The short-lived boom is hard to sustain, the second major crash after FTX is on its way.

The boom is hard to sustain, the second major crash after FTX is coming.

Macro recession, will it make crypto a safe haven asset or crash the entire crypto world?

The original article “The Second and Final Crypto Crash”, written by Ann and translated by Odaily, does not represent the views of Odaily and does not constitute investment advice.

Bear markets usually go through a massive price drop, with the value staying at the bottom for a long time until it ends years later. The previous market cycle (2018) experienced such a situation, followed by the black swan event of 2020 – the macro market crash caused by COVID-19. In November 2022, when FTX encountered problems and the price of Bitcoin reached $16,000, it experienced a similar 50% price crash as in 2018. And now we are facing a second similar crash.

2018 = 2022, 2020 = ?

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There are unsettling similarities between the market crashes in 2018 and 2022, which are more caused by the cryptocurrency industry itself rather than macroeconomic reasons. This is a clear cryptocurrency event, not a market-wide collapse. Yes, there was a Fed rate hike before this crash, but the final blow was implemented by our own Sam Bankman.

The crashes in 2018 and 2019 were the first “shocks” after reaching historical highs, the first bottom.

Crash after the bull market from 2012 to 2019

FTX crash in Q4 2022

After these two crashes, there was a rebound that made people think “the market is back,” but in reality, there is usually a retesting process before the bear market truly ends.

In the previous bear market, this “retesting” was the market crash caused by COVID-19. I believe we are now also facing a similar situation, waiting for the equivalent event of 2020.

I have noticed some characteristics for the second crash:

• Before the crash, there was a sentiment of rebound and “the market is back.” It was not only the price rise, but also the development of institutions adopting (such as BlackRock Bitcoin ETF) that was in this atmosphere.

• The seeds of the next bull market have already been planted. It was the “DeFi Summer” from 2019 to 2020. And now, any market similar to the DeFi Summer is the “Infra Summer.” I believe restaking will play a huge role in it.

• More importantly, unlike the first crash, the second crash is influenced by a major macro event and is completely beyond the control of the cryptocurrency industry.

The rise of the US stock market will come to an end

Regarding the last point, signs of macroeconomic impact have already emerged. In the past year, the Nasdaq index has shown vulnerability and recently experienced its worst performance since February. Interestingly, cryptocurrencies have not followed this upward trend, which may indicate that traders have more doubts about the Nasdaq’s “dead cat bounce”.

It’s like digital assets don’t believe in this rebound. It can be imagined that if the Nasdaq falls, the cryptocurrency prices, which already have doubts, will not have a good reaction either.

Economic recessions often occur during interest rate cuts

In addition, interest rate hikes should have an effect. Historically, economic recessions have not occurred during Federal Reserve interest rate hikes, but rather during their rate cuts.

As shown in the following figure, the gray overlay indicates economic recessions, and it can be seen that they always occur during interest rate cuts. This was true in both the 2008 financial crisis and the burst of the dot-com bubble in 2000.

Source: https://www.macrotrends.net/2638/sp500-fed-funds-rate-comLianGuaired

Second quarter performance

We are also about to enter the second quarter of 2023 earnings season, and these reports are expected to disappoint as the post-pandemic prosperity has begun to wane.

Companies are expected to release their earnings reports this week. We can expect market volatility, while Bitcoin prices have remained steady in recent weeks, indicating preparation (in technical analysis, this indicates that the Bollinger Bands are contracting, which is a calm period before a storm). This means that volatility is approaching, although this indicator alone cannot determine the direction of prices.

In addition to short-term reactions, this week’s earnings reports may be the first domino in a larger macro event. We will know soon.

A debt crisis is looming. Now, due to the increase in interest rates, US interest payments have soared to $1 trillion. It is unclear how the government will pay for this massive expenditure without cutting spending in other areas, but it is worth paying attention to.

US government spending increased by 15% in June

How to prepare?

For all potential doomsday events, the more urgent question is how should we, as individual market participants, respond to potential volatility.

I have a few suggestions, among which the most important are:

1. Do not lose money by trading low-quality coins

What sets this bear market apart is that we are still being inundated by junk coins and inferior projects that were temporarily popular. From trends similar to Azuki in 2022 to the recent craze for “memecoins,” the market has always tried to scam your last bit of money.

As I write this article, another project called “Worldcoin” has launched their token, which is very disappointing. If I were to list some of the recent popular scams on social media, I would include Rollbit, Hamster Coin (what are you thinking, people on social media!), and Arkham Intelligence Company on the fraud list from June to July 2023.

This attempt to make you give up your money seems endless. Never fall into their trap.

2. Income-generating assets

I know you might think that even with a 5% yield on Ethereum, it cannot offset the losses when digital assets plummet by 50%. But looking at the yield alone is not enough. For me, the biggest advantage of “harvesting” my digital assets (I use the term “harvest” broadly, covering various DeFi strategies that can generate income for me) is that once the assets are securely stored in the DeFi treasury, I become too lazy to intervene. For example, unlocking certain tokens may require a 7-day waiting period. It can help prevent panic selling during a significant price drop.

It’s more about preventing shaky hands than the yield.

3. Observe the level of borrowing

Recently, as the price of Bitcoin rose to $20,000 and the price of Ethereum rose to $2,000, some people started borrowing more boldly (using temporarily appreciated assets as collateral).

I’m not a fan of this practice. The market volatility in the past year is indeed inappropriate for managing loans. The price fluctuations are too great and can make you sweat. Unless you enjoy this kind of excitement, I believe that borrowing will only bring too much trouble, too much risk, and very little return.

4. Relax… and watch the world burn

When I tweeted that I like bear markets, I wasn’t exaggerating at all. The recent ETHCC event in Paris and all its associated activities showed that the crypto community is more vibrant than ever after the departure of visitors. Development work has not stopped, and there are more projects that can help you avoid being distracted.

In addition, the chaos in the traditional financial sector seems worth observing. We will see how the old ways of traditional finance end their weaknesses, and if they collapse, crypto will rise as the new generation of the financial system. I suggest we all get some popcorn and watch.

It may sound cold, but understand it as “relax, don’t worry too much.” The situation may get worse before it gets better. Human society has its own mysterious way of evolving, and this may just be one of the processes.

The most important thing is to keep your money and survive.

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