- The positive Fed commentary has helped the crypto market to bounce back, but it remains to be seen if this is a sustained move.
- Here are the five possible reasons that can lead to major corrections in the crypto space in the next few weeks.
The Crypto market entered a major correction over the last week eroding billions of dollars in investors’ wealth. However, a positive commentary from the Federal Reserve on Wednesday helped the broader crypto space to recover a bit with Bitcoin crossing $49,000 earlier today.
However, for a sustained upward trajectory, the markets will need more fuel to continue the rally. Besides, a Wharton professor has also been predicting a major crypto market shakeout taking place in 2022. Sean Williams from The Motley Fool shares why the crypto market can correct going into 2022.
Related: A crypto market shakeout coming in 2022 says Wharton Professor, talks about Metaverse and Web 3.0
1. Strong crypto market reversion
Well, the cryptocurrency market has rallied significantly this year with Bitcoin and altcoins giving multifold returns so far. Since the bottom of March 2020, the broader crypto market has jumped 14-fold to a staggering $2.14 trillion. This has been a similar scenario during the 2017 bull run after which the market witnessed a major crash in 2018.
The historical trends suggest that the market holds the possibility of 80 percent pullbacks thereby leading to a prolonged bear market. We can possibly witness a major meltdown in the trading euphoria going further.
2. Blockchain euphoria can outpace its use case
Of course, blockchain is the next big technology for the next few decades. The ability to make instant cross-border payments at a low cost can completely democratize the process while ensuring global participation. Besides, there’s been a growing demand for smart contracts-based blockchain networks that can streamline the supply chain.
However, some market analysts believe that the euphoria surrounding blockchain development has outpaced its use case. Blockchain has yet to prove its adoption given the recent euphoria around it.
3. Crypto’s inability to decouple from stocks
While Bitcoin and other cryptocurrencies emerged as a hedge to the traditional market, we have seen that the broader crypto market has been following the equity trend. Many see Bitcoin as a store-of-value or digital gold while calling it a safe-haven investment.
However, Bitcoin has exhibited massive volatility, unlike the physical gold which has been relatively stable. The stock market has also witnessed a massive run-up since the March 2020 crash. Thus, with the Fed rolling back its stimulus plans and raising interest rates the next year, we can expect a possible correction coming in the stock market. Probably, based on historical trends, the crypto market might as well correct.
4. Margin debts can lead to major liquidations
Just as the size of the crypto market increases, the number of margin trades also increases. Margin basically represents the amount of money that investors borrow to purchase or short-sell assets. In margin trading, users often end up taking big leverage positions in the hunt for greater profits.
However, if the bets don’t move in the expected direction, the brokerages offering these loans could come calling. Thus, the brokerages will ask investors to put extra capital as collateral or could force the sale of assets.
Since there’s no standard regulatory framework to govern the crypto space, it isn’t clear how much margin debt is outstanding. Earlier this year, it was possible for investors to use 100 percent of their cash margin in trading Bitcoin. The massive leverages clubbed with crypto market volatility can lead to massive liquidations.
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5. Meme coins lose their magic
The euphoria around cryptocurrency meme coin has been unprecedented this year. The like of Dogecoin, Shiba Inu, and what not has given multifold rallies recently. The crypto market craze around the popular Shiba Inu has been nothing short of euphoric.
Some analysts call it a FOMO-driven rally in meme coins and expect the magic to end in the next year of 2022.