Crypto Expert: Market Forces Accelerated Crypto Winter

Crypto winter spurred by various factors

According to Hoover, at the start of the year many investors had overweight exposure to equities given the limited alternatives available. As a result, some market participants increased their exposure to cryptocurrencies.

“Looking back on the historical performance of crypto as an asset class, or even Bitcoin and Ether as two different investments, you were able to get very powerful diversification and overall portfolio risk reduction with very small allocations to crypto,” he said.

The expert explained that even a portfolio with just 2 or 2.5 percent in cryptocurrencies would allow for this diversification and reduction of risk, as long as it was rebalanced every quarter.

But world conditions changed the panorama quickly.

“You had a bit of a delayed hangover from all of the economic stimulus that was put in during COVID, that all started to come back," Hoover said. “I think that that certainly started the deleveraging process in crypto, as crypto prices continued to fall; then the liquidations took the leverage out of the market and it sort of accelerated the fall.”

He went on to remind investors that even small declines in cryptocurrency prices can cause a "cascade of automated selling." Hoover added, "And so it turns into a big deal, it does tend to amplify the movements to the downside."

Will panicking investors give up on cryptocurrencies?

Heading into the end of the year, Hoover said he’s unsure exactly what investors will do, but he doesn’t expect a dramatic turn.

“I don't think that there are a bunch of people that are holding on and saying, ‘Okay, if Bitcoin goes below US$18,000 that's it, I'm done. I'm going to liquidate,'” he said.

However, Hoover told INN he expects to see some investors sell temporarily before the end of the year for tax purposes.

Investor takeaway

It's no secret that the cryptocurrency market is facing a difficult bear market, leaving investors under pressure.

However, many experts continue to express positivity about cryptocurrencies in the long term, pointing to key markers of health and emphasizing that exterior forces are affecting the current dynamics.