A concept that we hear a lot these days from investors and analysts of the digital currency market is crypto winter. Cryptocurrencies have experienced a sharp price decline this year, and since their peak in 2021, the total value of the crypto market has fallen from $2 trillion to nearly $1 trillion. Bitcoin, the world’s largest digital currency, is down 70% from its November 2021 all-time high of nearly $69,000. This led many experts to warn of a prolonged bear market known as “Crypto Winter”. Such an event last occurred between 2017 and 2018. In this article, we will talk more about the concept of crypto winter, its formation factors, and its advantages and disadvantages.
What does crypto winter mean?
Crypto winter is a term that refers to the poor performance of the digital currency market. This term is comparable to a bear market in the stock market.
Research shows that crypto winters have a great impact on the mindset of investors. Looking at the cryptocurrency price history, it is sometimes easy to spot crypto winter; Because the winter of the cryptocurrency market is usually long-term and accompanied by tens of percent drops in the market as a whole. In simple words, it can be said that the crypto winter is the period when the prices of digital currencies are at their lowest value.
What are the advantages of digital currency winter?
The concept of crypto winter does not leave much room to talk about its benefits. The downside of cryptocurrency winter is already seen among several crypto platforms laying off hundreds of employees to cut costs. Famous companies like Coinbase, Crypto.com, and BlockFi have laid off a significant number of their employees to avoid possible losses caused by this era.
However, every dark cloud has benefits, and the winner of the crypto market will not be without benefits. According to Forbes magazine, the winter of the cryptocurrency market can act like a normal bear market. Such a practice helps companies prove their products and weed out young startups in the process. Also, the dismissal of employees from companies makes a new job position open for people with enough. In the winter of digital currencies, some investors are forced to sell their assets and you can buy these assets at a low price. As a result, you will make a good profit after the price starts to rise.
Also, in such a situation, miners will leave the market, the competition will be less, and more profit can be obtained. Importantly, when the crypto market winter ends, it can lead to a long period of reliable growth in crypto prices, as was the case with the last cryptocurrency winter of 2020.
History of Crypto Winters
There have been several cryptocurrency winters in the past. For example, from late 2017 to December 2020, the price of crypto fell away from previous price peaks. However, in December 2020, prices reached an all-time high in the cryptocurrency market. The history of crypto winters in 2017 and 2018 is as follows:
- 2017: The price of Bitcoin reached its highest level until that year, around $20,000, and then dropped by 45% to below $11,000. The digital currency winter of 2017 lasted about 1 month.
- 2018: Bitcoin price fell by 12%. After Coincheck was hacked, $530 million of NEM was stolen by the hacker, and Coincheck was forced to temporarily stop trading. In the same year, Binance API keys were stolen and used in fraudulent transactions. Also, Initial Coin Offerings (ICO) and token sale ads were banned on Facebook, Google, and Twitter. In November 2018, the market cap of Bitcoin fell below $100 billion for the first time, and the price of Bitcoin fell to $5,500. This crypto winter lasted for about 1 year.
There is no specific and accepted guideline as to how much the price of cryptocurrencies must fall to consider a crypto winter. But market leaders and influencers agree that digital currency winter will happen, as it did in early 2022 and continues.
Due to the volatility of crypto markets, it is impossible to accurately predict future price changes. However, it is wise for investors to be aware of crypto winters.
Are we now in crypto winter? (the year 2022)
Yes, this year cryptocurrencies have seen a sharp price decline, losing about half of their $2 trillion market cap. As a result, we can say that we are now in the cryptocurrency winter of 2022.
Why is crypto winter 2022 different from previous years?
While there are similarities between the cryptocurrency winter of 2022 and past winters, a lot has changed since the last major crypto bear market. The crypto market is flooded with debt due to the rise of centralized lending schemes and so-called “decentralized finance”.
The collapse of the algorithmic stablecoin terraUSD and the contagion effect of the liquidation of the hedge fund Three Arrows Capital showed how interconnected projects and companies were in this cycle. As the markets began to sell off, it became clear that many large units will not prepare for a quick comeback. As a result, the damages caused by digital currencies this winter will be much more than the damages caused by previous winters.
How many days is cryptocurrency winter?
There is no clear indicator that can help determine when the crypto winter period will end. However, if we look at historical trends, this is not the first time that the market has seen a cryptocurrency winter. And it is safe to assume that digital currency winter will end at some point in time when the crypto market stabilizes again. The last cryptocurrency winter lasted about two years, from January 2018 to December 2020, when Bitcoin lost more than half of its market value.
“We’ve seen a lot of corrections in Bitcoin since 2011, but Bitcoin has been strongly on a comeback,” said Edul Patel, CEO, and co-founder of cryptocurrency trading platform Mudrex. “Historically it has been observed that bear markets usually fall quickly and never last long.”
Cryptocurrency winter formation factors
Various factors can contribute to the onset of digital currency winters. Both external factors and special factors of digital currencies are among the factors that form the winter of the cryptocurrency market. Among these factors, we can point out tightening regulations, rising interest rates, and deteriorating macroeconomic conditions, all of which associates with digital currency winters.
- Intensification of regulations: Every year, governments establish new regulations for using digital currencies and making money from them, and these regulations are usually strict. This strict regulation is one of the reasons for the crypto winter phenomenon.
- Increase in interest rate: The increase in the interest rate of the US Federal Reserve increases money and liquidity and brings people’s capital into banks. As a result, people see investing in the bank as less risky and more profitable than the crypto market, and this causes prices to fall in the digital currency market.
- Worsening macroeconomic conditions: This means higher unemployment rates, inflation, and reduced purchasing power of people, which makes them not have enough liquidity to invest in markets like crypto and stay away from it.
In each case, a specific set of catalysts can be present. For example, the crypto winter of mid-2022 is believed to have occurred after several prominent stablecoin and crypto lending projects collapsed and disrupted the DeFi space.
What is the difference between cryptocurrency winter and bear market?
In the world of digital currency, the term bear and bull market is very common. The term bear market usually refers to a period when stock values are low. Often due to a combination of economic factors. The difference between a bull market and a bear market is that in a bull market, stock values tend to rise. Although bear markets and crypto market winters can happen at the same time, they are not necessarily related. One of the most important differences is that there is no question of profiting in a bearish market during the winter of digital currencies. The difference between a crypto winter and a bear market is that a bear market occurs when the asset’s value continues to decline. On the other hand, the winter of the cryptocurrency market happens when the prices drop and there is no noticeable movement or change in them.
Stock prices will determine by market forces, and investors rely on fundamental and technical analysis strategies to determine target prices. With cryptocurrencies, valuation models are in their infancy. This could lead to a major disconnect between stocks and cryptocurrencies.
However, it is also possible that a stock market crash will coincide with a crypto market decline.
Does crypto winter affect all digital currencies?
Crypto winter effect most cryptocurrencies. Although exceptions are possible, investors should plan for market downturns during cryptocurrency winter periods.
Is it possible to predict when cryptocurrency winter will occur?
It is impossible to accurately predict when digital currency winter will start or end. Following cryptocurrency news and tracking activity among cryptocurrency communities on social media networks such as Twitter, Reddit, and Discord can provide insight into investor sentiment and planned investments. But it is impossible to accurately predict the occurrence of crypto winter, and no one can make such a claim.
The onset of crypto winter may make investors nervous. But remember that history shows that prices have always recovered after a bearish period. This is true even in the volatile cryptocurrency market. This is why research is so important before making an investment decision.
Why Bitcoin cloud mining?
An unknown individual or group called Satoshi Nakamoto introduced the Bitcoin network in 2009. In 2021, there will be more than 10,000 different projects in cryptocurrencies. So each of them has its role in building the future of money.
The market value of cryptocurrencies reached $ 1 trillion. It happened for the first time in January 2021. It passed $ 2.5 trillion less than three months later. So it shows that this market is one of the growing markets favoring its investors.
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