Cryptowinter is similar to a bear market for traditional equity instruments, when a benchmark index falls by at least 20 percent from its previous peak. Bitcoin (BTC) is the leader of the broader crypto market, its exchange rate is currently hovering around $20,000, 65 percent below its peak last November, as shown in the figure below.
Not only Bitcoin, but also other popular digital assets began to plummet. Ethereum (ETH) and other leading altcoins such as Cardano (ADA) and Polygon (MATIC) have fallen more than 59 percent so far this year.
Source: Google Finance
According to several experts, the crypto winter, i.e. the long-term bear market, has already arrived. The last crypto winter lasted quite a long time, from January 2018 to December 2020, so almost three years. This raises the question of how another multi-year slump will affect the crypto market, will there be a crash?
Crypto believers and fanatics
After the big price drops, many people are still convinced that the world is on the verge of a blockchain-driven financial revolution. According to them, cryptowinter will be like the dotcom bubble burst in the early 2000s – it will weed out unsuccessful businesses while making room for more promising startups. However, the collapse of FTX, one of the largest stock exchanges in the industry, in November seems to have vindicated the doubters, and it may be premature to assume that we are over.
According to the exchange monitoring company CoinMarketCap, the crypto winter of four years ago could have knocked off up to 88 percent of the market value of cryptoassets – shows by The Washington Post.
What causes cryptotele?
In their short lives, crypto markets have become synonymous with excessive booms and panic-induced crashes. Bitcoin lost about two-thirds of its value in 2014, partly due to the failure of a major crypto exchange. The fall in 2018 occurred at the same time as the regulation of so-called initial coin offerings (initial coin offerings) was tightened, which led to the destruction of thousands of new cryptocurrencies, according to The Washington Post.
This time, however, forces outside the crypto world played a role. When central banks eased monetary policy in response to the coronavirus pandemic, investors poured their money into blockchain startups and digital assets. Later, as central banks began to reverse, the market for cryptoassets began to collapse – destroying the idea that crypto was a safe haven for investors like gold.
The plunge triggered the collapse of the TerraUSD stablecoin (a digital token tied to the US dollar, hence the “stable” adjective). This led to the bankruptcy of hedge fund Three Arrows Capital, crypto broker Voyager Digital and crypto lender Celsius Network, among others. Prices fell further in the following weeks as investors feared a kind of domino effect.
They fell spectacularly, so they retreated from behind the cryptos.
Even by the industry’s own volatile standards, the drop was spectacular. And the collapse of cryptocurrencies has shocked pension fund and public asset fund managers, as well as millions of small investors who bought digital currencies in recent years. Those venture capitalists who invested tens of billions of dollars in astronomically valued crypto-startups were in a similar mess. In addition, it turned out that the bull market of recent years was built on shaky foundations, as many investors bought digital coins with large loans, which fewer and fewer are able to repay due to interest rate hikes.
Tesla also oversold its coins
The damage to institutional and retail investors has put more pressure on governments to put crypto on a par with traditional finance, with better regulatory oversight to avoid further disasters. Critics see the decline as evidence that cryptoassets are still too risky to be included in traditional investment portfolios.
Even the vocal supporter of cryptocurrencies, Elon Musk, backed down: his electric car company, Tesla, sold 75 percent of his Bitcoin holdings. And potential investors are understandably not trying to buy coins these days due to the lack of confidence prevailing in the market.
Gloomy outlook on the crypto market.
The winter of 2022 has given ammunition to critics who see crypto as a purely speculative investment. It showed that crypto is not, as its proponents have often claimed, independent of traditional financial instruments and can be just as sensitive to rising interest rates as other investments. Almost a year after the start of cryptowinter 2021, exchange rates and trading volumes are still weak, and many of the crypto startups with viable business plans have run out of cash. Cryptominers, who play a vital role in crypto transactions, have also struggled as the value of the tokens they earn has plummeted and rising energy prices have swelled their electricity bills.
We can even profit from the drop
Some large institutional investors were not deterred by the fall: in August, BlackRock announced its first fund that allows direct investment in Bitcoin, informed the Bloomberg. That same month, hedge fund manager Brevan Howard raised more than $1 billion for a crypto fund.
Just as the recent downturn led to the creation of fewer but stronger businesses, businesses that survive the current winter will have fewer competitors and can come back stronger from the downturn. Increasing regulatory rigor, while fueling short-term uncertainty around crypto, could ultimately make it a more respectable, stable asset class.
(Cover photo: Thomas Trutschel / Getty Images)