Brace Yourself During Crypto Winter, But Prepare for the Spring to Come
“Winter is coming,” the saying from the "A Song of Ice and Fire" series by George R.R. Martin, made famous by the HBO show “Game of Thrones,” is a warning that lasting conflict could descend on the land at any time. Similarly, “Crypto Winter” suggests turbulent times, and an extended period of trouble may be settling over the crypto market. During these difficult times, investors must remain vigilant and be prepared for chaos to sweep over the market without warning.
What is "Crypto Winter"?
Crypto winter is when prices contract and remain low for an extended period.
“This is where we are now, in the contraction phase that is settling into a period of stasis – what our industry refers to as ‘crypto winter’,” said Tyler and Cameron Winklevoss, the CEO and president of Gemini, in a blog in June.
The last crypto winter lasted from January 2018 to early 2021. The term was probably first used in 2018, when Bitcoin (BTC) had reached a high of nearly $19,500 in December 2017 before falling to less than $3,300 in 2018, representing a loss of about 83%.
From this experience, we can infer that crypto winter is a lot like a conventional bear market and the results aren’t too dissimilar from bear markets in other asset classes. Long-term, crypto winters weed out young startups and present an opportunity for top companies to mature and prove their products, just like in bear markets for other asset classes and industries.
How Does This Crypto Winter Differ From Previous Ones?
Bitcoin hit a 52-week high of $68,990 in November 2021 before starting an extended downwards plunge. Over the last seven months, Bitcoin has experienced heavy losses, dipping nearly 70% from November 2021 to mid-June. It regained some footing from its 52-week low to trade at almost $22,000 as of this writing.
Ethereum, the second-largest cryptocurrency, has dropped 75% since its November peak as of this writing. Overall, the damage in crypto has been broad, with hundreds of coins having plunged by some 90%.
Although the selloff in crypto may not be as big as others in its history, it feels worse because the market has grown so big, to the trillions of dollars in size. In November 2021, the crypto market had reached a value of about $3 trillion. Since then, it drastically dropped almost 70% to less than $1 trillion as of this writing.
And there are other differences at play.
In late 2020, there was lots of chatter about institutional adoption of bitcoin. The conventional wisdom was that institutional investors would not take bitcoin seriously until it was at least a $1 trillion asset. When it reached that milestone, the largest asset manager for institutions in the world, BlackRock, announced in February that it planned to enter the cryptocurrency space with "client support trading and then with their own credit facility."
Counterintuitively, as the value of bitcoin goes up, it becomes more, not less, investable. The more institutional investors enter the crypto market, the more correlated it has become with other asset classes.
Bitcoin has maintained above a 0.9 correlation with the Nasdaq since April 8, according to a dashboard by The Block. A correlation of 1 would mean that crypto and the Nasdaq are entirely in lockstep. This means that crypto has been tracking the stock market more than 90% of the time. Looking at the chart on dashboard for the year 2022, it suggests that the correlation between Nasdaq and bitcoin has been very strong throughout the year.
This time around, all asset classes are in a bear market territory, not just crypto. While the crypto market is in shambles, stocks also officially entered bear market territory in mid-June. The S&P 500 index down around 23% since the beginning of the year as of this writing.
As the crypto market starts to behave more like other asset classes, macroeconomic and geopolitical factors, which did impact the crypto market in the past, have significant implications on the crypto market these days. And with a global recession looming, it seems that the crypto market will suffer along with the entire economy and the traditional financial markets.
Before 2017, bitcoin was considered a safe haven and as an inflation-protection asset. But not anymore.
Is this Crypto Winter Warranted?
The blockchain technology underpinning cryptocurrencies has huge potential, though we can’t predict what it will look like in ten years from now. Venture capitalists believe in the technology, and they’ve been making numerous Web3 (decentralized internet) investments and receiving tokens in return. Vast fortunes have been made in non-fungible tokens (NFTs), but the value of all these assets have been demolished over the last few months.
In previous crypto bear markets, people wondered if Bitcoin would rebound. Now, they wonder about the future of blockchain technology in general. There should be no doubt about the boundless potential of this technology.
From a fundamental perspective, when you analyze the Bitcoin blockchain network, the number of unique addresses (i.e., accounts) used and the number of confirmed payments per day have not changed much, if at all, during the crypto market turmoil in the last few months. Therefore, the fundamentals of the network are still quite strong and there is a disconnect between the fundamentals (the activity on the network) versus the crypto market prices.
This implies that crypto markets do not represent the fundamental value of the network but rather have been responding to speculative moves by traders.
That said, not all blockchain products have merit and some products are failing – particularly Tera (Luna) and Celsius – which were substantially illusory all along, driven by inflated, unsustainable returns. When investor enthusiasm drives asset prices higher than those assets' fundamentals justify, it creates "irrational exuberance," and these incidents had Wall Street and Main Street question the entire industry’s fundamentals. Like in any industry, some products have economic validity and will last, and those which do not will vanish.
Prepare for the Spring to Come
During the dotcom bust era that started in 2000 and ended in late 2002, many companies folded and disappeared. However, a few survivors went on to be magnificent winners, including Amazon, Google and eBay, among others. The capital markets are a massive sorting machine, filtering out the bad ideas and rewarding the good ones.
This filtering mechanism also happened during the Initial Coin Offering (ICO) hype in 2017, leading to the crypto market crash in early 2018 and the long period of a crypto winter. During this crypto bust, about 99% of the ICO’s projects vanished. The major cryptocurrencies – Bitcoin and Ethereum – suffered significant value declines but due to their strong fundamentals, weathered the storm and reached new historic values in the wake of that last winter.
When people ask whether crypto will come back, the answer is yes, no doubt it will come back, but the vast majority won't survive; only the quality projects will. If you are a contrarian, you might view this period of downturn as an opportunity rather than a risk.
Abigail Johnson, Fidelity Investments CEO, told an audience at Consensus 2022 conference, in Austin, Texas: “This is my third crypto winter. There’s been plenty of ups and downs, but I see that as an opportunity. I was raised to be a contrarian thinker, and so I have this knee-jerk reaction: If you believe that the fundamentals of a long-term case are really strong, when everybody else is dipping [out], that’s the time to double down and go extra hard into it.”
No season lasts forever, and after winter comes spring. So, prepare for the spring to come.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Merav Ozair, PhD
Dr. Merav Ozair is a global leading expert on Web3 technologies, with a background of a data scientist and a quant strategist. She has in-depth knowledge and experience in global financial markets and their market microstructure.
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