What is a crypto winter? Definition, duration and impact on investors | Arena

For those betting big on digital currencies, crypto winters can decimate wealth.

Izzy Park via Unsplash; Cloth

Although cryptocurrency is a younger asset class, its overall performance seems to be somewhat cyclical, much like its more established peers. In other words, it experiences ups and downs in the same way as more traditional securities like stocks and bonds.

Despite being younger than most Gen Zers, the cryptocurrency has already seen several major peaks and troughs characterized by high trading volume, wild volatility, and unfathomable gains and losses for people. involved.

What is a “crypto winter?” Where does the term come from?

When the value of the cryptocurrency market as a whole declines by a significant percentage for an extended period — usually led by major players like Bitcoin and Ethereum — many investors describe the downturn as a “crypto winter.” A crypto winter is essentially the digital currency equivalent of a bear market in stocks.

The term was coined by South African data analyst and digital asset enthusiast Eugene Etsebeth in 2018. At the time, Bitcoin, the most popular and largest cryptocurrency by market capitalization, had fell from a high of nearly $15,000 in 2017, eventually reaching near $3,500 in early 2019.

Many have speculated that the inspiration for the term may come in part from HBO’s popular fantasy series, game of thronesin which the concept of an impending winter of unusual length and severity is a central motif.

How long do Crypto Winters last?

If cryptocurrency behaves like other asset classes (which it seems to, but with even more volatility), then crypto winters, like bear markets, likely come in all shapes and sizes. The sizes. Since crypto hasn’t been around that long, we don’t have a lot of data to look at.

The crypto winter that led to the coining of the term lasted nearly three years, from early 2018 to late 2020. Around this time, the crypto began to soar, with Bitcoin surging above $60,000 at mid-March 2021.

A much shorter decline in crypto prices followed, from early May to mid-August of the same year. However, this downturn was so short-lived that some would probably be hesitant to call it an actual crypto winter, instead calling it just a pullback (which is interesting because this downturn was very close to lasting around 4 months in real life).

The crypto market began to fall again in late 2021, with Bitcoin falling from a high near $65,000 in mid-November to a low of around $17,000 in mid-November 2022. In late January 2023, the crypto market had yet to recover.

A Timeline of Crypto Winters

  • Beginning of 2018 to end of 2020 (~3 years)
  • Early May to mid-August 2021 (~3.5 months)
  • Beginning of 2022 to present (1 year and more)
This chart tracks the value of Bitcoin in USD from early 2016 to early 2023.

Google Finance

What Causes Crypto Winters?

Like most large-scale phenomena, crypto winters do not have a single cause, and different crypto winters likely resulted from different circumstances. That being said, a number of factors can reasonably be expected to contribute to a downturn in the crypto market.

  • Inflation and rising interest rates: When the rate of inflation rises and the Federal Reserve raises interest rates in response, investors tend to shift their money from riskier investments like tech stocks and crypto to safer, higher-paying assets like bonds. and preferred stocks. This leads to lower prices for these riskier assets. Rising interest rates and general economic malaise are likely among the biggest contributors to crypto downturns.
  • Scandals and negative press: When something untoward happens in crypto (scams and scandals are not uncommon in decentralized finance due to the lack of regulation cryptocurrencies are subject to), investors take notice, and it can affect crypto prices.
  • Capitulation: Despite the original purpose of cryptocurrency as a store of value to be used as a currency, most individuals and institutions treat crypto as an investment, and investors are notoriously emotional. When the value of an investment begins to decline, a “herd mentality” can easily take hold of investors who are still long in the asset, triggering a wave of capitulation. As prices fall, more investors panic and sell, causing prices to fall further, and so on until demand and supply finally reach relative equilibrium.

What is the impact of Crypto Winters on investors and institutions?

The most obvious impact of a crypto winter is the financial loss suffered by investors, both individual and institutional. During each crypto winter, DeFi evangelists whose portfolios are tied almost exclusively to cryptocurrency suffer devastating hits to their net worth, while investors with more diverse portfolios suffer more subtle losses based on their allocations. of assets.

Another consequence of prolonged downturns in the crypto market are job losses and business closures. During crypto bull markets, many new businesses tend to emerge in the field of decentralized finance, primarily mining operations and digital exchanges. The lure of the “digital gold rush” is hard to pass up, and start-ups ready to take advantage of the industry’s boom abound.

However, when crypto stocks tumble and stay low for extended periods, smaller, newer mining companies and exchanges often fail, and larger, more established operations have to cut costs through mass layoffs.

Examples of Layoffs at Crypto Companies

  • Robinhood, a popular crypto (and stock) trading platform, laid off 8% of its workforce in April 2022 and another 23% in August of the same year.
  • Coinbase, one of the most popular and established crypto exchanges, laid off 18% of its staff in June 2022.
  • Hodlnaut, a popular crypto-lending platform, cut its workforce by 80% in August 2022.
  • In January 2023, Crypto.com announced that it was laying off 20% of its staff.

When will the current crypto winter end?

Bitcoin began falling from a high of around $65,000 in November 2021. About a year later, in November 2022, it hit a low of around $16,000. At the end of January 2023, it bounced back to around $23,000.

But will the current crypto winter come to an end? Or will prices continue to fall until the market crashes completely? Because crypto is such a young industry and many financial professionals denounce digital currencies for their lack of “intrinsic value”, it is certainly possible that cryptocurrencies will continue to lose value and eventually fall completely. in disgrace.

On the other hand, so many individuals, businesses, and institutions have money tied up in the crypto world that once interest rates drop and inflation stabilizes, the industry (or at least major players like Bitcoin and Ethereum) could see a massive comeback. According to Luc Olinga of TheStreet, “While optimism appears to have returned, cryptocurrency prices are still far from their highs set amid the late 2021 crypto craze.”

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