The Bear Market
I hate to be the bearer (pun intended) of bad news, but it is no secret that Crypto and NFTs are going through an incredibly challenging time at present. If you need some proof of just how bad the current bear market is, here are the facts. Dune Analytics clearly shows us that OpenSea daily volume is consistently at an all-time low. Daily volume has been moving sideways between the $15 – $20 million range for more than a month now, which is appalling when compared to April.
In addition, Google trends have consistently been showing a heavy lack of interest in NFTs as a whole when compared to the start of the year. The current interest level is almost as low as Q2 last year before NFTs really gained any traction. This will come as no surprise as the poor overall sentiment and general market consensus can be felt throughout all secondary market places, Twitter, and even Discord.
While almost no one cares enough to search for NFTs on Google presently, last month searches for the words “bitcoin” and “dead” together reached an all-time high.
If this isn’t enough to convince you, then how about this fact. For the first time since 2022, the total Cryptocurrency Global Market Cap is under $1 trillion and it has remained that way for a number of weeks now. NGMI!
As a result of all of this mentioned above, you won’t be surprised to hear that the Crypto Fear & Greed Index shows us that we are in a period of extreme fear. This is partly what has led to the price of many NFTs, as well as Crypto coins to crash as risk-on, intangible and speculative assets are amongst the first to be liquidated.
It is not only our beloved degen assets that are suffering. Traditional investment sectors such as the S&P 500 are very red and ‘bloody’ too. Even Web2 giants such as Microsoft, Amazon, and Netflix are being influenced by what is happening in the macroeconomy. The evidence is compelling and it cannot be argued that we are weathering one of the most brutal bear markets in history.
The Macroeconomy
You may be wondering why this has happened? Well, you might be happy to hear that there are logical reasons why the current climate is like this. We are currently in a risk-off period, which means that people are generally worried about the economy and a recession due to certain factors. These factors include a series of black swan macroeconomic events that happened in succession.
1) The Coronavirus Pandemic
2) The War In Ukraine
4) The Over Printing Of The Dollar
3) ‘Skyrocketing’ Inflation
4) The FED Being Hawkish And Hiking Interest Rates To Combat Inflation
The Coronavirus Pandemic & The War In Ukraine
Even though Covid-19 may almost seem like a thing of the past now, there are still lingering geopolitical restrictions that are affecting trade around the world. This, in combination with the Ukraine war, has created a series of logistical and supply-side issues such as supply chain disruptions, labor shortages, resource shortages and so on. Again, due to the basic economics of supply and demand, because of the lack of supply, the cost of everything has increased. This is something that is better known as inflation.
The Over Printing Of The Dollar
Speaking of inflation, another major influential factor is that “80% of all US dollars in existence” has been printed since January 2020, in attempts to “save the economy from the Covid-19 crisis”. As the US government printed trillions of dollars in such a short amount of time, there is an increased amount of money in circulation. Consequently, the prices of all asset classes ‘skyrocketed’ parabolically in 2020-2021. So did the cost of living. This is the result of when a vast amount of money is printed quickly.
‘Skyrocketing’ Inflation
Because of inflation, people aren’t able to afford their standard of living because the cost of living is increasing faster than the raises they are getting at work. People need raises from work to maintain their standard of living, but for people to get raises, companies need to generate more income. To do this, companies raise the prices of their products or services to get more money, to pay employees more. Then, people need another raise to afford these increased prices, and the inflation cycle continues. As you can see, it gets a little complicated. It’s a multi-systemic issue that is highly complex.
So who are the lucky ones who have to deal with the situation? It’s the Federal Reserve Board (FED), and they have a big task on their hands.
The FED Being Hawkish And Hiking Interest Rates To Combat Inflation
When the macroeconomic conditions are bad, markets are crashing and inflation is high, the FED are the ones who must combat the issues. In the present case, a ‘fight fire with fire’ approach was adopted as they became more hawkish and hiked interest rates. On June 15th, 2022, an FOMC meeting took place. It was decided that interest rates would increase by 75bps (0.75%). Note that this is the most aggressive hike since 1994. Just recently, the Consumer Price Index (CPI) increased 9.1% from a year ago, which isn’t good news for inflation either.
By doing this, the FED is hoping to dampen people’s willingness to spend money. This causes people to change their behavior from buying to selling. This selling is what creates a cycle of increased supply (people selling) and reduced demand (people not buying), ultimately driving down the price of all assets. As Crypto and NFTs are a risk-on, intangible, and speculative asset class, they’re often the first to be liquidated, causing the prices to trend downwards.
Not only do inflation and interest rate hikes influence risk-on assets, but they are also going to affect other markets, such as real estate. With increasing interest rates, fewer people will be taking out a loan to buy a property, due to increased cost (interest rates). As a result, fewer people will be purchasing properties, which increases the supply and reduces the demand. As we know, this is a recipe for value depreciation, ultimately leading to a crash as estate agents flock to sell properties. All of the combined factors mentioned above are exactly what may lead us into a deep global recession.
In the microenvironment, the combinations of these macro elements have been the driving force for the collapse of Terra Luna, as well as the catalyst triggering the cascade of many lenders and exchanges becoming insolvent and filing for bankruptcy. It’s a chain of circumstantial events, more pain may be coming and we could be here for a while, so brace yourself!
A Summary
Together, these factors make a perfect storm of macroeconomic events that could not have been predicted, and we do not know how long they will last. The Ukraine war could last for a very long time, and it has and will have further effects on logistics and supply chains. The sky-high rates of inflation have set a 40-year record, which means people have less disposable income. To cool down this inflation, interest rates have been hiked. These hikes mean that fixed-income assets such as bonds generate more income, meaning that they become more attractive than risk-on assets like NFTs and Crypto. That extends to dividend stocks that also tend to perform better in market conditions like this.
So when can we expect to see a reversal? The catalyst will be a pivot from the FED. Whilst the macro conditions are brutal, we cannot expect to see risk-on assets thrive. I expect BTC, Crypto, and subsequently NFTs will continue to ‘bleed’ more. Until we see the FED pivot, we cannot assume a bottom is in. Crypto is at the mercy of the traditional sectors, which are at the mercy of the FED. The good news is that those who follow closely can capitalize on the current market condition and win big.
It may seem counterintuitive, but the bear market actually provides the safest opportunity to buy, if you know what to buy, and when. The risk-to-reward ratio is far lower than buying Crypto coins in a bull run, as in a bull run you’re more likely to be buying closer to the top. This is not financial advice and always, do your own research. However, this is something to think about. Hang in there, we’re all going to make it!
