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Crypto Winter is Coming… Again

Wednesday, January 26, 2022 02:16 PM | Neal Farmer
Crypto Winter is Coming… Again

It’s been a rough start to 2022 for investors. Stocks have pulled back from highs with the S&P 500 losing more than 9%. Crypto investors have had it far worse though as the largest coins Bitcoin (BTC) and Ethereum (ETH) are down 23% and 34%, respectively.

The drop in cryptocurrencies is really just a continuation of its bearish trend that started in early November. Bitcoin is now almost half of what its price was back then ($36,000 compared to highs around $69,000) while Ethereum has actually fallen more than 50% in just less than three months. This massive crash in the cryptosphere is what many are now believing to be the start of another “crypto winter”.

What is a Crypto Winter?

A crypto winter is essentially a bear market for cryptocurrencies that involves a crash in prices leading to a decline in mining activity, which leads to less trading activity. There has been one real crypto winter before which occurred in 2018 where crypto prices fell dramatically and interest in the technology waned.

At the end of 2017 Bitcoin had reached a high of roughly $20,000 only to fall to $3,100 by December of 2018. The 80% decline in the world’s leading cryptocurrency was far more than any major index has experienced in the stock market over any time period. Interest in cryptos had only been rising until the beginning of 2018 where banks were beginning plans to open crypto trading desks and initial coin offerings (ICOs) were taking place often. However, the belief in Bitcoin and other projects died as prices started to turn south, leading to banks shelving plans for trading desks and the ICO market drying up.

With the current hype and mania around blockchain technology, many are wondering if the the recent sharp decline in prices could extend further and bring on another crypto winter.

Why Now?

There have certainly been some signals of a crypto bubble ready to burst as coins are up massively since the pandemic and seemingly every single celebrity either creating their own coin or NFT project or marketing some sort of crypto product.

Ethereum, for example, reached a low just above $100 in March of 2020 only to reach a high over $4,800 in November 2021, just 20 months for a 48x gain. Bitcoin in that same time skyrocketed from around $5,000 to nearly $70,000. Even at their current prices, roughly $2,400 for Ethereum and $36,000 for Bitcoin, these cryptos and many others are way above prices from before the pandemic started.

Contrary to popular Reddit belief, stonks do not only go up and assets do occasionally lose value or at least don’t rise in value long term anywhere near the rate the leading cryptos have the past two years. A crypto market correction or bear market was bound to occur sometime and given the high volatility in crypto, it was bound to be severe. When every single person is talking about crypto and it's becoming the main topic over every family dinner, it's likely to lose its steam at some point.

Every day a new project is created varying from somewhat useful to completely pointless (Dogecoin or Shiba Inu are solid memes but aren’t exactly going to fundamentally change the way people do business). The crypto world truly feels like the new Wild West where regulations are limited and anything goes. A fun world to live in perhaps but a dangerous one if not careful (pour one out to those who invested in the Squid Game coin).

What Will a New Crypto Winter Look Like?

It’s impossible to know whether prices will continue falling or bounce back like they did after a swoon over the summer of 2021. The problem with a massive decline in prices and less trading activity is that it only leads to further complications in cryptos.

In order for the crypto ecosystem to function, people have to mine for cryptos. This process takes extraordinary amounts of computing power and electricity. So much in fact, that at certain price level, miners no longer get a return on their investment. Thus, coins are mined at a lower rate and it takes longer and longer to process transactions. As mining capacity decreases, those pesky fees paid for each transaction are only going to rise, even if transaction volume stays flat.

The relationship between crypto prices and mining is a delicate one that has already been massively shifted over the past few months where leading projects have seen prices nosedive. A quick recovery is always possible should interest in crypto continue to rise, but those who remain unconfident in crypto aren’t likely to change their position when seeing sharp price declines and extraordinarily high fees.

Wrapping Up

Although cryptos remain highly volatile compared to stocks, many factors have changed over the past few years.

The market does not solely revolve around Bitcoin and investors are realizing that there are many more intriguing projects with their own benefits. Bitcoin’s market share now stands around 39% while Ethereum holds about 18% of the crypto market. Just the two major coins account for more than half of the crypto market but those numbers are down significantly from 2017 when all things crypto revolved around Bitcoin and nothing else.

Investors are interested in other blockchain projects and the technology is being used in many areas as non fungible tokens (NFTs) rise in prominence, for better or worse. It’s a different market now than in previous years with more people taking an interest in the crypto world and trying to gain a baseline understanding of how the technology works and what it can do. Whether or not the increased interest in the technology will continue is going to have a major impact on how long this winter lasts for cryptocurrencies.

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