Bitcoin’s Bouncing Back — but Is the Bottom in Sight?

Cryptocurrency investors have had an even tougher time of late than those investing in the stock market. Over the past seven months, Bitcoin (BTC -5.96%) has lost more than half of its value. Ether (CRYPTO: ETH) is down an even steeper 60%. As painful as the decline in the stock market has been for many investors, the losses in crypto make the Nasdaq‘s 24% drop since early November seem tame by comparison.

For much of the past two months, the crypto bear market saw its descent accelerate. But after eight straight weeks of declines, Bitcoin and Ether finally managed to eke out some gains last week to break their losing streak. On Monday, Bitcoin was up nearly 4% as of 2 p.m. ET, while Ether notched a 2% rise.

Daily gains are one thing, but the question most crypto investors have is whether this means the bottom is in sight for major digital assets. Unfortunately, there are several reasons why crypto investors shouldn’t count on an immediate rebound from current levels — and indeed should be prepared for further declines that could be substantial.

Headwinds buffeting crypto

Digital assets have proven to be vulnerable to some of the same forces that have hit higher-growth stocks. The Federal Reserve’s moves to raise interest rates have increased the opportunity cost for investors to put their money into cryptocurrency, and it has also threatened to increase borrowing costs for those who invest in crypto through leveraged vehicles like Bitcoin futures. With inflationary pressures seeming to go unchecked for now, it’s likely that the Fed will remain diligent to ensure rising prices don’t get entrenched in longer-term consumer expectations.

In addition, many fear that the economy could enter a recession, and the potential impact on crypto is far from clear. Bitcoin was just getting started during the Great Recession of 2008 and 2009, and while many economists treat the massive short-term plunge in economic activity at the beginning of the COVID-19 pandemic as a recession, it’s hard to use that experience as a baseline for what to expect in a potentially more extended economic slowdown.

The cryptocurrency world has also seen confidence among mainstream investors shaken by the sudden collapse of TerraUSD (CRYPTO: USTC). The sudden drop in the stablecoin’s value also led to massive losses for investors in Terra Luna Classic (CRYPTO: LUNC), as the algorithm linking the two tokens proved disastrous.

Waiting for a bottom

Amid all these pessimistic arguments, there are things that some crypto investors are excited about. The coming Ethereum merge has been an anticipated catalyst for the No. 2 digital asset for a long time now and could also help crypto regain some of its lost luster.

Nevertheless, it’s important for digital asset investors to be prepared for even more downside volatility. Bitcoin has gone through multiple bear markets when it lost more than 80% of its value. As painful as the drop from $68,000 to $31,000 has been, a full 80% decline from its November 2021 highs would take Bitcoin all the way to $13,600. That’s a 56% drop even from current levels. Similarly, an 80% drop in Ether from its high would take its price down to $980 — almost half its value right now.

The volatility involved in cryptocurrency investing has always been one of the hardest things for those interested in the space to endure. For many, it’s the reason why they’ve remained on the sidelines with crypto. If Bitcoin and Ether can demonstrate that they don’t always have to have such deep bear markets every time adversity strikes, it could go a long way to generate more long-term confidence in the market. But…

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