© Courtesy of TheStreet For those who spend big on digital currency, the cryptocurrency winter can wipe out a lot of money. Izzy Park via Unsplash; TowelWhile cryptocurrencies are an old asset class, their overall performance appears to be somewhat cyclical, like their established counterparts. In other words, it has its ups and downs like traditional securities like stocks and bonds.
Despite being under the lion's share of Generation X, the coin has experienced several major upheavals characterized by high trading volumes, wild volatility, and unpredictable gains and losses by participants.
Winter comes. . .
What is “crypto winter”? Where does this word come from?
When the overall value of the cryptocurrency market drops by a large percentage over a long period of time, usually led by big players like Bitcoin and Ethereum, many investors refer to the drop as a "crypto winter." Cryptocurrency winter is basically the digital equivalent of the bear market.
The term was coined in 2018 by Eugene Etebase, a South African data analyst and digital asset enthusiast. At the time, Bitcoin was the most popular cryptocurrency and its market capitalization fell from a high of $15,000 in 2017, eventually falling to $3,500. Early 2019.
Many have speculated that the term may have been inspired by HBO's popular fantasy series Game of Thrones, in which the coming winter was a concept of immense length and severity.
How long will the crypto winter last?
If cryptocurrencies behave like other asset classes (as they seem, but with much more volatility), crypto winter, like a bear market, is likely to come in all shapes and sizes. Since cryptocurrencies haven't been around that long, we don't have a lot of data to analyze.
The crypto winter, which kicked off the period, lasted for three years, from early 2018 to late 2020. Currently, cryptocurrencies are starting to rise, and by mid-March 2021, Bitcoin had reached $60,000.
This follows a very brief drop in the price of the cryptocurrency that lasted from early May to mid-August. However, this fall was so short-lived that some might hesitate to call it a real cryptovalyutnogo winter, rather than just a retrograde winter (interesting because this fall is very close to the length of a real winter: around 4 months) real crypto winter . .
The cryptocurrency market started to fall again in late 2021 when Bitcoin fell from its peak of $65,000 in mid-November to $17,000 in mid-November 2022. As of late January 2023, the cryptocurrency market has yet to break. recovered.
Crypto winter timeline
- Early 2018 to late 2020 (~3 years)
- Beginning of May to mid-August 2021 (~3.5 months)
- From the beginning of 2022 until now (1 year or more)
© Provided by TheStreet This chart tracks the price of Bitcoin from early 2016 to early 2023. Google FinanceWhat will crypto winter bring?
Like most large-scale events, crypto winters do not have a single cause, and different circumstances can cause different crypto winters. That being said, a number of factors could reasonably be expected to contribute to the downturn in the cryptocurrency market.
- Inflation and Rising Interest Rates: When inflation rises and the Federal Reserve raises interest rates in response, investors shift their money from riskier investments like tech stocks and cryptocurrencies to safer interest-bearing assets like bonds and warrants. Share, distribute. This will reduce the value of this risky asset. Rising interest rates and general economic instability could be the main reasons for the decline of cryptocurrencies.
- Scandals and Negative Press – When something nasty happens in the cryptocurrency space (frauds and scandals are not uncommon in decentralized finance because cryptocurrencies are poorly regulated), investors take notice and can affect the price of cryptocurrencies.
- Transportation – While the primary purpose of cryptocurrency is to be a store of value that can be used as currency, most people and organizations view cryptocurrency as an investment and investors are known to be sentimental. When the value of an investment begins to decline, a herd mentality can easily overwhelm investors who have been in the asset for a long time and trigger a flood of capital. When the price falls, many investors sell, driving the price down even further, until supply and demand reach a relative balance.
How will the crypto winter affect investors and institutions?
The most obvious impact of the crypto winter has been financial loss for investors, both individual and institutional. Every crypto winter, DeFi evangelists whose portfolios are almost entirely in crypto suffer large losses on their assets, while investors with more diversified portfolios suffer more subtle losses depending on their asset allocation.
Another consequence of the prolonged slump in the cryptocurrency market is job losses and business closures. During the cryptocurrency bull market, many innovations emerged in the decentralized finance space, primarily digital mining and exchanges. It's hard to miss the allure of the "digital gold rush," and there are plenty of startups ready to take advantage of the boom in the industry.
But when the price of cryptocurrencies falls and lasts, small and new mining companies and exchanges often go bankrupt, while large established operations are forced to cut costs through mass layoffs.
An example of a discount at a cryptocurrency company
- Robinhood, a popular cryptocurrency (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 employees in June 2022.
- Hodlnaut, a popular crypto lending platform, reduced its staff by 80% in August 2022.
- In January 2023, Crypto.com announced that it would cut 20% of its workforce.
When will the current crypto winter end?
Bitcoin started falling from around $65,000 in November 2021. About a year later, in November 2022, it reached an all-time high of $16,000. By the end of January 2023, it had returned to around $23,000.
But is the current crypto winter coming to an end? Or will prices keep falling until the market crashes? Since cryptocurrencies are a young industry and many financial experts are of the opinion that digital currencies lack “intrinsic value”, it is likely that they will continue to lose value and eventually become obsolete.
On the other hand, as more people, companies and institutions have money associated with the crypto world, as interest rates come down and inflation levels off, the industry (at least the major players like Bitcoin and Ethereum) could experience a great renaissance . According to TheStreet's Luke Olinga, "While optimism appears to have returned, cryptocurrency prices are still far from their all-time highs at the height of the cryptocurrency craze in late 2021."