The sharp drop in crypto prices has people asking whether we are about to go through another long slump. This market cycle has a predictable pattern – a steep decline in prices, followed by a long period of flat trading. This is what is known as the “crypto winter”.
The Last Crypto Winter
This last happened in 2018 when Bitcoin rose to $20,000 before dramatically sliding down over the next two years. It fell as low as $5,000. These slumps have always been followed by a sharp rise. More players and greater corporate investment came in during these rallies.
The crypto craze has led to some pretty quirky business moves. In 2017, when Bitcoin was on the rise, the Long Island Iced Tea Corp. rebranded itself as Long Blockchain. It was delisted from the Nasdaq last year.
The slump we currently find ourselves in began in early November. The total market cap of all cryptocurrencies hit around the $3 trillion mark before beginning to slide. It has dipped to almost half of that amount. The price of Bitcoin has tumbled from $67,000 to $36,000.
Are We Heading For Another Winter?
Is the current slump a wonderful opportunity to buy in the dip before we start to see a dramatic upturn? Or is it the start of a protracted period of flat trading? With crypto, it is really difficult to tell. There have been key changes in the crypto sphere which could be driving the current volatility.
The rise in the value of crypto may have been driven by speculation and low-interest rates during the pandemic. With low-interest rates in other assets, the capital was flowing towards riskier assets, such as crypto, to get returns. With the Fed now signaling for higher interest rates, many people may be repositioning to assets they consider lower risk.
Regulations and crackdowns in the crypto space may be affecting the industry. Russia is currently talking about banning the use and mining of cryptocurrencies. This has already been enforced in China. The US government is also putting strategies in place for tighter regulation.
For many people, questions may remain about the long-term value of crypto assets. Short-term rises and falls tell us nothing about its long-term value. We all know that the crypto sphere is attractive for people with a high tolerance for risk. For investors with a history of thorough stock picking, crypto may just be considered too volatile.
Many larger institutions may not want to enter the crypto space until some of the volatility has gone out of the market. However, some big companies are bucking the trend and starting to dabble in crypto. This famously includes Tesla, Block, MicroStrategy, and CoinBase. These companies hold billions of dollars worth of crypto assets.
The inclusion of large institutions in the crypto space is pushing us to unchartered territory. With this attraction from big players, hedge funds, and even governments, crypto is entering a new phase in its lifecycle. If cryptocurrencies gain enough liquidity and a high enough level of adoption, the market will stabilize.
This will mean that it becomes a less risky asset. It also removes some of the possibility of massive gains which now exist for risk-tolerant investors.
HODLing On
Those in the crypto sphere who see blockchain technology as having the potential for revolutionizing our world would encourage people to adopt the long view. These dips are a widely accepted part of the industry.
A short-term view in the crypto sphere could be considered four years. A mid-term view could be considered ten years. A longer-term view could be forever. Keeping your eyes on the potential society-wide impacts of completely decentralized technology is imperative.
Perhaps only those with true faith in the technology can stick through this kind of volatility. These may be the times that separate the casual investor from the serious crypto proponents.
In Summary
The current plunge has hit every corner of the crypto ecosystem, with more than $1 trillion of value erased from the market. However, the current selloff is very mild when compared to the 90% drop in the value of Bitcoin earlier in its lifecycle.
During crypto winters, there is an opportunity for companies to focus on using blockchain technology to solve real-world problems rather than pumping out worthless tokens. This can be of great benefit in the long term.
