and lots of disposable cash rewards investors and borrowers. In the extreme, too much of this can create too much inflation.
Having the opposite, i.e. very high interest rates and less cash in the system, rewards savers, as people have a greater incentive not to spend their money. This tends to result in slower economic growth. Too much of this can result in an economic depression.
In March 2020, to prevent financial collapse and to revive the US economy, the Fed applied an unprecedented level of quantitative easing (money printing). Further, it purchased US stocks and bonds directly. This was the first time on record the US central bank specifically did this with stocks to support the economy.
Stimulus checks to individuals, increased borrowing by the US government and asset purchases by the Fed have all resulted in an increase in cash throughout all levels of the system, from the top down. Some effects of this have been:
- A red-hot stock market
- An explosive bitcoin and crypto market
- Increasing real estate prices
- Growing commodities prices
- Rising prices for consumer goods
The Fed’s mandate is to balance inflation and growth.
The Fed has an inflation “target” of 2%. US Inflation hit 7% year-over-year in December 2021. The central bank’s policy makers did not expect inflation to get this high, and now, they are facing growing pressure to decrease inflation.
The Fed has two actions it can take to place downward pressure on inflation. The first is to remove money from the system.
2 — The Federal Reserve Will Increase Interest Rates
The second action the Fed can take to decrease inflation is increasing the central bank’s benchmark interest rate. The Fed lowers their benchmark interest rate to stimulate the economy.
In March 2020, the Fed lowered their benchmark rate to 0%. Other banks determine their interest rates for lending and borrowing based on the Fed.
So far this year, Fed Chair Jerome Powell has repeatedly announced plans to provide several hikes in benchmark rates.
Like removing money from the system, increasing interest rates tends to create downward pressure on asset prices like stocks and crypto.
3–History Does Not Repeat, But it Rhymes
In crypto and especially Bitcoin, historically, markets have moved around the approximately four-year Bitcoin halving cycles. The previous halving cycles occurred in 2012, 2016 and May 11, 2020.
The bull markets peaked in 2013, 2017 and based on appearances, 2021. This can be viewed on the Bitcoin historical price chart. According to many crypto influencers on Twitter (NYSE:TWTR), this was the very reason why they were so bullish in 2021. I agreed with them.
Like a few others on Twitter, I am bearish for the same reason. It might just be my timeline, but most continue to be bullish despite the above three factors.
Again, no one knows the future, and it is possible for the future trend to violate the pattern of the past. It’s just not very likely.
Wait — Was That a Bull Market?
Yes it was. And it was a spectacular bull market. It came, and it appears that it went.
Traditional asset managers in the stock market consider beating the average 12% gain of the S&P 500 to be successful (less than half of the pros succeed). While someone new to crypto in 2020 might find a 64% gain to be “boring,” this is not usual.
To reiterate, Bitcoin and crypto just (apparently) finished a MASSIVE bull market. Bear markets tend to follow bull markets, which follow bear markets, which in turn follow bull markets. Of course these markets are only visible by looking at the past, so this is not a perfect system. Past performance does not guarantee future results.
One might find reasons for the uptrend to continue. I have heard some nonsense around Twitter stating that the bull market hasn’t started yet, or that it is just getting started.
While there is no consensus on when the most recent bull market started, here are some prices and dates:
December 13, 2018 crypto prices:
- Bitcoin: $3,242
- Ether: $86
- Binance Coin: $6
February 27, 2020 crypto prices, at the advent of COVID-19 lockdowns:
- Bitcoin: $8,784
- Ethereum: $227
- Binance Coin: $19
At the end of 2021, the prices are as follows (even if 20% down from all-time highs):
- Bitcoin: $46,718
- Ethereum: $3,713
- Binance Coin: $516
Bitcoin gained 297% in 2020 and then another 64% in 2021.
The following are some of the top gaining cryptocurrencies in 2021:
- Shiba Inu $SHIB: 43 million%
- Gala $GALA: 40,400%
- Axie Infinity $AXS: 15,132%
- Sandbox $SAND: 12,763%
- Polygon $MATIC: 11,485%
- Terra $LUNA: 11,249%
- Solana $SOL: 9,160%
If you missed out on these gains, hoping that they will continue is not a sound strategy. As a perhaps too conservative long-term holder of mostly Bitcoin and Ethereum, I missed out on these parabolic explosions, though it was an excellent year for my portfolio. I did manage to catch the wave with Gala, Sandbox, and Polygon, though these gains were more modest, around the 50% to 300% range.
Okay So Now What?
My projections are thus as follows:
The Fed added money into the system and lowered interest rates, and crypto and stocks went up.
As the Fed removes money from the system and increases interest rates, I expect the same markets will move down.
Without some massive world-changing event, crypto markets will trend downward until the next Bitcoin halving event. 2022 and much of 2023 will be down markets.
It’s not all bad — for my counter arguments on why to be bullish, read this.
And let’s not forget the silver linings:
- Down and less volatile markets are the best for Bitcoin and crypto to be used as currency. Who wants to spend a currency that could double in value this year?
- Dishonest projects, scams and badly run and organized projects tend to die off.
- Smart leaders and teams and real dedicated builders make good with less capital and keep on building great things.
- Great investments go up long-term, and the best time to buy them is when they are less valuable.
I will be here in crypto full time, no matter the weather — will you?