August 05, 2022
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0When Will the “Crypto Winter” End?
In June, bitcoin fell below the psychological mark of $20,000 for the first time since December 2020. Following this, other popular cryptocurrencies collapsed: Ethereum — down to $990 (previously $4,800 at the peak), Dogecoin — down to $0.05 (previously $0.64.)
The capitalization of the cryptocurrency market has dropped to $1 trillion, having lost the same amount over the past two months. Investors are actively getting rid of the riskiest assets. The reason is the acceleration of inflation in the United States and the increase in rates by central banks, which hinder growth.
It seems that a new “crypto winter” has come to the market. What is it and when will it end? We’ll tell you in the article.
What happened in the crypto sphere this June? Read more here.
What is a “Crypto winter”?
“Crypto winter” is a prolonged period of persistently low quotations of most crypto assets. This “crypto winter” is not the first — the market experienced one such period from January 2018 to December 2020. At the same time, with the loss of half of bitcoin’s capitalization, the term itself appeared.
The founders of the Gemini crypto exchange, the Winklevoss brothers, recently wrote about the onset of a new winter. They consider it a manifestation of the specifics of the market, which lives according to the laws of interval equilibrium: with periods of stability inevitably followed by periods of sharp growth and decline.
“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. […] This has all been further compounded by the current macroeconomic and geopolitical turmoil.” the crypto investors said.
A sharp sell-off of Bitcoin after another historical maximum is considered a marker of the beginning of the “crypto winter” — and what is happening now corresponds to this. In November 2021, the main cryptocurrency was approaching $70,000 per unit, and by mid-June of this year it had fallen by 70%. Ethereum has a similar dynamic — it has fallen in price by 75%.
The crypto winter also has other indicators: for example, the number of transactions on the most popular crypto exchange in the United States, Coinbase, has fallen by 40% since last year. Traders, who actively bought alternative cryptocurrencies last year, again began to increase the volume of transactions with the two most popular: Bitcoin and Ethereum.
Is Coinbase safe to use? Learn more here.
“Crypto winters” are similar to periods of a bear market, Forbes notes: they clear the field of unpromising startups, but provide an opportunity for future leaders to grow and mature.
The founder of the Binance crypto exchange, Changpeng Zhao, is going to take advantage of this. According to him, “this will be the second ‘crypto winter’ with the company and the third without it” — and he knows what to do.
For example, now, according to Zhao, it’s time to hire specialists who have been left out of work due to the crisis in the market. But some popular crypto projects will not survive this crypto winter.
How to buy Bitcoin anonymously. Learn more here.
Big crypto projects dip
In addition to the general negative economic background, the sentiment of crypto investors in recent months has been affected by several large interconnected failures.
On June 13, the Celsius crypto bank announced the suspension of withdrawals due to “extreme market conditions.” The platform with 1.7 million users as of May had $12 billion in assets under management (in October 2021 it was $26 billion.)
In fact, Celsius offered banking services to customers, but with much higher deposit rates (they reached up to 17%) and without regulatory requirements.
The interest rates were really very attractive; however, independent observers could not find a reliable source of this yield. The crypto bank invested in all kinds of crypto projects, and at the moment when the market began to collapse, Celsius, which had accumulated an impressive number of crypto deposits, began to have big problems.
Because of its scale, Celsius turned out to be closely connected with many other projects in the cryptocurrency market. In early May, the algorithmic stablecoin TerraUSD lost its peg to the dollar and stopped trading.
Celsius had large investments in TerraUSD, but the service assured investors that it had managed to exit the asset in advance. However, according to the analytical company Nansen, Celsius withdrew $500 million from TerraUSD only on May 13, when already less than 50% of its nominal value was given for the stablecoin.
In addition, Celsius had investments in Tether — about $500 million as of mid-May. The rest the platform probably managed to withdraw before the volatility began.
The second largest pension fund in Canada could suffer from the fall of Celsius. Less than a year ago, CDPQ invested in Celsius. The exact amount is unknown — it was only reported that the total investment of the fund and another company amounted to $400 million.
The fall of bitcoin has exacerbated economic problems in the most crypto-friendly country in the world — El Salvador. According to Bloomberg, the country has already lost almost $56 million on investments in cryptocurrency. For a poor Central American country that is mired in debt, this is a significant amount.
Last month, S&P lowered El Salvador’s credit rating to “CCC+,” which means high exposure to risks and the ability to fulfill debt obligations only if the situation develops favorably.
The president and chief crypto enthusiast Nayib Bukele tries not to lose optimism: according to him, the fall of bitcoin opens up new opportunities for its further purchase.
The last time El Salvador bought about 500 bitcoins was more than a month ago. In total, the state has about 2,300 bitcoins.
Another harbinger of the coming “crypto winter” is the freezing of hiring and staff reduction in large projects that were considered islands of stability. For example, last month it became known that a fifth of the staff is being cut by the Coinbase crypto exchange. Moreover, the company has recruited most of its current employees quite recently: a year ago there were 1,250 of them, and by the end of this spring — more than 6,000. After the collapse of the market, the exchange announced first a hiring freeze, and then cuts.
For Coinbase as a whole, the situation is still not the best: with the IPO last year, the company’s shares brought investors an 85% loss.
What is happening in the crypto market now resembles a domino effect, analysts say.
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“Crypto winter” for a long time!
The impending “crypto winter” was talked about for the first time six months ago. In February, after Bitcoin’s drawdown by 50%, analysts were already waiting for a prolonged market decline. At the same time, experts predicted that the next “bullish” crypto market should be expected only in 2024 or early 2025.
It is certainly not worth waiting for a quick rollback to peak values, market participants believe even now.
Investors’ trust clearly has to be earned anew. The collapse of the algorithmic stablecoin TerraUSD made them doubt other similar projects, which the market is now actively testing for strength.
The results of these tests already raise questions: at the beginning of the week, another algorithmic USDD stablecoin lost its peg to the dollar.
A four-year cycle may have already been established in crypto assets — the last “crypto winter” began in 2018, immediately after the year in which the ICO boom occurred, with a huge number of crypto transactions and large amount of fraud, and a sharp, mostly unjustified increase in the popularity of the blockchain.
But some survived this crisis and laid the foundation for future crypto markets — like the pioneer of the Aave DeFi project, Yahoo Finance reminds.
Back in the winter, the former head of Meta’s crypto group, David Marcus, warned that “crypto winter” was close, but stipulated that this was good news. It is during the “crypto winter” that the best entrepreneurs build the best companies.
But before the crypto market finds a new meaning, its numerous investors will suffer, Bloomberg warns. They will lose tens and hundreds of thousands of dollars on depreciated tokens.
Most of the young investors have entered the market over the past two years during a period of rapid growth, the heyday of NFT and DeFi, and have never experienced such a rebound. “If earlier the investment landscape was characterized by the fear of lost profits, now only fear remains,” the publication writes.
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