What You Need To Know – Forbes Advisor UK

Since the stablecoin meltdown of early May, all eyes have been on Bitcoin (BTC). It’s the key bellwether for the cryptocurrency market, and before the big downdraft earlier this week, the price of BTC had been struggling to remain near the psychological threshold of £24,000.

But it’s not just Bitcoin that’s been feeling downward pressure. Ethereum (ETH) and other leading altcoins, such as Cardano (ADA) and Polygon (MATIC), are all off more than 60% year to date.

Meanwhile, major crypto exchanges such as Coinbase and Gemini announced hiring freezes and layoffs in early June. Shares of Coinbase have fallen 86% from their 52-week highs, and the company has announced plans to lay off roughly 18% of its workforce as the crypto market joins the US stocks in a bear market.

Tyler and Cameron Winklevoss, the CEO and president of Gemini, announced in a June blog post that the industry was entering a contraction that they labeled “crypto winter.”

“This is where we are now, in the phase that is setting into a period of stasis—what our industry refers to as ‘crypto winter.’” The Winklevoss memo cited “current macroeconomic and geopolitical turmoil” as a catalyst for this troubling return.

What Is Crypto Winter?

The phrase “crypto winter” likely came from the hit television series game of Thrones. In the show, the motto of the House of Stark was “Winter Is Coming.” It was considered to be a warning that lasting conflict could descend on the land of Westeros at any time.

Similarly, an extended period of trouble may be settling over the crypto market. During this difficult time, you must remain vigilant and be prepared for chaos to sweep over the market without much warning.

Defining the phrase even more literally, crypto winter is when prices contract and remain low for an extended period. Analysts believe the wheels of the emerging crypto winter were set in motion earlier in 2022.

“The crypto market was already feeling the effect of world events, especially the Russia-Ukraine conflict that caused turmoil in global finance,” says Igor Zakharov, CEO of DBX Digital Ecosystem.

Zakharov notes that high inflation has driven rising interest rates in the US, which is the biggest player in crypto. “By the time TerraUSD and Luna collapsed and set in motion a domino effect in the crypto world, crypto winter had already begun,” he says.

Since November 2021, the crypto market has dropped 60%—drastically falling from £2.5 trillion to around £825 billion, as of this writing.

The Advantages of Crypto Winter

This is not the first time a crypto winter has settled over the market.

The last crypto winter lasted from January 2018 to December 2020. The term was probably first used in 2018 when Bitcoin lost more than half of its market cap, and other cryptos, such as Ethereum and Litecoin (LTC), dropped sharply.

We know from that experience 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.

“We saw a lot of new startups throughout the industry over the past year, and many of them will fail,” says Jake Weiner, founder and CEO of Uncommon.

Weiner notes that as it gets tougher to compete for venture capitalists, more crypto companies will be cutting budgets. Unfortunately, some will be forced to lay off staff.

“If the market remains in contraction for long enough, it’s not only poor companies that will suffer—but some great ones too,” he says. “The good news for those companies is that, unlike past crypto winters, a lot of crypto [venture capitalists] have already smashed war chests that they will continue to deploy.”

Once the crypto winter thawed in late 2020, there was a period of incredible growth that lasted for most of 2021.

When Does Crypto Winter Start?

Analysts say that crypto winters usually begin when there is a steep sell-off from an all-time high in the price of Bitcoin.

BTC hit a 52-week high of £57,000 in November 2021 before starting an extended downwards plunges. Over the last seven months, Bitcoin has experienced heavy loss, dipping nearly 70% from November 2021 to mid June. The most recent leg down has come amid the Celsius scandal. The original crypto has regained some footing from its 52-week low to trade at around £18,600.

Ethereum, the second-largest cryptocurrency, has dropped 74% since its November peak, as of this writing.

Experts say expectations for more US Federal Reserve monetary policy tightening are worsening the June downturn, and that institutional investors are driving sales.

Any investors who purchased Bitcoin in the past year will have experienced a loss, as the original crypto has slid downward.

Before the last crypto winter, Bitcoin had reached a high of nearly £16,000 in 2017 before falling to less than £2,700 in 2018, representing a loss of at least 83%.

Crypto as a Risk Asset

The crypto markets soared in late 2020 through 2021 partly because the US Federal Reserve was infusing unprecedented amounts of liquidity into the financial markets.

This helped fuel the crypto market, unleashing a major hyper-growth phase, with thousands of new crypto projects added in 2021. That massive growth phase continued until the bottom started to fall late last year.

“When the liquidity is pulled from the markets, the most speculative assets are hit the hardest—and, I would say that there is no more speculative asset class than cryptocurrency,” says Robert Johnson, professor of finance at the Heider College of Business at Creighton University.

Will Crypto Come Roaring Back?

When it comes to predicting the future of the crypto market, most experts say the “stronger cryptos” shall prevail.

“I don’t expect crypto to come roaring back as it did in 2021 because the tailwind of the Federal Reserve monetary policy has actually become a headwind for the asset class,” Johnson says, adding that despite the headwinds, we could still see the cryptocurrency market rise from the ashes.

But some investors love the pullback, viewing it as a time to double down on the market for the long term.

When Bitcoin is trading at around £25,000, slightly less than half its 52-week high, investors view it as an opportunity to buy at a discount. They are banking on a crypto revival once the global political and economic crisis settles.

“This is my third crypto winter. There’s been plenty of ups and downs, but I see that as an opportunity,” Fidelity Investments CEO Abigail Johnson told an audience at Consensus 2022 in Austin, Texas. “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.”

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