May 2022 is a "bloody month" for the crypto market. This month, the global financial market is still keeping a close eye on the Fed's policy trends, but the crypto circle has taken the lead in ushering in a huge wave of negative news -
The algorithmic stablecoin UST collapsed, and the project behind it, Luna (whose total market value once ranked among the top five in the industry), ended ahead of schedule, which brought about an unimaginable chain reaction: Bitcoin prices fell sharply, most currencies in the market fell, and panic continued to spread, so that "the market has clearly turned bearish" has almost become a consensus in the industry.
The subsequent impact of this incident may further exceed expectations.
1. The collapse of UST triggered a chain reaction, and market confidence was severely frustrated
The most intuitive impact is that the algorithmic stablecoin track of seigniorage shares may become an outcast in the industry. In fact, since the birth of algorithmic stablecoins, the market has been aware of the risk of its own death spiral. Only the sudden collapse of UST made the entire industry suddenly realize this. Of course, the wide range of its impact and the scope of its destruction were unexpected. Users will naturally accelerate their exit.
The malignant impact of UST will certainly attract the attention of regulators. Last week, U.S. Treasury Secretary Yellen called for regulation of stablecoins in Congress. It is foreseeable that sanctions against stablecoins may come quickly and will be more punitive than before, and market sentiment has therefore fallen into a slump. The Crypto Market Fear and Greed Index (CFGI) has fallen to a two-year low, even close to the value before the outbreak of the epidemic in 2019.
Institutions also have a negative attitude towards the market outlook caused by this. On May 13, Citibank released a report saying that due to the collapse of UST, Bitcoin is expected to remain highly volatile for some time to come, and the impact of multiple factors including increased regulation and panic will exacerbate volatility.
The report also said that the current price of Bitcoin has fallen to a level close to its production cost and the valuation implied by the spot adoption model.
Second, the US stock market may experience a major correction, which actually plays a key role in this round of decline
After the crypto circle was hit hard by the UST collapse, a large amount of funds flowed out, causing the price of Bitcoin to still hover around $29,000 this week. According to statistics, compared with the highest point of this round of bull market, the current total market value of the crypto circle has fallen by $1.7 trillion.
Citibank mentioned in its report this week that the plunge caused by this round of "black swan" events was actually an inevitable event against the backdrop of weak risk assets, and it was only accidental factors that catalyzed this result. This also further shows that the correlation between Bitcoin and US stocks has strengthened, especially in a depressed situation.
Institutions are also not optimistic about the overall financial market. Goldman Sachs Group recently publicly warned that "companies and consumers should prepare for a recession" and has lowered the S&P 500's target for the end of 2022 from 4,700 points to 4,300 points.
Goldman Sachs' equity strategy team also added that "if a recession occurs, it will push the S&P index down to 3,600 points." Not long ago, Goldman Sachs publicly reported that the probability of a recession in the United States by the end of 2022 reached 35%.
3. The Fed’s monetary policy may be the real determinant of the future of the crypto market
The U.S. Consumer Price Index (CPI) rose 8.3% year-on-year in April, the first decline in growth since August 2021, but it is still at a high level, proving that the inflation situation in the United States is still severe. According to the previous analysis of the European Economic Research Institute, raising interest rates and shrinking the balance sheet have always been the Fed’s must-have option to deal with high inflation, which has an impact on the crypto market.
Federal Reserve Chairman Powell reiterated his stance on combating inflation last week, suggesting that the June meeting will continue to raise interest rates by 50 basis points. At least from the news side, it has already formed a certain negative effect. It is currently unknown whether the market can digest it in advance after the resolution is finalized.
Various signs indicate that the decline in the crypto market is much higher than that in the traditional financial circle. Before the bad news came, it also took a short-term bear market, which can be said to have started an independent decline. With the tightening of the external financial environment, the cost of speculation by users in the crypto circle has also risen significantly, and the trend of accelerating departure is irreversible in the short term.
Risks are always accompanied by opportunities. This mutually dependent relationship is also more reflected in the time cycle of investment.
It should be noted that since the birth of Bitcoin more than ten years ago, it has experienced many peaks and troughs. But what is consistent is that every time after crossing the trough, the total market value of Bitcoin can reach a new peak. Investors who are truly at ease need to have the qualities of prudence, decisiveness, and patience to cross the bull and bear markets and win in the end.
Author: Zhao Wei, researcher at Ouyi Research Institute
Editor: Edward, Ouyi Novice Academy
