Similar to the stock market, the cryptocurrency market also goes through cycles. Just like the bear phase in a stock market, where prices are sharply lower for a prolonged period, even the crypto market can go on a downward spiral. So, when prices drop without any recovery in sight for over a year, it is called a ‘crypto winter’.
Understanding the term ‘crypto winter’
The term ‘crypto winter’ comes from the TV series Game of Thrones, where the motto of the House of Stark is “Winter Is Coming.” It is a warning that the ongoing conflict could trouble the land of Westeros at any time. Here, it is used in the context of an extended period of trouble that may be settling over the crypto market. In other words, a crypto winter is when prices contract and remain low for a prolonged period.
According to a few analysts, the crypto market was already feeling the effect of world events, especially the Russia-Ukraine conflict that caused turmoil in global finance. The crypto market has dropped 60 percent since November 2021, falling from $2.5 trillion to around $825 billion at the time of writing.
But this is not the first crypto winter. The most recent one was from January 2018 to December 2020. The term itself was probably first used in 2018 when Bitcoin lost more than half of its market capitalization, and other cryptos such as Ethereum and Litecoin also fell sharply.
Crypto winter is very similar to a conventional bear market. Interestingly they both weed out the young startups and present an opportunity for top companies to mature and prove their products.
However, in December 2020, prices exploded to record highs in the overall crypto market.
This shows that there are no specific guidelines for how far cryptocurrency prices must fall to be considered a crypto winter. But market leaders and influencers tend to agree publicly or rather mutually when one has begun, as was the case in early 2022.
Thus, due to the extreme volatility of crypto markets, it is impossible to accurately predict future price changes. However, it’s wise for crypto investors to be aware that crypto winters happen and will happen again.
Few major factors that have led to crypto winter
To begin with the collapse of Terra, the second-largest DeFi ecosystem left behind the most severe financial loss in history. Moreover retail, institutional, and even corporate investors lost over $60 billion in UST and LUNA as market capitalization’s 7th and 10th largest tokens had evaporated in days.
Secondly, crypto exchanges such as Coinbase and Gemini which allows their investors to trade digital assets had announced job losses. Coinbase had cut 18 percent of its workforce while Gemini’s bosses had warned of tough times ahead
Other contributing factors to the crypto winter, according to market analysts, are high inflation and interest rates. Not to forget the financial turmoil that followed after Russia invaded Ukraine. Though crypto markets had soared in the late 2020 and 2021, that was due to US Federal Reserve pumping money into the market due to Covid -19 crisis.
Are all cryptocurrencies affected during crypto winter?
During a typical crypto winter, the majority of cryptocurrencies are affected. Though there are exceptions, investors should plan for a market-wide downturn during crypto winter periods.
What about NFTs?
Despite gloomy days of crypto coins, NFTs are very much alive. With NFTs, artists can reach new audiences around the world and sell their work without dealing with traditional middlemen like galleries, agents, or record labels. Moreover, they merely need to use platforms like OpenSea, Mintable, and Magic Eden.
The reason why NFTs will prevail is that they embody the freewheeling and liberated spirit that was promised by the initial glamour of cryptocurrency while giving most of the control to the creator. So, in many ways, it is a win-win situation.
Is it possible to predict crypto winter?
It is not possible to predict accurately when a crypto winter will begin or end. Only by following cryptocurrency news or tracking activities among cryptocurrency communities on social media networks like Twitter, Reddit, and Discord can offer insights.
What is the role of inflation during crypto winter?
Many believe that cryptocurrency fits into a world where inflation is rising faster. Blame it on crypto’s big moves in 2021 that have led many investors to believe that it could protect against inflation. Moreover, some investors are already using Bitcoin and other cryptocurrencies as a hedge against inflation. Though this could be a savvy move, the results remain to be seen as its risks are less understood and more challenging when compared with other financial securities.
According to some analysts, this crypto winter will be less severe because giant corporates and financial institutions have stepped into the market. These institutions are ready to provide the infrastructure needed (for instance, staff, technology, and legal arrangements) for future transactions.
How can investors play safe?
Here are a few precautionary steps that can be followed:
- By avoiding spot trading for a while because of the volatility in the market.
- Reevaluate your current investing strategies.
- Avoid investing during such phases if you are a new investor, study the market first.
- Most importantly, invest only the amount you can afford to lose.
As we all know, the crypto market is going through growing pains. Maybe many crypto coins especially the major coins will prevail, but a large number of the subordinate businesses that have flocked to crypto might not survive. Though the cryptocurrency market is rising from the ashes despite strong headwinds, will there be a springtime anytime soon?