Cryptocurrencies have seen many seasons over the last few years while basking in the world’s attention. But there is one particular season everyone in the crypto world, even the hardcore crypto enthusiasts, dread. The two-word horror story for HODLers and traders alike, ‘crypto winter’.
However, much like real winters, there are also people who like crypto winters since they promise a possibility of spring. Change, in life and in crypto, is inevitable. Let us not get too poetic and ahead of ourselves. This year’s crypto market slump has been pretty difficult, coupled with worries of falling economies worldwide. While most of us remain convinced that the world is about to face a block-shaped revolution, real-world conditions have postponed many plans. Many people also believe that ‘crypto winter’ will help weed out the failing ventures and make room for newer, better startups to rise.
Things We Know About Crypto Winter
The term crypto winter usually refers to a long period of downturn in the prices of digital assets. Digital assets like Bitcoin, Ether, and even NFTs or Altcoins, are newer avenues of investment, and the crypto market itself is only about a decade old. Also, this new range of assets is noted for being decentralized in nature and the crypto market moves independently. A crypto winter might not imply an overall economic slowdown and vice versa.
There is no particular crypto winter definition that could be hard and fast. The only signal for declaring a crypto winter is when prices of leading assets, like Bitcoin, seem to contract and remain lower than key psychological levels.
For many investors, crypto winter could be an opportunity more than a threat. If you’ve been around for a couple of years in the cryptoverse, you might already be familiar with the crypto slang ‘buy the dip.’ Many long-term investors use the fall in prices as an opportunity to buy the dip and remain profitable when the value of an asset appreciates over the years.
Another question you might have in mind is – how do I know that I am in the middle of a crypto winter? Crypto market falling into a series of downward moving prices is indicative of the crypto winter approaching. The current period of crypto winter is predicted to have begun somewhere around late 2021. According to The Bitpay Blog, there were two dramatic price drops between November 10th of last year and January 24, when prices fell by about 25%.
The total crypto market cap, as shown in the graph below from coinmarketcap.com, has slid from its ATH of $3 Trillion in November 2021 to $867 Billion at the time of writing.
This happened gradually over the last few months with top coins like Bitcoin, Ether, Cardano, XRP, BNB have all seen constant price slides. With reference to the data below, taken from coingecko, Bitcoin and Ether have both fallen by more than 75% of their ATH. Altcoins like XRP and Shiba Inu have fallen even more than 85% from their respective ATHs.
With falling crypto prices and shrinking overall crypto market cap over almost a year now, we can say that the market has entered into a crypto winter. We will explore the exact causes of the situation in the next section.
What Causes a Crypto Winter?
A crypto winter is caused by a variety of factors. Let us analyze the current situation and what paved the way for this crypto winter. Arising from a global pandemic, many of the world economies suffered over the past months to re-establish the growth pace. The world was also launched into fresh worries of war and the subsequent energy crisis. The rise in energy prices is also causing problems for the Bitcoin miners. It is no secret that Bitcoin mining requires energy in the form of high-performance CPUs. As the hashrate increases and the energy prices rise through the roof, while the price of Bitcoin falls, the conditions are pretty stressful for an average miner. These are harsh conditions for any asset class to survive, much harder for a new asset class like crypto.
Coinbase Research’s recent report on crypto winter also says that, ‘Investors had already been scaling back their capital deployment due to concerns surrounding the Fed and weak technology stock earnings, even assuming a future recession in the US will be mild.’On top of this, the FTX controversy sent fresh tremors into the crypto market.
There are two major indicators that are being discussed by experts to understand the crypto winter cause and effect.
- The steep drop in value of assets: According to coingecko.com, the global cryptocurrency market cap at the time of writing stands at $867 Billion. This comes after a 2.29% change in the last 24 hours, which is a huge number in itself. However, the decline in value has been recorded at 68.54% from exactly a year ago. This means that the value of the overall market has depreciated steeply and is also in the process of falling further.
- The widespread drop in value: Major cryptocurrencies (by market cap) have constantly been dropping over a year. There have been brief moments of relief, but since the economic conditions worsened and the Fed Reserve started increasing rates, and some high-profile crypto scandals came into light, the prices again took a dip.
This year, a lot of bitcoin’s movements have been based on the macroeconomic situation across the globe. It is however not right to say that crypto winter causes economic depression or that economic depression causes crypto winter. Yes, the effects could be felt in the crypto market, as in the stock market, but there could be a complexity of reasons. Let us look at the bitcoin price history to understand the pattern of losses.
Bitcoin hit the limelight in 2011 when it soared from $2 to more than $32, almost the same as an ounce of silver. It soon bottomed out to one penny when there were reports of hacking into the famous exchange, Mt. Gox.
In 2013, the price of Bitcoin, which was rising and trading on Mt Gox was also seeing more action however, some events like the exchange crashing, and China’s ban on crypto led to a new meltdown. Over 2014 and 2016, Bitcoin’s popularity slowly rose, but it was a slow bear market without any price surges. Bitcoin’s price tumbled from $1,135 on December 4, 2013, to $175 on January 14, 2015.
In the last significant crypto winter, Bitcoin reached a high price of $19,500 in 2017, eventually falling to $3,300 in 2018 because of major hacking activities in Korea and Japan. This meant a loss of 83% of its value. However, as we know, the period of loss did not last long or did not completely flush away the cryptocurrency market, as Bitcoin reached a staggering value of over $69k in November 2021. Again, in 2022, we are facing a crypto slowdown with major slumps.
History, as they say, repeats itself. This couldn’t be truer in the case of cryptocurrencies. Analysts know that patterns could be relied on. Those who were writing ‘bitcoin obituaries’ from way back in 2010, must now have realized the power of Bitcoin as a long-term investment. Bitcoin has fallen, along with the rest of the crypto market, over and over again. However, the more significant message here is this – it always bounces back.
Crypto Winter Vs Bear Market
The major difference between a bear market and a crypto winter is that in a bear market, the prices go downwards however, in a crypto winter, the prices remain down, but the graph moves sideways. This means that an investor will see negative returns during a bear market but flat returns during a crypto winter. Piers Ridyard, the Switzerland-based CEO of RDX Works, is quoted by Time.com, that, ‘These “winters” are often marked by people losing interest in the crypto market as returns are stunted. It essentially becomes a waiting game for many investors who aren’t confident about the state of the market.’
It is also perhaps correct to say that a prolonged bear market results in a crypto winter. Another aspect to keep in mind is that just like bear and bull markets, crypto winters are also a functionality or a preset of how the market works. It is also a maxim that crypto winters follow a set pattern of recurring every 4 years. There is some amount of consistency through the turbulence. So it is possible that we will see a cryptocurrency rally soon.
The 4-Year Cycle
As mentioned above, history tends to repeat itself very often in the cryptocurrency graphs. In fact, experts tend to know exactly how often. Every four years, it is possible that there is a slowdown or a period of downturn. This could be called a crypto winter cycle, however, there are no exact parameters as to when the current crypt winter might end. According to a report by market-insights firm Grayscale, on average, crypto market cycles last for around four years or approximately 1,275 days. In their approximation, they also note how the market cycles take a longer time to peak every time.
The report states:
“According to the aforementioned framework, crypto market cycles have been taking longer to peak each time. In 2012, the market took 603 days to peak, increasing approximately 180 days for each subsequent cycle, with 2016 taking 786 days, and 2020 taking 952 days to peak.”
It is also noted by Grayscale, and also analysts all over the world that the period of winter could be a pretty good time to make your investments and buy bitcoin as well as its counterparts.
Grayscale’s report also made a prediction of when the current crypto winter cycle might peak. It states: “Bitcoin is 222 days off the all-time high, which means we may see another 5-6 months of downward or sideways price movement. Historically, market bottoms also appear to come one month sooner each time.”
After the bottoming out, it will be possible for Bitcoin to push to another ATH if market conditions are favorable. There is another BTC cycle that moves alongside the crypto winter cycle. This is the Bitcoin halving. After a period of about 4 years, the block reward for mining a Bitcoin block reduces by half. Each halving reduces the rate of inflation. This is also coupled with an upward push in the price of Bitcoin. The next bitcoin halving takes place in 2024. It is also said that the period of modern recession goes for about 10 months. Critics have said that the recession period might not have any effect on Bitcoin. However, larger economic conditions are starting to seep into the tech industry, as well as the crypto industry, further solidifying the ice during an already persistent crypto winter.
What Happened to NFTs During Crypto Winter?
NFTs or Non-Fungible Tokens are relatively new to the scene when compared to more than a decade-long run of Bitcoin and other cryptocurrencies. However, the effect of a slowdown in the crypto market also usually is reflected in the DeFi as well as NFT space.
Over the last year, NFTs recorded high growth. NFT sales volumes in 2021 were estimated to be over $24.9 billion, a huge jump from $94.9 million in 2020.
With the FTX scandal, many DeFi and NFT platforms have been affected. DappRadar has reported that NFT values have depreciated by a huge margin over the last quarters. Q3 of 2022 saw $3.4 billion in NFT sales, down from $8.4 billion in Q2 and $12.5 billion in Q1. This also means that with the crypto winter, NFT space has also faced a sharp decline in buyers.
The current crypto winter conditions offer a time of opportunity for making smart, cautious decisions. To make sure you do not fall victim to the cold wind, make proper portfolio adjustments. It is advisable not to invest more than you can afford to lose when you consider the opportunity to buy the dip. Stay warm and positive as the crypto winter cycle takes its course, leading to a much-awaited spring.
Please note that this is not trading advice. We recommend you to carry out your own research before making any trading decisions. This article is for informational purposes only.