For those who bet big on digital currencies, crypto winters can decimate fortunes.
Izzy Park via Unsplash; Canva
Although cryptocurrency is a younger asset class, its overall performance appears to be somewhat cyclical – just like its more established peers. In other words, it experiences ups and downs in a similar way to more traditional securities like stocks and bonds.
Despite being younger than most Gen Zers, cryptocurrency has already seen several major highs and lows characterized by high trading volume, wild volatility, and unfathomable gains and losses for those involved.
What is “crypto winter?” Where does the term come from?
When the value of the cryptocurrency market as a whole declines by a significant percentage over an extended period—usually led by major players like Bitcoin and Ethereum—many investors describe the downturn as “crypto winter.” Crypto winter is essentially the digital currency equivalent of a stock bear market.
The term was coined by South African data analyst and digital asset enthusiast Eugéne Etsebeth in 2018. At the time, Bitcoin, the most popular cryptocurrency and largest by market capitalization, fell from a 2017 peak of nearly $15,000, eventually bottoming out near $3,500 in early 2019. .
Many have speculated that the inspiration for the term may have come in part from the popular HBO fantasy series, Game of Thronesin which the central motif of the coming winter is of unusual length and sharpness.
How long do crypto winters last?
If cryptocurrency behaves like other asset classes (which it seems to, but with even greater volatility), then crypto winters, like bear markets, are likely to come in all shapes and sizes. Since cryptocurrency hasn’t been around that long, we don’t have that much data to look at.
The crypto winter that led to the coining of the term lasted for almost three years, from the beginning of 2018 to the end of 2020. At that point, crypto began to skyrocket, and Bitcoin surpassed $60,000 in mid-March 2021.
This was followed by a much shorter fall in the prices of crypto currencies, which lasted from the beginning of May to the middle of August of the same year. That dip was so short-lived, however, that some would probably hesitate to call it a true crypto winter, rather than simply calling it a pullback (which is interesting because this dip was very close to the actual duration of the winter of about 4 months).
The crypto market began to fall again in late 2021, with Bitcoin falling from a mid-November high of nearly $65,000 to a low of around $17,000 in mid-November 2022. By the end of January 2023, the crypto market has yet to recover.
Crypto winter timeline
- From the beginning of 2018 to the end of 2020 (~3 years)
- From the beginning of May to the middle of August 2021 (~3.5 months)
- Beginning 2022 to date (1 year and beyond)
This chart tracks the value of Bitcoin in USD from early 2016 to early 2023.
Google Finance
What causes crypto winters?
Like most large-scale phenomena, crypto winters do not have a single cause, and different crypto winters are likely the result of different circumstances. That said, there are a number of factors that can reasonably be expected to contribute to a downturn in the crypto market.
- Inflation and rising interest rates: When the inflation rate rises and the Federal Reserve raises interest rates in response, investors tend to move their money from riskier investments like tech stocks and cryptocurrencies to safer interest-paying assets like bonds and preferred stocks. This leads to a fall in the prices of riskier assets. Rising interest rates and general economic malaise are likely among the biggest factors contributing to the cryptocurrency’s decline.
- Scandals and negative press: When something adverse happens in the cryptocurrency space (fraud and scandals are not uncommon in decentralized finance due to how little regulation cryptocurrencies are), investors take notice, and this can affect cryptocurrency prices.
- capitulation: Despite cryptocurrency’s original purpose as a store of value used as currency, most individuals and institutions treat cryptocurrencies as an investment, and investors are notoriously emotional. When the value of any investment begins to decline, the “herd mentality” can easily take hold among investors who are still long in the asset, causing a wave of capitulation. As prices fall, more investors panic and sell, causing prices to fall further, and so on until supply and demand eventually reach relative equilibrium.
How do crypto winters affect investors and institutions?
The most obvious effect of the crypto winter is the financial loss suffered by investors, both individual and institutional. During each crypto winter, DeFi evangelists whose portfolios are almost exclusively tied to cryptocurrencies experience devastating hits to their net worth, while investors with more diversified portfolios experience more subtle losses depending on their asset allocation.
Job losses and business closures are another consequence of the long-term decline in the crypto market. During the crypto market, many new businesses tend to emerge in the field of decentralized finance—mainly mining operations and digital exchanges. The allure of the “digital gold rush” is hard to beat, and young companies ready to take advantage of the booming industry abound.
However, when cryptocurrency values plummet and remain low for extended periods, smaller and newer mining companies and exchanges often fail, and larger, more established operations must cut costs by initiating mass layoffs.
Examples of layoffs in crypto companies
- Robinhood, a popular crypto (and stock) trading platform, laid off 8% of its workforce in April 2022 and an additional 23% in August of the same year.
- Coinbase, one of the most popular and well-established crypto exchanges, laid off 18% of its staff in June 2022.
- Hodlnaut, a popular cryptocurrency lending platform, has cut its workforce by a whopping 80% in August 2022.
- In January 2023, Crypto.com announced that it was laying off 20% of its staff.
When will the current crypto winter end?
Bitcoin started falling from a high of around $65,000 in November 2021. About a year later, in November 2022, it hit a low of around $16,000. At the end of January 2023, it jumped to around $23,000.
But will the current crypto winter come to an end? Or will prices continue to plummet until the market crashes completely? Because the crypto industry is so young, and many financial experts decry digital currencies for their lack of “intrinsic value,” it’s entirely possible that cryptocurrencies could continue to lose value and eventually fall out of favor altogether.
On the other hand, so many individuals, companies and institutions have money tied up in the crypto world that the industry (or at least major players like Bitcoin and Ethereum) could make a massive comeback when interest rates fall and inflation stabilizes. According to TheStreet’s Luc Olinga, “while optimism appears to have returned, cryptocurrency prices are still far from their record highs set amid the crypto frenzy at the end of 2021.”