Is a Crypto Winter Coming? 3 Things to Consider

There’s a definite chill in the air as the crypto market tries to shake off another steep crash. But is a new crypto winter really upon us?
Updated Jan 28, 2022 at 3:00 p.m. UTC
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Ollie is the Learn editor for the Crypto Explainer+ section. He holds some SOL, RAY, CHSB and BTC.

Crypto winter is a term that’s making the rounds again as the global crypto market has shed $1.2 trillion in the last three months. Commonly associated with the bitcoin market downturn between late 2017 and late 2018, crypto winter refers to a prolonged bearish period where asset prices persistently fall over many months.

Bitcoin's price plunged more than 84% during the last crypto winter period, spreading panic throughout the rest of the market and causing a vast majority of altcoins to plummet in unison. This had the knock-on effect of triggering widespread redundancies across the blockchain industry, hindering mainstream adoption and resurfacing predictions of bitcoin crashing to zero.

It wasn’t until mid-2019 that the crypto markets showed signs of recovery – bolstered by record investment from traditional institutions and trade tensions escalating between the U.S. and China encouraging investors to seek out economic hedge assets.

While things are certainly different now, that hasn’t stopped rumors circulating that another winter could be around the corner. But how can anyone know for certain?

1. The crypto market then and now

Since the market has only experienced a single crypto winter in its history, one way to discern whether another winter is coming or not is to draw comparisons between the market back then and now.

The crypto winter of 2018 blew in immediately after bitcoin reached its then all-time high of $19,850 in December 2017, followed by the leading cryptocurrency’s price tanking 70% over the following 51 days.

It has now been 75 days since bitcoin fell from its new all-time high of $68,990 and has so far dropped as much as 52% from that record price. No obvious signs of a recovery have appeared.

Looking at the broader market as a whole, the global market capitalization – the sum of all cryptocurrency project market capitalizations – fell by 66% during the same 51-day period between late 2017 and early 2018, according to Coinmarketcap data.

By comparison, the current global crypto market capitalization has decreased 48% over the last 75 days.

Finally, taking into consideration that bitcoin plunged 84% before hitting bottom during the first crypto winter, it would mean that bitcoin’s current price would need to bottom out around $11,000 to reflect the same percentage loss.

This is, of course, a rough estimation for gauging where the current market stacks up against itself previously during the last crypto winter and should not be construed as concretely confirming or denying a new bearish cycle has started.

2. The mythical four-year crypto cycle

There’s a growing belief the crypto market (in more recent years) follows a pattern of rising and falling in price every four years. Whether this is the result of a self-fulfilling prophecy or not is difficult to say, however, many tie this theory to the timing of Bitcoin halving events, which occur roughly every four years (more specifically, every 210,000 blocks). This changes the dynamic of the market and ushers in a new market cycle – or so the story goes.

During each Bitcoin halving, the number of newly minted bitcoin given to successful miners as block rewards is cut in half – in the last halving event in 2020, the block reward was cut by 50% from 12.5 to 6.25. What’s most intriguing about these events is the repeated effect it seems to have on the crypto market approximately one year after each halving takes place.

A year after the 2016 halving, when bitcoin block rewards were slashed from 25 to 12.5 BTC, bitcoin – and most other cryptocurrencies in the market – printed new all-time highs. In 2021, one year after the next sequential halving took place, bitcoin and the broader crypto market recorded new all-time highs again.

This four-year gap between these two peaks has understandably caused some investors to fear the same gap rings true for crypto winters. And since 2018 was the last winter, it, theoretically, implies a second is due this year – assuming cycles will continue to follow the same four-year pattern.

But, again, it’s important to balance this with the maturity of the market now versus then, as well as other factors such as improved regulation, better-educated investors and a wider range of financial vehicles for gaining exposure to the crypto market indirectly.

3. Exacerbating macroeconomic factors

Indeed, a lot has changed since 2018, not merely in the cryptocurrency space but also throughout the global economy. Financial markets worldwide have been rocked by the first global pandemic crisis since 1918, the Federal Reserve is expected to hike interest rates for the first time in three years and inflation has reached levels in many countries not seen in decades. In addition, the total U.S. federal debt has doubled in the past decade to $28 trillion. Global authorities, who largely left cryptocurrencies alone for most of the industry's 13-year history, are now moving fast to catch up with new regulations and laws.

It’s entirely possible these events could curtail the frivolous investing we’ve seen from institutional and retail crypto investors alike over the last year, as borrowing becomes more expensive, and therefore less attractive, while the cost of living rises. In extension, this could provide the cooler climate necessary to initiate another winter in the crypto market.

That being said, it’s always important to understand the difference between sell-offs, crashes and crypto winters. While news headlines will often inflate the severity of crypto market movements, a vast majority of corrections in the crypto markets are simply sell-offs (a decline in price of approximately 5%-20%). Crashes can be characterized as 20%-50% declines, while crypto winters (going from the previous history) generally involve an 80%+ decline over an extended period of 10-12 months.

This article was originally published on Jan 28, 2022 at 12:52 p.m. UTC

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Ollie is the Learn editor for the Crypto Explainer+ section. He holds some SOL, RAY, CHSB and BTC.

CoinDesk - Unknown

Ollie is the Learn editor for the Crypto Explainer+ section. He holds some SOL, RAY, CHSB and BTC.


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