Crypto current has been experiencing significant fluctuating changes since the beginning of the Covid-19 pandemic. Whilst people are getting stuck at home, their attention turns to investing, which, as a consequence, results in the fact that Bitcoin price has fallen almost 50% between April and July, Dogecoin has decreased from a high of $0.65 down to a current price of $0.06, and Coinbase has laid off thousands of employees. All of these are warning signs of the Crypto Winter. So what is Crypto Winter and how will this period affect our market in both the short and long term? Read the article below for further information.
1. What is Crypto Winter?
Michael Anderson, a financial advisor at Maranatha Financial in Ventura, Calif claimed that “When cryptocurrency prices are down, it’s hard to decide if you should sell before additional losses or hold on waiting for a hopeful rebound”. She added, “Cryptocurrencies are a risky asset that could eventually fall to zero value. While I don’t think all cryptocurrencies will fail, a good number may ultimately bite the dust.”
Therefore, to literally define the term Crypto Winter, it is crucial to note that since November 2021, the crypto market has experienced a significant decrease by 60%, drastically falling from $3 trillion to less than $1 trillion.
Generally speaking, Crypto Winter, which represents a downturn period in terms of cryptocurrency prices, widely varies from Bitcoin or Ethereum to less-known crypto coins and tokens like non-fungible tokens which cannot be copied, substituted, or subdivided while being recorded in a blockchain.
“The crypto market was already feeling the effect of world events, especially the Russia-Ukraine conflict that caused turmoil in global finance,” says Igor Zakharov, CEO of DBX Digital Ecosystem.
Importantly, Zakharov noted that “By the time TerraUSD and Luna collapsed and set in motion a domino effect in the crypto world, crypto winter had already begun”.
2. The Crypto Winter 2022
a. The Advantages of Crypto Winter
Undeniably, the year 2022 is not the first time a crypto winter has settled over the market. Two years ago, crypto winter lasted from January 2018 to December 2020 when Bitcoin price, unfortunately, lost more than 50% of its existing market cap, whilst Ethereum and Litecoin (LTC) dropped sharply during that period.
Crypto winter, in some ways, is considered to be similar to a conventional bear market, though, the results are not unlike bear markets in other asset classes. Not to mention, in the long-term, crypto winters not only weed out young startups but also enable top companies to nurture, develop their products and build sustainable relationships with their stakeholders.
The more challenging it gets to compete for venture capitalist dollars, the more crypto companies will be forced to cut budgets. Or in the worst scenario, some firms are likely to lay off staff as the most optimal solution at the time.
b. This crypto winter is different than the previous one
When the last crypto winter came to the market in 2018, the price of Bitcoin considerably dropped by more than 50% from its all-time high in traditional finance.
However, in the 2022 crypto winter, we have been witnessing a totally different situation. Joel Kruger, a market strategist at LMAX Group, which specializes in cryptocurrency services for institutional investors claimed that was the very first time they had seen a crypto trading lower than before in a traditional bear market.
With the appearance of the bear market, a crypto recovery is getting far more challenging. Specifically, crypto-specific issues started to emerge, the collapse of the algorithmic stablecoin TerraUSD and Terra known by the ticker LUNA, its sister coin.
c. Frozen customer accounts and sudden bankruptcies
It is the fact that if a customer borrows an amount of money from a bank to make investment bets that don’t pan out, he is much more likely to cope with further trouble repaying that original loan.
The stories below highlight how quickly the fortunes changed for companies that, only months before, were seemingly swimming in success.
- Celsius Network opened in 2017 and operated much like a bank. Users could deposit crypto and earn interest — up to 17%, according to the company’s website — and Celsius would issue loans against those deposits. (Last year, regulators in multiple states questioned the legality of Celsius products.) In June 2022, the company barred its 1.7 million users from withdrawing or transferring funds — valued at $20 billion at its peak. In July, the company filed for bankruptcy. In a court filing, the company stated that its assets had plummeted by 80% between March 30 and July 14, 2022.
- Three Arrows Capital, a crypto hedge fund, managed about $10 billion in assets at its peak before crypto price declines left the company unable to repay loans worth billions. Its founders went into hiding after filing for bankruptcy and their whereabouts are still unknown.
- Voyager Digital, a crypto brokerage service, filed for bankruptcy in July. Prior to this filing, it paused customer withdrawals. The company cited Three Arrows Capital’s failure to make a $350 million loan payment as a primary reason for its financial troubles.
But these events do relieve the fact that some consumer safeguards found in traditional financial products — such as FDIC insurance, which protects savers in the event their bank goes under — are absent in crypto.
d. What does the future hold?
So what is the future set for crypto, right after this cold winter? Let us drawdowns happen about every four years. For some, that regularity is cause for optimism.
There will be a lot of potential opportunities for investors who might have already foreseen them at the moment. Although the shock of the initial price drops might have worn off, winter has not yet thawed into spring. Many professionals pointed to a Grayscale white paper released in July that states Bitcoin, a proxy for the crypto market, could “see another five to six months of downward or sideways price movement.”
In the meantime, news about some firms freezing customer accounts is, for sure, a good reminder when selecting companies to partner with, rather than a reason to write off the sector altogether.
3. Final Thoughts: How long does crypto winter last?
After each dropping period, crypto winters leave the market chances to leverage the whole system and exacerbate losses. It also reinforces to firms the importance of diversification which plays such an essential role in the product mix of businesses.
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