Key points to remember
- The crypto market started falling from its price peak in November 2021, but technically didn’t enter a “winter” phase until June 13, 2022.
- Past trends would indicate that the crypto winter will last another three to four months, but it would take another three years for prices to fully recover to their November 2021 glory. Trusting past trends can be a mistake for such a new commodity.
- Government policies around the world are likely to impact the recovery of crypto, or lack thereof, and are partly to blame for the slow burn they have experienced throughout 2022. This may be bad for crypto but good for the planet.
Cryptocurrencies have had a year of major decline. If it was a financially sound stock and you were a long-term investor, this would make it a good time to buy. But cryptocurrency markets don’t act like the stock market, making it difficult to gauge whether crypto will ever recover.
Why Crypto Isn’t As Easy To Predict As The Stock Market
Crypto does not have a very long history. Bitcoin, the first of the current generation of digital currencies, launched in 2009. The New York Stock Exchange, for comparison, started in 1792. We can easily look back on historical stock market trends, but we don’t have enough data to understand how crypto works in different economic conditions.
Moreover, the cryptocurrency markets are less regulated than others, such as the stock market. While agencies like the Securities and Exchange Commission and FINRA closely monitor investment firms in the stock market, crypto firms operate with relatively little oversight. This exposes investors to additional risks, including the additional risk of scams and fraud.
Finally, cryptocurrencies operate outside of the backing of a big government or central bank. Unlike US dollars and euros, most cryptocurrencies derive their value from the communities that use them. They are difficult to value and few are backed by dollar assets.
Unlike investing in stocks, there is no metric for an associated company that would give a full story on whether your crypto investment is a “good one” or not. Although there are many methods to value a stock, analysts struggle to do so for digital assets like bitcoin and ether.
A Brief History of Crypto Winters
crypto winter is a term similar to a bear market in the stock market. A crypto winter signifies an extended period of low asset prices from recent highs. As of this writing, crypto prices have fallen significantly from 2021 highs.
We have very limited data on crypto winters, as the cryptocurrency has only experienced two such events in the past, which gives us a meaningful comparison. While it’s easy to chart stock market trends and look for recurring ebbs and flows, it’s more difficult with cryptocurrency.
The Crypto Crash of 2018
Crypto – and Bitcoin in particular – soared in value in 2017. In January it was below $1,000, but in December it was close to $20,000. It’s not because it suddenly became more popular or demand increased, although many started paying attention to it for the first time after this meteoric rise.
Since the price spike may have been partly due to market manipulation by large investors, the price swings may not have always been what they seemed. In particular, a user with a large wallet, known as a crypto whale, allegedly engaged in two types of manipulation:
- Usurpation. When someone sends a fake crypto offer to increase demand, only to cancel the offer after the price has been artificially increased.
- Washing trade. When someone buys and sells on their own, it looks like the cryptocurrency is exchanging hands and being demanded at a higher price than it actually is.
The violation was so serious that the Department of Justice opened an investigation. After the artificial price increases, prices fell in spurts until November 2018 when the official crypto winter of 2018 set in. The bear market officially started when the price of crypto assets was lower than what most crypto holders had bought them for.
This bear market lasted about four and a half months in total. While the crypto exited its bear market in early April 2019, it only started gaining momentum again a year later in 2020 when the pandemic hit.
Our current Crypto Winter
Everyone reacted differently to the pandemic, but at first it was destabilizing for everyone. Many lost faith in their leaders and governments and clung to cryptocurrencies for what they perceived as a “safer” investment than the infrastructure they saw shut down around them.
Over the next year, it continued its bull run. But in the background, two of the biggest crypto mining countries – Russia and China – have started cracking down on energy-intensive mining operations via tougher policies in 2021.
This happened at the same time as global inflation took off, and rumors that the US Federal Reserve would soon raise interest rates had begun to percolate. These circumstances led investors to leave the crypto markets in droves.
Digital asset manager Grayscale Insights wrote that the market peak price drop began in November 2021, but we didn’t enter a true crypto winter – or bear market – until June 13, 2022.
What happens after a Crypto Winter?
Just because the crypto exits a bear market does not mean that prices will automatically return to previous highs, not even close. The last time a crypto winter happened, investors had to wait about a year for prices to rise more steadily. Bitcoin did not regain its 2017 peak until early 2021.
From there, it skyrocketed, increasing in value for a short time. But based on a model where winter and crypto boom cycles occur approximately every four years, it could be 2025 or early 2026 before prices return to their November 2021 highs.
Assuming the four-year pattern holds, this may be a great time to buy more cryptocurrencies. But it’s an extremely risky move, ideal for long-term investors only, because cryptocurrencies are risky and there’s no guarantee they’ll ever recover.
Will Crypto Ever Recover?
The crypto will likely correct its current downward trajectory, but there is also a good chance that it will fall to zero. China’s moves restricting crypto could be the first in a long line, for example, as governments and environmentalists battle crypto’s massive use of electricity.
Tiny El Salvador has made bitcoin an official national currency, but other countries are considering serious regulations and restrictions. Government officials say they need additional digital asset laws to protect consumers and the environment.
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