Recent data suggest that crypto winter is only going to get colder, but could this bring any upsides?
Tezos CEO Kathleen Breitman believes the present cryptocurrency bear market is far from an end and could worsen in the foreseeable future. She also thinks venture capital firms are at fault for aggravating the bear market. When asked about the drop in price of many cryptocurrencies in 2022, Breitman answered a large part of that was inflated on easy money and that VCs gave their financial support. She added that a lot of cheap money entered the system, and valuations reached all-time high levels, making people resort to scrambling to justify those valuations in one form or another, typically through cheap strategies like yield farming. So, the idea that ice will thaw at least for a while seems no longer viable.
Nonetheless, Tezos’ co-founder thinks a “small minority” of valuable cryptocurrency applications will overcome these testing times and flourish in the future.
With so many premises, it is hard to get a clearer idea of the phenomenon; for latecomers, it might even sound like Sci-Fi. That is why we have found it helpful to come up with some insightful information about crypto winter in general and what it means for digital currencies.
What exactly is crypto winter?
The expression “crypto winter” is frequently used to describe a poorly operating cryptocurrency market. It might sound surprising, but it is likely to be inspired by the all-time favorite HBO show, “Game of Thrones”. In the series, the House of Stark’s slogan is “Winter is Coming”, meaning danger is inevitably coming. So, the winter is associated with conflict, panic, and loss. In the same manner, a prolonged period of trouble may threaten the cryptocurrency market. During this challenging time, investors and traders need to prepare for the chaos and remain cautious. In such unpredictable situations, patience may be of great help, so let us say even if prices continue to keep down over an extended period, it is generally recommended not to do sudden moves and balance your options attentively.
This ongoing crypto winter is believed to have been triggered earlier this year. But no one can predict precisely when it is going to be over, all the more so since it can be influenced by external events, particularly the Russia-Ukraine war that has led to confusion and tumult in global finance, as CEO of DBX Digital Ecosystem also said.
High inflation has also resulted in a lower appetite for high-risk/high-return cryptocurrencies, hence higher interest rates. This happened especially in the US, one of the world’s most significant crypto players. And it is only normal to be so; according to a study focused on the behavioral structure of users in the crypto market (National Library of Medicine), phenomena like crypto winters influence investor mentality. Considering the cryptocurrency price history, it is not hard to notice a crypto winter since the decline may manifest through a double-digital percentage dip in asset prices. In May 2022, promising digital currencies like Luna and TerraUSD collapsed dramatically, leading to a domino effect. By that time, crypto winter had already started.
Understanding a crypto winter
We do not face a crypto winter for the first time; there have been many in the past. For instance, from late 2017 to December 2020 (just before Covid-19), cryptocurrency prices slumped and floated far over the prior highest prices. Nevertheless, prices reached all-time heights in a momentous bull market in December 2020.
While there are no exact guidelines that help determine the time a crypto winter begins, market leaders can still decide on a particular moment, as in the case of Q1 2022. Analysts agreed, for example, that Bitcoin winter started in November 2021, and since then, the coin has experienced some notable downfalls. This phenomenon, however, has impacted the vast majority of cryptocurrencies. In Ethereum’s case, there is hope that the recent upgrade called The Merge will stop its price from sinking. ETH price USD looks promising for the moment, so a potential investment in this particular altcoin could bring considerable profits. Careful though, if you are one of those eager to invest in ETH or any other cryptocurrency, you must be aware of several aspects, including price history, market cap, worldwide adoption, volatility and liquidity levels, etc.
Because of the market volatility, it is hard to forecast price changes accurately; still, cryptocurrency investors are advised to understand that such phenomena happen, and nothing can prevent them from doing so.
The advantages of crypto winter
There is no doubt that crypto winters like that from January 2018 to December 2022 are awful, mainly when cryptocurrencies such as Bitcoin, Ethereum, and Litecoin (LTC) are at stake. But there might be a positive about that, as Kathleen Breitman herself declares. She states that “the things that are useful are going to thrive”, so there is no way for successful crypto applications to be affected much by a crypto winter. Indeed, a “small minority” will flourish, but still, there is something to put faith in.
A crypto winter is similar to a conventional bear market, and this is valid for other asset classes, too. A prolonged crypto winter can be a nightmare, especially for young startups that may be forced to give the push. Yet, it can open an opportunity for top organizations to grow and prove their services or products. While it might sound unfair, the wheat is sorted from the chaff, so it will be clearer which company does have potential.
When will the winter loosen its grip?
Some experts opine that crypto winters are an inevitable part of a development cycle, so people should be patient as regards their end. The actual crypto winter is not that different from previous ones (which did come to an end), so it is just a matter of perspective. Such an event can’t lead to a dramatic loss of venture capital, so there is probably enough venture capital circulating in the industry that will eventually result in the next bull run. That would be the time this crypto winter may be over.