- Some indications suggest that we’re in the midst of a crypto winter.
- However, some point toward a recovery in the short term.
- Investors should proceed with due diligence.
Despite the widespread market turbulence of 2021, the prospect of Bitcoin (BTC) falling from its all-time high of $69,044.27 on November 10th last year to less than $29,000 just six months later – but this was before the worrying prospect of a ‘crypto winter’ began to rear its head.
The latest crash to befall Bitcoin was actually prompted by the collapse of another cryptocurrency, Terra (LUNA), which lost virtually all of its value when Terra’s stablecoin, UST, lost its dollar peg.
Today, BTC/USD is down by 57% from its November all-time high, but is this proof that we’re in the midst of a crypto winter? Or could a recovery still take place in the short term?
As the chart above shows, Bitcoin has tumbled so far that the asset has been left to fight resistance at $30,000, underlining the magnitude of the coin’s decline since November 2021. Other major coins like Ethereum are also some 60% adrift from their November highs.
Although Terra’s collapse has accelerated the downturn, we can see that the downward trend surrounding the crypto market has been ongoing for some months now. So why is such a long-term decline taking place?
In a nutshell, the downturn has been brought on by a significant shift in investor sentiment toward coins like BTC, ETH, and particularly meme coins like DOGE as record-breaking inflation has entered the markets.
As the rate of inflation soars beyond 8% throughout many economies across the world, investors have increasingly shied away from riskier assets like cryptocurrencies in favor of more safe haven stocks and commodities that are less prone to volatility – such as gold, for instance.
“If we compare the situation from summer 2021 when [B]itcoin grew on inflation expectations and was to some extent a temporary digital alternative to gold, and the current situation, one important difference is worth highlighting – on the 15th of March the Fed started the process of raising rates and ending QE,” said Maxim Manturov, head of investment advice at Freedom Finance Europe, quelling the notion that BTC could once again be regarded as a digital safe haven investment.
“This has been the fundamental reason for all [B]itcoin and cryptocurrency growth in the last two years. And with higher rates, an asset class like cryptocurrency may be less attractive.”
Despite Manturov’s suggestion that BTC’s bull run was influenced largely by temporarily favorable market conditions, cryptocurrency enthusiasts will argue that the likes of Bitcoin should outperform the market when downturns occur.
Theoretically, Bitcoin’s decentralized blockchain framework means that the cryptocurrency, like other crypto assets, should be immune from stock market downturns and other external influences linked directly to economies throughout nations and continents alike. After all, a coin that has no physical location shouldn’t be impacted by a rise in US inflation rates.
However, 2022 has shown us that this is fundamentally untrue at the present time. This is because investors generally sell their crypto assets at early signs of wider market trouble. Notably, the 2020 global stock market crash during the emergence of the COVID-19 pandemic also saw BTC fall by 57% in a matter of days.
This is understandable, and it’s largely down to bitcoin’s decentralized nature that such considerable volatility occurs. Because of the distributed digital ledger that BTC is built on, there’s such a lack of central concerns for the currency that its performance is driven heavily by sentiment. So when wider market sentiment declines, it can snowball into an avalanche of crypto sell-offs as intent cools.
So, how long will the current downturn last? Whilst it’s very difficult to anticipate cryptocurrency price movements, the cyclical nature of Bitcoin means that the periods between the coin’s pre-programmed halving events can naturally fall into a ‘winter’ in which the prices of coins stagnate with very few upward trends.
Bitcoin’s most recent halving event – which cuts the volume of BTC awarded to miners by 50%, thus increasing its scarcity – occurred in May 2020. Following the coin’s 2016 halving a similar pattern occurred whereby the asset rallied for 12 months before giving way to a prolonged period of stagnation.
Notably, Bitcoin’s next halving event is set to occur in 2024, with some experts already stating that they don’t expect another bull run to take place for another two years at least.
Although the prospect of a crypto winter may seem like a bad thing for investors, it can improve the overall health of the industry, with developers having time to be less focused on short-term profits and more intent on developing better projects to incorporate decentralized finance and blockchains for greater functionality in the future.
Of course, it’s important to note that massive institutional interest in crypto may mean that Bitcoin’s cycles bring less volatility over time. Furthermore, an upturn in global markets and the lowering of inflation rates over the remainder of 2022 may yet bring an upturn in the fortunes of the crypto landscape.
The unpredictability of the cryptocurrency ecosystem is one of the reasons why investors have drawn so many profits from it in the past. It also means that the forecasting of a crypto winter can be a tricky prediction to manage. Either way, investors shouldn’t be perturbed by what’s set to be a promising future for the crypto market.