Crypto got off to a great start in 2022, with many crypto assets reaching astronomically high values, but continued and ended the year on a less fortunate note, in a way that made even the most optimistic crypto enthusiasts shudder in fear, with the onset of the crypto winter. As many of you probably know, this is not the first time that digital currencies go through such a period, and according to some pundits, it won’t be the last either. However, it’s certainly not something to rejoice about, as the market experienced a sharp decline which caused significant financial losses for a large number of traders and investors.
While stakeholders held out hope that the downturn won’t last long and many exchange platforms like Binance, where participants can sell or buy Bitcoin and other available cryptos, continued to operate normally, there’s no denying that the crypto winter sent shockwaves through the industry and its reverberating effects will remain etched in crypto history.
But what’s not quite so clear are the hows and the whys. Many people don’t understand what a crypto winter really is, why it happens or how long it lasts. The season brings about as much confusion as fear, so it might be time to warm up with a few facts on the topic.
What is crypto winter?
The term crypto winter entered the crypto lingo back in 2018 when the value of Bitcoin and other digital currencies plummeted after experiencing a spectacular bull run. The decline lasted until the end of 2020, marking one of the worst-performing periods in crypto history. However, this was not the first time that digital currencies had suffered a major drop in value. Ever since their inception, cryptos went through constant cycles of rise and decline due to their novelty and inherent volatility.
This was to be expected of an industry that was still in its infancy. The first bear market happened in 2011, and then again in 2015. But crypto winters are much more intense than mere bear runs in that the decline tends to last longer and has extensive negative effects on stakeholders.
Therefore, a crypto winter can be described as a prolonged period of decline where the value of crypto assets drops and continue to remain low for a significant amount of time. This downturn is also accompanied by lower trading volume, a slowdown in the development of crypto projects, and negative investor sentiment which causes the market to shrink considerably.
But, since digital currencies represent a new asset class, there are no established markers that can help us accurately determine the moment when a crypto winter sets in, and there’s no official authority that can announce these types of events either and warn the public. There’s only a general consensus that crypto winters occur when most of the stakeholders in the industry notice a continuous downward trend across the board over a longer period of time, usually exceeding three months.
Crypto seemed to be doing more than fine at the beginning of 2022. The prices of digital assets were skyrocketing, celebrities were busy promoting different blockchain-based projects, people were investing like crazy and crypto companies were thriving. So, one can’t help but wonder what went wrong and how we come to this point.
The onset of the crypto winter can’t be traced back to one single event or cause. Instead, there’s usually a combination of factors leading up to it, such as hacking attacks, a lack of regulations, loss of interest, market saturation, and so on. So, we need a bit of context to understand how the latest crypto winter happened.
In January and February, the crypto market was enjoying its brightest days ever, and no one suspected it would all come crashing down. But then the Federal Reserve decided to raise interest rates to combat the rising inflation, which left many Bitcoin supporters in disbelief as they hoped the coin would serve as a hedge against inflation. This move brought to the surface many issues in the industry that managed to go under the radar for a while, such as the poor risk management of crypto firms, or fraudulent activities.
The following months were marked by a string of failures. First, there was the collapse of two major stablecoins Terra and Luna, followed by the trading platform Voyager which filed for bankruptcy. It all culminated with the collapse of FTX in November whose founder and ex-CEO Sam Banking was arrested and charged with a host of financial crimes.
On top of it, the industry was also struggling with security issues and regulatory concerns that contributed to rising fear, uncertainty and doubt. Problems regarding inflation and the looming recession added fuel to the fire, so crypto’s decline was inevitable.
Is it over yet?
After all the torment and turmoil, the past few months were surprisingly uneventful for digital assets, causing many crypto fans to think that winter might be finally over. So, are we really out of the woods?
Considering that the prices are still low for the time being and there’s no way to predict when the next bull run will start, we can’t say with certainty that the season has changed just yet. Besides, the previous crypto winter lasted more than a few months, so it wouldn’t be unusual for this one to drag a little longer.
However, most analysts believe that the worst is already behind us. The fact that governments are taking an active interest in regulating cryptocurrencies and the increasing adoption rates for crypto in the business environment can be interpreted as a good sign. In addition, Bitcoin is approaching its next halving event, which usually correlates with an upcoming bull run, so we might start seeing some improvements price-wise.
At the moment, we can only say that the temperatures are a bit milder in the crypto sphere. And since crypto winters and market fluctuations are seen as normal events for an industry that is still in its infancy, we have solid reasons to believe this crypto winter too shall pass.
Also read: Ethereum’s Most Exciting Features – According to Its Founder Vitalik Buterin