Winter is coming for crypto - How cold will it get?

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With the cryptocurrency market in a turmoil of falling values in recent days, all eyes have been on Bitcoin (BTC). As the largest presence in the cryptocurrency market, it is seen as an indicator of the health and wellbeing of the sector as a whole. And with its price recently as low as £17,400 from a year high of £50,000, commentators have started to adopt a distinctly pessimistic outlook.

It’s not just Bitcoin experiencing downward pressure. Ethereum (ETH) and other altcoins including Cardano (ADA) and Polygon (MATIC), are down more than 60% in 2022.

Major crypto exchanges including Coinbase and Gemini have this month announced hiring freezes and layoffs. Shares of Coinbase have tumbled 86% from their 52-week high, and the company is planning to lay off around 18% of its workforce in the US.

Twins Tyler and Cameron Winklevoss, respectively the CEO and president of Gemini, said in a June blog post that the industry was entering a contraction they called “crypto winter.”

The Winklevoss memo cited “current macroeconomic and geopolitical turmoil” as a cause for this change in the season: “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.’”

What is ‘Crypto Winter’?

“Crypto winter” comes from the TV series Game of Thrones, where the motto of the House of Stark is “Winter Is Coming.” This is a warning that enduring conflict could afflict the land of Westeros at any time.

The feeling is that an extended period of trouble may be settling over the crypto market.

A more literal definition is that a crypto winter is when prices contract and remain low for a prolonged period. Analysts say the wheels of the developing crypto winter were set in motion earlier in 2022.

Igor Zakharov, CEO of DBX Digital Ecosystem, says: “The crypto market was already feeling the effect of world events, especially the Russia-Ukraine conflict that caused turmoil in global finance.”

Zakharov adds that high inflation has driven rising interest rates in the US, 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.”

The crypto market has dropped 60% since November 2021, falling from £2.5 trillion to around £825 billion at the time of writing.

Impact of Crypto Winter

This is not the first crypto winter. The most recent one lasted from January 2018 to December 2020. The phrase itself was probably first used in 2018 when Bitcoin lost more than half of its market capitalisation, and other cryptos, such as Ethereum and Litecoin (LTC), also fell sharply.

A crypto winter is in many ways similar to a conventional bear market, with similar results. Both weed out young startups and present an opportunity for top companies to mature and prove their products.

Jake Weiner, founder and CEO of Uncommon, says: “We saw a lot of new startups throughout the industry over the past year, and many of them will fail.”

He says that, as it gets tougher to compete for venture capitalist funding, more crypto companies will cut budgets. Unfortunately, some will 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.

“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.”

When the crypto winter thawed in late 2020, there was a period of incredible growth lasting for most of 2021.

What marks the start of Crypto Winter?

Analysts say crypto winters usually begin with a steep sell-off from an all-time high in the price of Bitcoin.

BTC hit a 52-week high of £57,000 in November 2021 before starting an extended downwards fall. Since then, Bitcoin has experienced further heavy losses, dipping nearly 70% from November 2021 to mid June 2022.

Any investors who purchased Bitcoin in the past year will have experienced a loss, as the original crypto has slid downward.

Before the last crypto winter, Bitcoin had reached a high of nearly £16,000 in 2017 before falling to less than £2,700 in 2018, representing a loss of at least 83%.

Ethereum, the second-largest cryptocurrency, has fallen 74% since its November peak.

With the US Federal Reserve increasing US interest rates this week, there are fears the situation will deteriorate further, with  institutional investors driving the market.

Crypto as a risk asset

The crypto markets soared from late 2020 until 2021 partly because the Fed was pumping unprecedented amounts of liquidity into the financial markets via quantitative easing.

This unleashed hyper-growth in the crypto market, with thousands of new crypto projects starting in 2021. But come the end of QE, come the end of the market surge.

Robert Johnson, professor of finance at the Heider College of Business at Creighton University, says: “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.”

Will crypto feel the warmth of spring?

Johnson says we could still see the cryptocurrency market rise from the ashes, despite strong headwinds: “I don’t expect crypto to come roaring back as it did in 2021 because the tailwind of Federal Reserve monetary policy has actually become a headwind for the asset class,”

But some investors view low prices as an opportunity to buy at a discount - the so-called ‘buy the dip’ strategy. They are hoping for a crypto revival once the global geopolitical and economic crises settle.

Abigail Johnson, Fidelity Investments CEO, told an audience at Consensus 2022 in Austin, Texas: “This is my third crypto winter. There’s been plenty of ups and downs, but I see that as an opportunity.

“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.”

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