The crypto market recently went through a catastrophic crash, which was triggered by the collapse of the Terra Luna cryptocurrency. However, the crypto market crash may not have bottomed out based on historical events. For instance, the last time the US Fed raised its rate from zero to 2.5 percent in 2018, Bitcoin prices fell by 83 percent.
The Recent Crypto Crash
In the past week, the old mantra of buying the deep has been decimated across various markets besides crypto markets. For instance, the equities markets have fallen catastrophically in the last few days after going through what seemed to be the beginning of a rally. As of May 19, 2022, the Nasdaq index had fallen by 29 percent, while the S&P 500 had fallen 19 percent. Both of them are now well below their 2021 peaks. Some experts believe that the US could be on the verge of a recession in 2023.
How Low Can Bitcoin Go?
All of these deeps in the markers are happening amidst a deep in the crypto market, which has got some wondering how low it can go. Looking at history gives a rough idea. In 2018, when the Federal Reserve raised its overnight cash rate from 0.25 percent to 2.5 percent, Bitcoin fell by 83 percent. Today, the core inflation and wage growth are much higher than the 2018 level. Thus, if the US Fed decides to intervene, it would raise rates well above 2.5 percent.
One of the key drivers of growth in the crypto market is the near-zero interest rates offered by conventional cash. As a result, some investors have seen it as a way to make profits in a high-risk market. This was especially true during the COVID19 pandemic when most leading central banks took their rates to zero, with some even offering negative interest rates.
When investors began to pour money into crypto, the markets experienced huge capital gains. As the world pulls out of the pandemic, it will no doubt mean the opposite of the conditions during the pandemic.
In 2015 when the US Fed’s rate was near zero, the price of BTC was around $250, by December 2017, it had risen to nearly $19,000. Shortly after, the Fed raised interest rates, and the price of Bitcoin collapsed, and it was trading at around $3400 by December 2018.
If Bitcoin follows a similar path to that of 2018, the price of BTC should bottom out at around $11,000. However, conditions are slightly different this time. For one, there was no inflation shock and wage-price spiral. This time, the US Fed has no choice but to keep hiking rates until it smothers inflation.
Historical data suggests that there could be bigger risks for crypto investors on the way. The major problem with the crypto industry is that there is no real-world use case apart from speculation. Most people who buy and sell crypto today do it for specialized purposes. Without any real-world use cases, many of them could depart the crypto markets if the risks, and pressure becomes high enough. It is especially so if the reward for taking the risk is not as high. As a result, while it is unlikely the crypto market could collapse to zero, there is a possibility it could drop below $10,000 based on current market conditions.