The iconic phrase “Winter is coming” from Game of Thrones foreshadowed harsh times for the Starks. With Bitcoin plummeting by over 50% from its November 2021 all-time high of nearly $69,000, many fear a similar crypto winter, mirroring the 2018 market crash.
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What is a Crypto Winter?
A crypto winter describes a sharp decline in cryptocurrency prices, followed by prolonged depressed trading and market sentiment. The current market downturn has erased over a trillion dollars in market value, fueled by investor anticipation of Federal Reserve policy tightening. This has impacted all corners of the crypto ecosystem, from Bitcoin to memecoins and publicly listed crypto exchanges.
Bitcoin’s drop to around $38,000 (at the time of writing) and Ether’s 38.5% decline from its November 2021 peak of $4,800 paint a grim picture. This chilling effect extends beyond crypto; Wall Street experienced an 8% drop in major tech stocks (FANG+ index) in January, and Meta Platforms Inc. saw a 34% decline over six months. These figures evoke memories of 2018, leading many to believe history is repeating itself. That year, Bitcoin plunged over 80% from its late 2017 peak to nearly $3,000, a downturn that persisted until December 2019. This period was characterized by the boom and bust of ICOs and major banks halting plans for crypto trading desks.
James Malcolm, head of FX research at UBS, states, “The question is how do we describe the current situation? And the closest analogy is probably 2018 – a crypto winter…It feels like we’re in a pretty tough period and it could last – hence the analogy is quite apt. Remember, the 2018 crypto winter didn’t just play out in the winter months. It basically lasted a year.”
2022 – A New Crypto Winter?
2018 vs. 2022: A Comparative Analysis
With only one historical crypto winter (2018) as a reference point, comparing “then” and “now” offers insights into the current market situation.
The 2018 crypto winter followed Bitcoin’s December 2017 all-time high of nearly $20,000, with leading coins surging 70% in the subsequent two months. Currently, Bitcoin’s decline from its November 2021 peak persists with no clear signs of recovery. The global market capitalization has fallen approximately 48% over the past three months, compared to a 66% drop in roughly two months during late 2017 and early 2018. For a similar scenario to unfold, Bitcoin would need to bottom out around $11,000, representing an 84% drop from its peak.
The Four-Year Cycle Theory
The belief that crypto markets follow a four-year cycle of boom and bust has gained traction, often linked to the Bitcoin halving event, which occurs approximately every four years. This event halves the number of Bitcoins awarded to miners for each new block, potentially altering market dynamics.
Historically, a year after each halving, Bitcoin and the broader crypto market have reached new all-time highs. This pattern fuels concerns that the four-year cycle applies to crypto winters as well, suggesting 2022 could mirror the 2018 downturn.
Macroeconomic Shifts
Significant changes since 2018, both within the crypto space and the global economy, warrant consideration. The global pandemic, impending Federal Reserve interest rate hikes, and record-high inflation create a different economic landscape. Additionally, the doubling of U.S. federal debt and increasing regulatory scrutiny of cryptocurrencies could curb speculative investments. These factors could contribute to a crypto winter by making borrowing more expensive and reducing investor appetite for riskier assets.
Not Everyone Predicts a Deep Freeze
Despite the concerning signs, dissenting voices argue against a repeat of 2018.
Budd White, co-founder of software development firm Tacen, contends that ongoing development momentum indicates a healthy ecosystem, stating, “I don’t believe we are entering a crypto winter because the building momentum is increasing. We are just seeing the more realistic price of what is being built.” Optimistic projections remain, with some experts viewing the current downturn as a temporary correction before further growth. Vijay Ayyar, VP of corporate development at Luno, suggests the recent decline falls within the typical 30-50% correction range for Bitcoin.
Key Differences from 2018
Arguments against a 2018 repeat highlight:
Bitcoin’s Increased Maturity: Bitcoin’s market capitalization peaked at a trillion dollars last year, signifying its growth as a major asset class. Institutional adoption continues to accelerate, with hedge funds, banks, and even national investment funds showing interest.
Reduced Speculation: While still speculative, Bitcoin exhibits less volatility and greater institutional acceptance compared to a decade ago. This suggests a more resilient market with long-term investors less likely to panic sell. “Buy the dip” mentality may prevail among seasoned players.
Crypto Winter: A Season for Building
Regardless of whether a full-fledged crypto winter arrives, leading players view downturns as opportunities for focused development. FTX’s $2 billion venture fund for Web3 development and increasing mainstream adoption of NFTs and DeFi demonstrate continued innovation. David Marcus, former head of crypto at Meta, emphasizes the importance of building solutions rather than hype during market downturns. Nadya Ivanova, COO at L’Atelier BNP Paribas, suggests the cooling market allows developers to focus on fundamentals rather than speculative profits. Even Vitalik Buterin welcomes crypto winters as a test of project sustainability and team resilience.
