A Mini Crypto Bear Run in a Strong Economy: What the Heck is Going On?

December 15, 2021

Today was a very important day for the US Economy. The Federal Reserve concluded its two-day meeting and accelerated the end of its bond-buying program. Additionally, interest rate forecasts were made, with announcements of three rate hikes over the next year.

Barring a major surprise, Bitcoin, the cryptocurrency market as a whole, and the Dow Jones Industrial Average (DJIA) aren’t expected to react much. The Omicron COVID variant doesn’t appear that it will cause major shutdowns, and unemployment rates are headed back down to pre-pandemic levels. The biggest (and justified) concern is the huge inflation rate fueled by economic relief packages.

Most economy experts are of the opinion that concerns about interest rate hikes and inflation have already factored into the markets. Both Bitcoin and the DJIA hit record highs within two days of each other in November, and then there was a correction.

Following the correction, the Dow Jones is trading within a thousand points of its all-time high of 36,432.22. Every factor listed above is an indicator that the cryptocurrency market should have rebounded along with the Dow Jones. If anything, cryptocurrency should have rebounded faster, as it’s often been used as a hedge against inflation. But it hasn’t.

Bitcoin, the bellwether of the cryptocurrency market, has repeatedly bounced off a floor of about $46,000 over the past few weeks, while the DJIA has recovered. Every time that floor is breached, there has been a near-immediate reaction of buy orders. So, what the heck is going on?

As a reminder, we at MacguyverTech are not investment advisors; these are just our opinions. As always, don’t invest anything you can’t afford to lose, and do your own research before buying. With that being said, here are three factors we believe are keeping the crypto market suppressed into a mini bear run.

Number One: “Let’s Just Say It’s a Matter of Leverage.”

One of the things that happens during a massive bull run is that investors with less capital borrow capital to leverage their positions and buy more of a commodity. The difficulty with this is, as you may have expected, that you must repay what you borrowed. When the market stalls or retreats, those who are leveraged heavily against a particular commodity are forced to sell to pay down their debt.

Major investors know this. Bitcoin, during its massive bull run of 2021, became heavily leveraged. Much of the Bitcoin leverage has been forced out of the market during this mini bear run, showing a return to normalcy.

Our reaction: We decidedly feel this is a factor, but it’s one that has nearly run its course.

Number Two: “The Problem is Not the Problem. The Problem is Your Attitude About the Problem.”

 As we said last week, fear is an excellent short-term motivator, but a horrible long-term one. However, fear turns into hope very quickly, particularly in the investment arena. Inflation and the Omicron variant shook investors, and eyes will be on the Federal Reserve’s announcement today.

If things go as expected, the bear market shouldn’t get much worse. If the announcement is better than expected, Santa might make an early appearance.

Our reaction: Markets are easily spooked, particularly one as volatile as cryptocurrency. This is definitely a factor.

Number Three: “Take What You Can. Give Nothing Back.”

 Let’s face it; 2021 has been a bull market for cryptocurrency, the likes of which have rarely ever been seen before. As such, many people cashed out with profits over the past month. This isn’t a judgement; it’s perfectly reasonable to “get out while the gettin’ is good.”

However, there’s a delineation between cashing out on memecoins and cashing out on blockchain platforms. Both of those saw remarkable ROI in 2021, but what we’re seeing now may be a transition from short-term to long-term investing.

Our reaction: If this is a factor, it’s a smart one. Fads come and go. Trends repeat themselves. But technological innovations tend to stick around for quite a while. Regardless of what one might think about Bitcoin, blockchain technology is here to stay. Likewise, Ethereum, Solana, Polkadot, Avalanche and Cardano coins are, as well.

In Summary:

We could debate for quite some time about a projection for Bitcoin’s price over the next two years, but it’s difficult to see it as a bad long-term investment. Will Bitcoin eventually be replaced by another blockchain coin? Quite possibly.

Whatever the case, we feel confident that this is indeed a “mini” bear market. Also, if you hadn’t noticed, each of the factors listed above was accompanied by a “Pirates of The Caribbean” quote. If you’re trying to determine if this is a good time to get into crypto, we’d like to offer one more that you might hear in a couple months if you wait:

“If you were waiting for the opportune moment, that was it.”