For crypto-industry veterans, Bitcoin and the crypto markets falling into a bear market should not be the biggest surprise as the whole industry has really operated in a boom-to-bust cylindrical pattern. This cycle differs from the others for a variety of reasons but the underlying driver still remains the same.

Leverage

What is Leverage

Leverage is the underlying mechanism for margin trading. It allows users to be able to invest like they have much more money than they actually have. For example, someone with a margin account and only has $10 in the account but with leverage is able to trade and invest like they have $50 or $100. While an extremely risky way of trading, even for advanced traders, during a bull market people tend to be okay. More often than not when you see or hear about some kid who has made a huge sum of money trading it often comes from margin/leveraged trading. When the market slows down or people make the wrong trade the result is exponentially worse than a typical trade as you owe additional money for losing money that was not even yours.  

Leverage Roles in Crypto

Unlike in previous bull markets, Wall Street and Wall Street-like companies (3 Arrows Capital) were involved in the bull market this time around. We saw 3 Arrows, the first crypto hedge fund emerge, along with traditional companies like MicroStrategy buying into Bitcoin as well. This brought even more interest into the industry and APY's soared as every single asset just appeared to not be able to slow down. Investors, to keep up, then started to use leverage at incredibly high rates which while the market was going up was fine. However, investors became greedy APYs under 10% were considered awful and led to projects losing users as people chased after the 200-1000% APY returns. For a lot of projects/cryptos now getting a 10% APY is really a fantastic rate of return a ton of people would wish for. 

As the market began to move sideways late last year issues with leverage emerged. Traditional finance turmoil along with mixed signals from the crypto space led to those leverage loans being called in by the issuers. Suddenly money was owed and when these people went to pay it from accounts that they thought had it well it turned out those accounts were also being leveraged creating a circle best imagined as a snake eating its tail. The values on these accounts started to turn out to be nothing more than a scribble on a piece of paper with only a fraction of the value actually in their account. Suddenly accounts were frozen, bankruptcies were announced, and people realized their funds might have gotten lost in the whole shuffle of things. 

This alone made sure that we were going into a bear market as a lot of scams and get-rich schemes died. People who had used leverage were suddenly in a ton of trouble without any answers. A lot of money is/was lost because of this and it will take a ton of time to short out who has what and who gets what. 

Additional Issues Facing Crypto

The leverage issue is enough to keep the industry in trouble for quite a while but crypto has been further beaten while it was down. We are dealing with inflation and cost of living issues leading to central banks raising interest rates thus taking liquidity out of the markets. We also have macroeconomic issues with the instability of governments in the Middle East and Africa, the Russian invasion of Ukraine, and China still implementing mass lockdowns to try and control the COVID-19 virus. 

Not everything is bad though. We have seen adoption increase significantly from previous cycles and investors in the space doubling down. The Merge is also occurring which will help take care of the energy consumption cloud that has loomed over the industry head. Lastly, sports are getting involved more and more in the space with NFTs, Fan Tokens, and accepting crypto as payment exposing a ton of sports fans to the space and giving crypto further utility! How long the market will be in this bear market though is going to be unclear until we see substantial progress with not only the bankruptcy hearings but also when the macroeconomic situation improves. Anyone that thinks that it is easy to time is blowing smoke because this cycle is just substantially different than others. 

Please know I am not a financial advisor and make sure you do your own research! If you enjoyed this article and would like to support me further below are a few referral links that if you used when signing up I would appreciate it! Also, follow me on Twitter @Cje95_

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