Despite posting impressive returns in 2020 and 2021, cryptocurrencies ended up in another massive bear market in recent months, catching many investors off guard. However, this can be a lesson learned – even if you still believe there is potential in this market, the volatile and speculative nature of digital assets should not be ignored.

With that being the case, there are several subtle signs suggesting that the crypto market might take yet another turn for the worse. Knowing them can help traders and investors shift their investments away from digital assets to other safe havens like cash, bank deposits, or Treasury bonds.

Irrational exuberance

One of the early warning signs is irrational exuberance. Analysts from the global trading brand Invest Ecapitals recommend that traders remain rational even when crazy things start happening. Each crypto cycle is unique. The last one, for example, brought with it the rise of dog coins (Dogecoins, Shiba Inu, etc.), all of which are tokens with no real added value in the global economy.

When such assets rise in value and reach impressive market capitalization, that can be a time to take capital off the table. The main reason is that there are no fundamentals to support those elevated valuations and if large market participants cash out on their early investments, prices will fall sharply (just like in 2022).

A period of above-trend returns

Every bull market eventually reaches an end and the crypto market is no exception. Traders need to understand that the benefits of the blockchain do not cancel the flaws associated with how most crypto projects operate.

Simply put, the rise of DeFi (decentralized finance) facilitated the creation of crypto liquidity. Investors lock funds in these platforms, which use them to lend based on a fractional reserve system and with interest. This naturally creates a self-reinforcing cycle, but when loans need to be paid back, liquidating crypto holdings is the only way to meet obligations. That is why a year of impressive returns in the cryptocurrency space might actually be a sign to get out fast.

Alt-text: cryptocurrency prices


Prospects for monetary policy tightening

As the experts at Invest Ecapitals put it, financial assets are heavily influenced by monetary policy. When central banks keep rates low and conduct quantitative easing, that creates liquidity in the financial industry, supporting asset prices.

The opposite happens when financial conditions are tightening. This year, inflation figures above expectations prompted central banks to act and cryptocurrencies have been the biggest victim.

Diminishing confidence in crypto

For the cryptocurrency market to rise, traders and investors need to be confident enough to buy at higher and higher levels. Confidence is what leads to bull markets and a loss of it keeps prices low for an extended period.

In 2022, major companies like FTX, BlockFi, Three Arrows Capitals, and Voyager Digital went bust, suggesting that there are structural issues within the cryptocurrency industry which still need to be solved. When traders see these early signs of trouble, that is the time to start considering moving capital away.