Five aspects could lead to a major downturn in the crypto market in 2022


The crypto market suffered a severe loss of value in the past week, reducing investor wealth by billions of dollars. However, a positive comment from the US Federal Reserve on December 15 helped the industry bounce back a bit, and Bitcoin passed the $ 49,000 mark earlier this morning.

However, for a sustained uptrend, markets need more fuel to continue the rally. Incidentally, a professor at the renowned Wharton Business School believes that a major upheaval in the crypto market is possible in 2022. The Motley Fool’s Sean Williams explains why the market could hit heavy weather in 2022.

More on the topic: Professor Kevin Werbach sees crypto market in crisis in 2022

Aspect 1: A trend reversal in the crypto market

The crypto market has expanded strongly this year, with Bitcoin and other altcoins generating enormous returns. Since the low in March 2020, the market has grown 14-fold to a staggering $ 2.14 trillion.

But there was a similar scenario with the 2017 bull market, which was followed by the big crash in 2018. This history is an indication of a possible renewed extreme shrinkage of the market.

Aspect 2: The practical proof of the benefits of the blockchain is still pending

Of course, the blockchain is one of the big technologies for the next few decades. The ability to make cross-border payments in real time and at low cost can reduce the risk of the procedure and could be implemented globally. There is also a growing demand for blockchain networks that are based on smart contracts and can streamline supply chains.

However, some market analysts believe that the euphoria surrounding blockchain development is out of place because there are not yet enough practical applications that would justify the great optimism. The blockchain has yet to prove its acceptance in the real world, they say.

Aspect 3: The inability of crypto to decouple from stocks

While Bitcoin and other cryptocurrencies were invented as a hedge against traditional market risk, we have seen the crypto market follow the trend in equities. Now the stock market has seen a massive surge since the crash in March 2020.

If the US Federal Reserve cuts its economic stimulus programs in 2022 and raises interest rates next year – which it has announced – a bear market is likely to occur. Based on previous experience, the crypto market would follow suit.

Aspect 4: Margin debt can lead to large liquidations

As the size of the crypto market increases, so does the number of margin trades. Margin basically represents the amount of money investors borrow to buy assets or to sell short. In margin trading, traders often take great leverage risks in the hunt for bigger profits.

If the asset in question does not behave as speculated, the brokerage firms that offer these loans can step in. They will then ask for additional money from investors as collateral and thereby force other assets to be sold. Since there is no single regulatory framework for the crypto industry, it is not clear how high the outstanding margin debt is. Earlier this year, it was possible that investors could use 100% of their cash deposits to trade Bitcoin. The extreme leverage due to the volatility of cryptocurrencies can therefore lead to massive liquidations.

Aspect 5: The hype about meme coins is evaporating

The euphoria surrounding meme coins has never been so great. Dogecoin, Shiba Inu, and whatever else they’re called, have had their bullruns. What happened to Shiba Inu, for example, can only be described as insane.

Therefore, many analysts are talking about a FOMO-driven rally ( F ear O f M issing O ut) in meme coins and expect their magic to dissipate in 2022.

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