Opinion is divided on whether the current price rout faced by cryptocurrencies is similar to that experienced by the industry in 2022, experts say.
Three years ago, there was a series of cataclysmic events in the crypto industry, including the collapse of Luna, Three Arrows Capital imploding and FTX, one of the largest exchanges in the world, found to be committing fraud.
Anish Shivdasani, head of digital assets at global consultancy Roland Berger, said at the Binance Blockchain Week in Dubai on Wednesday: “If we look at today, I would argue we're not in a slump. Bitcoin is at $90,000.
"Yes, it got to $126,000 but we're used to having huge drawdowns in bull markets. If you look at the reasons for this drop, they don't compare with the last cycle because the fundamentals are more solid now.
“The crypto exchanges are more solid, there is large-scale institutional adoption and huge buyers of exchange-traded funds, not just Bitcoin but Ethereum, Solana and other chains, too," he added. "We also have digital asset treasuries now, like Strategy and Metaplanet, and much more stable infrastructure.”
Navin Gupta, chief executive of blockchain analytics platform Crystal Intelligence, also said the current cycle is different because multiple-use cases driven by institutional adoption are gaining momentum. Non-speculative use cases such as stablecoins are driving adoption and bringing transacting users, he said.
However, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said excess leverage and speculative trading are the major common denominators of the two cycles. Both slumps were fuelled by high leverage, causing cascading liquidations when prices started falling, worsening sell-offs, she added.
“High correlation with broader markets is another one: cryptocurrencies tend to follow risk-on/risk-off trends in equities and global macro sentiment, rather than moving independently. Retail panic selling is also a recurring theme, as retail traders often chase highs and exit during drops,” she said.
While hard commodities have understandable supply/demand dynamics, production costs, use cases and organic demand, Bitcoin suffers a "lack of solid valuation", she said.
"Bitcoin has the mining costs [around $70,000 per coin] but the demand side of the equation is missing – what's the organic demand, real-life use cases, what would prevent people from selling their Bitcoin?”
Increased cautiousness about riskier assets, spurred by the spectre of an AI bubble amid lofty tech valuations and overall economic uncertainty, has weighed on cryptocurrencies in recent weeks.
Bitcoin, the world’s largest digital currency, was trading at $93,018.67 at 3:39pm on Wednesday and is down more than 30 per cent from a peak of about $126,000 set in early October. The digital assets market remains on shaky ground after a sell-off that began in October.
“On October 10, the market witnessed $19 billion in crypto liquidations in just 24 hours, the largest single-day wipeout in digital-asset history," said Vijay Valecha, chief investment officer of Dubai-based Century Financial.
"November saw $3.45 billion exit Bitcoin ETFs, with BlackRock’s flagship fund recording its worst month since inception. By December 1, an additional $646 million was liquidated before midday."
What is causing price drop?
The decline has been driven by a confluence of global macroeconomic shocks, liquidity stress and regulatory tightening, rather than any deterioration in the long-term fundamentals of digital assets, Mr Valecha said.
The single biggest catalyst has been the violent unwinding of "yen carry trade", a strategy where investors borrow Japanese money at its historically low interest rate and convert it to a higher-yielding currency to invest in assets such as stocks or bonds in other countries. This was triggered when Japan’s 10-year government bond yield surged to 1.88 per cent, its highest level since 2008.
For decades, global investors borrowed in near-zero-interest yen to leverage positions across tech stocks, US Treasuries and Bitcoin.
The yen strengthened sharply, as yields surged, turning these leveraged positions unprofitable and setting off a chain reaction: forced selling, margin calls, liquidations and large outflows from risk assets. This mechanical deleveraging spilt directly into the crypto ecosystem, Mr Valecha said.
“Regulatory pressure has amplified the stress. Recently, People's Bank of China reconfirmed to maintain a hardline stance regarding virtual currencies after seeing a resurgence in speculation and committing itself to continue its crackdown on illegal stablecoin activities.”
Mr Shivdasani cited macroeconomic factors at play. What happened over the past few weeks was a move towards risk-off because of AI bubble discussions, he said. Also, interest rates are not moving as fast as people want, while geopolitical complexity is also a factor, he said.
Mr Gupta from Crystal Intelligence agreed crypto prices have started becoming corelated with the risk-on and risk-off mindset in the broader market.
What’s next for cryptos?
Ms Ozkardeskaya believes things are expected to look up when the threat of reverse JPY carry weakens.
“The Fed is also interesting to watch,” she said. "A hawkish December cut could amplify worries, while a dovish cut could provide relief. Once the dust settles, growing inflows from institutional investors or adoption by mainstream financial players can stabilise the market and tame volatility." Friendly regulation could also "throw a floor under the recent sell-off".
Mr Valecha said the next major catalyst hinges on the Bank of Japan’s December 18 policy decision. A further hawkish shift could extend the “crypto winter” towards $75,000 for Bitcoin, while a pause could trigger a powerful short squeeze, potentially reclaiming $100,000 within days.
Looking forward, sentiment can improve quickly once prices move back toward $100,000. Bitcoin could set the stage for a run early next year, he added.
“In the long run: when the crypto market matures, we should see lower correlation with traditional assets, that should justify higher allocation due to better diversification opportunities," Ms Ozkardeskaya said.
What should retail investors do?
Bitcoin should be part of an investor's portfolio because it has been around for 15 years, grown by a compound annual rate of 100 per cent per year, has very strong fundamentals and is accepted by all regulators, said Roland Berger’s Mr Shivdasani.
Ms Ozkardeskaya said retail investors should diversify and deleverage. An all-crypto portfolio carries high risk. Spreading exposure across equities, bonds and commodities reduces portfolio volatility and limits losses. For a traditional portfolio, the average allocation to Bitcoin/cryptocurrencies could be between 2 per cent to 5 per cent, she suggested.
“Retail investors should always invest only an amount they are willing to lose. Dollar cost averaging is better versus chasing a buy/sell price,” Mr Gupta recommended.
Mr Valecha advised investors to treat crypto as a speculative/high-risk investment and not include it as a core asset in their portfolio. He also suggested diversifying crypto assets by investing in multiple reputable coins.
“Also, it is important to be disciplined and avoid emotional trading, don’t panic sell during crashes, or chase hype when prices rise. Instead, do your own research and stick to a long-term plan that matches your risk comfort,” he said.
“Having a plan upfront helps you make smarter decisions even in volatile markets.”
