The reasons for the bear market
How to use blockchain transparency?
What is a bear market? It's when equity markets are losing more than 20% of their previous highs.
There is a perception that cryptocurrency is completely independent of other financial markets. But that's not entirely true. Stocks that are heavily capitalized are also in a bearish phase. In this case, we can observe correlations and overlapping trends between them and digital assets.
This correlation has become possible because institutional investors are starting to actively invest in cryptocurrency. This reflects the maturity of digital assets and leads to the emergence of new financial products and modes of regulation. The main difference and advantage of cryptocurrency is transparency, because of blockchain technology. This allows you to properly assess the risks of your investments or to trace any transaction.
Today we will look at the reasons for the bearish trend from the macroeconomic side and the ability of regulators and lawmakers to DeFi.
What happened?
This isn't the first precipitous decline in cryptocurrencies. More recently, declines in crypto-assets have correlated with broader markets. So why is the situation now more extreme than in the stock market? DeFi has become more competitive and so it's starting to use risky investment strategies more. They have a ripple effect throughout the ecosystem - that's one of the key factors.
How did we get here?
After the "crash" of cryptocurrencies in 2018, we saw strong growth across the entire digital asset market. Over time, growth stopped gaining momentum and capitalization became smaller. But lending and revenue services continued to grow.
There is a perception that cryptocurrency is completely independent of other financial markets. But that's not entirely true. Stocks that are heavily capitalized are also in a bearish phase. In this case, we can observe correlations and overlapping trends between them and digital assets.
This correlation has become possible because institutional investors are starting to actively invest in cryptocurrency. This reflects the maturity of digital assets and leads to the emergence of new financial products and modes of regulation. The main difference and advantage of cryptocurrency is transparency, because of blockchain technology. This allows you to properly assess the risks of your investments or to trace any transaction.
Today we will look at the reasons for the bearish trend from the macroeconomic side and the ability of regulators and lawmakers to DeFi.
What happened?
This isn't the first precipitous decline in cryptocurrencies. More recently, declines in crypto-assets have correlated with broader markets. So why is the situation now more extreme than in the stock market? DeFi has become more competitive and so it's starting to use risky investment strategies more. They have a ripple effect throughout the ecosystem - that's one of the key factors.
How did we get here?
After the "crash" of cryptocurrencies in 2018, we saw strong growth across the entire digital asset market. Over time, growth stopped gaining momentum and capitalization became smaller. But lending and revenue services continued to grow.
Because of competition, the current centralized credit services are technically set up as decentralized. To offer more profits, users have taken riskier investments as the basis. For example, in the first quarter of 2022, other lending services became the largest source of funds. Eventually, when prices started to fall, the entire ecosystem was affected.
Also, the collapse of the UST Algorithmic Stablecoin. The reasons we wrote about earlier in our LinkedIn post have intensified the negativity in the market and with even more "pressure" on the market. Because of this, many investors started exchanging their cryptocurrency for fiat.
Understanding Systemic Risks
Due to the open nature of DeFi protocols, cryptocurrency is transparent. This is a huge plus in favor of security because you can trace the positions of major players. And understand the risks of possible liquidation. And also to check whether a particular project corresponds to its description, etc.
Also, with the transparency of the blockchain, which never lies, you can figure out how this or that project failed. And who is to blame: the fraudulent team or external circumstances and stupid actions? This is how we learn and work on our mistakes. We filter out projects that are done poorly and quickly.
This filtering is especially inherent in a bear market. When negativity and skepticism about cryptocurrencies rise to huge levels and there is not enough money in the sphere for ill-conceived investments - bad projects simply do not survive and the DeFi sphere becomes "cleaner".
However, transparency has not stopped huge centralized companies from betting on the cryptocurrency rate. DeFi's protocols continue to function technically as intended. At this time, some heavily leveraged businesses are trying to get rid of unprofitable projects in financially unstable times.
Regulators and in general, all DeFi players, need to examine the relationship between the centralized and decentralized parts of the crypto market. For example, centralized players can lose a huge amount of money investing in DeFi. They face a significant amount of leverage and fail to calculate the risks. All this destabilizes the market. In decentralized projects, investments by centralized players can be susceptible to hacking and dramatically lose value.
Due to the open nature of DeFi protocols, cryptocurrency is transparent. This is a huge plus in favor of security because you can trace the positions of major players. And understand the risks of possible liquidation. And also to check whether a particular project corresponds to its description, etc.
Also, with the transparency of the blockchain, which never lies, you can figure out how this or that project failed. And who is to blame: the fraudulent team or external circumstances and stupid actions? This is how we learn and work on our mistakes. We filter out projects that are done poorly and quickly.
This filtering is especially inherent in a bear market. When negativity and skepticism about cryptocurrencies rise to huge levels and there is not enough money in the sphere for ill-conceived investments - bad projects simply do not survive and the DeFi sphere becomes "cleaner".
However, transparency has not stopped huge centralized companies from betting on the cryptocurrency rate. DeFi's protocols continue to function technically as intended. At this time, some heavily leveraged businesses are trying to get rid of unprofitable projects in financially unstable times.
Regulators and in general, all DeFi players, need to examine the relationship between the centralized and decentralized parts of the crypto market. For example, centralized players can lose a huge amount of money investing in DeFi. They face a significant amount of leverage and fail to calculate the risks. All this destabilizes the market. In decentralized projects, investments by centralized players can be susceptible to hacking and dramatically lose value.
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