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Since the stablecoin meltdown of early May, all eyes have been on Bitcoin (BTC). It is the key bellwether for the cryptocurrency market, and the price of BTC had been struggling to remain near the psychological threshold of $30,000.
Tyler and Cameron Winklevoss, the CEO and president of Gemini, announced in a June blog post that the industry was entering a contraction that they labeled “crypto winter.”
“This is where we are now, in the contraction phase that is settling into a period of stasis—what our industry refers to as ‘crypto winter.’” The Winklevoss memo cited “current macroeconomic and geopolitical turmoil” as a catalyst for this troubling devolution.
What Is Crypto Winter?
The phrase “crypto winter” most likely came from the hit HBO series, Game of Thrones. In the show, the motto of the House of Stark was “Winter Is Coming.” It was considered to be a warning that lasting conflict could descend on the land of Westeros at any time.
In a similar fashion, an extended period of trouble may be settling over the crypto market. During this difficult time, you must remain vigilant and be prepared for chaos to sweep over the market without much warning.
Defining the phrase even more literally, crypto winter is when prices contract and remain low for an extended period. Analysts believe the wheels of the emerging crypto winter were set in motion earlier in 2022.
“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.
Zakharov notes that high inflation has driven rising interest rates in the U.S., which is the biggest player in crypto. “By the time TerraUSD and Luna collapsed and set in motion a domino effect in the crypto world, crypto winter had already begun,” he says.
Since November 2021, the crypto market has dropped 60%—drastically falling from $3 trillion to $1.2 trillion, as of this writing.
The Advantages of Crypto Winter
This is not the first time a crypto winter has settled over the market.
The last crypto winter lasted from January 2018 to December 2020. The term was probably first used in 2018 when Bitcoin shed 50% of its market cap, and other cryptos, such as Ethereum and Litecoin (LTC), dropped sharply.
We know from that experience that crypto winter is a lot like a conventional bear market, and the results aren’t too dissimilar from bear markets in other asset classes. Long-term, crypto winters weed out young startups and present an opportunity for top companies to mature and prove their products.
“We saw a lot of new startups throughout the industry over the past year, and many of them will fail,” says Jake Weiner, founder and CEO of Uncommon.
Weiner notes that as it gets tougher to compete for venture capitalist dollars, more crypto companies will be cutting budgets. Unfortunately, some will be forced to lay off staff.
“If the market remains in contraction for long enough, it is not only poor companies that will suffer—but some great ones too,” he says. “The good news for those companies is that, unlike past crypto winters, a lot of crypto [venture capitalists] have already amassed war chests that they will continue to deploy.”
Once the crypto winter thawed in late 2020, there was a period of incredible growth that lasted for most of 2021.
Analysts say that crypto winters usually begin at the last all-time high seen in the price of Bitcoin. BTC hit a 52-week high of $68,990 in November 2021 before it started to tumble downwards to its current price of around $25,000.
Crypto as a Risk Asset
The crypto markets soared in late 2020 through 2021 partly because the Federal Reserve was infusing unprecedented amounts of liquidity into the financial markets.
This helped fuel the crypto market, unleashing a major hyper growth phase, with thousands of new crypto projects added in 2021. That massive growth phase continued until the bottom started to fall out late last year.
“When the liquidity is pulled from the markets, the most speculative assets are hit the hardest—and, I would say that there is no more speculative asset class than cryptocurrency,” says Robert Johnson, professor of finance at the Heider College of Business at Creighton University.
Will Crypto Come Roaring Back?
When it comes to predicting the future of the crypto market, most experts say the “stronger cryptos” shall prevail.
“I don’t expect crypto to come roaring back like it did in 2021 because the tailwind of Federal Reserve monetary policy has actually become a headwind for the asset class,” Johnson says, adding that despite the headwinds, we could still see the cryptocurrency market rise from the ashes.
But some investors love the pullback, viewing it as a time to double down on the market for the long term.
When Bitcoin is trading around $30,000, slightly less than half its 52-week high, investors view it as an opportunity to buy at a discount. They are banking on a crypto revival once the global political and economic crisis settles.
“This is my third crypto winter. There’s been plenty of ups and downs, but I see that as an opportunity,” Fidelity Investments CEO Abigail Johnson told an audience at Consensus 2022 in Austin, Texas. “I was raised to be a contrarian thinker, and so I have this knee-jerk reaction: If you believe that the fundamentals of a long-term case are really strong, when everybody else is dipping [out], that’s the time to double down and go extra hard into it.”