The crypto market downturn explained | by Coinbase | Jun, 2022

Around the Block from Coinbase Ventures sheds light on key trends in crypto. Written by Connor Dempsey. Data by Mike Cohen.

TLDR:

• Central Banks and governments responded to the March 2020 COVID market shock with unprecedented interest rate cuts, money printing, and stimulus
• These easy money policies kicked off a multi-year bull run for equities and crypto, before eventually causing inflation that was further exacerbated by COVID supply shocks
• BTC, ETH, the NASDAQ, and S&P each peaked at the tail end of 2021, when it became clear that inflation was not under control and that Central Banks would have to unwind the same policies that propelled stocks and crypto to new heights in the first place
• This cycle crypto has been broadly correlated with tech stocks, and has traded like risk assets
• While not immune to Central Bank policy in the short run, the prospects of crypto and Web 3 in the long run remain stronger than they’ve ever been

Financial markets are, in essence, one giant information processing machine. A machine that responds to new information not directly, but as it affects the decisions of millions of individual buyers and sellers. Or as Benjamin Graham famously put it, “in the short run, the market is a voting machine.”

With the S&P 500, NASDAQ, BTC, ETH, and most crypto assets significantly off of their all-time-highs, that begs the question: what information has market participants predominantly voting to sell?

In this edition of Around The Block, we take a look at the overall macro downturn with an eye towards the crypto markets.

As of June 2022, US equities have shed roughly 20%, or $10 Trillion in value. For US stocks, the selloff has not yet approached the severity of other historically noteworthy downturns, but it’s certainly in the conversation.

Crypto meanwhile, has shed nearly 60%, or $1.7 Trillion. For comparison, it shed 87% of its total market cap after the peak of the 2017 bull run.

BTC, ETH, and the NASDAQ all peaked in November, with the S&P 500 peaking at the end of December. So what changed during the last two months of the year? To understand this market downturn, it’s helpful to start at the beginning of a historic bull run that both stocks and crypto experienced in 2020.

Entering 2020, Bitcoin was rallying from the depths of the 2018/19 crypto winter, from $7,500 to nearly $10,000. Meanwhile the S&P and NASDAQ each stood at all-time highs. Then COVID hit.

COVID shock of March 2020

On March 12, 2020, the World Health Organization…