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key takeaways
- The crypto market began to fall from its peak price in November 2021, but did not technically enter a “winter” phase until June 13, 2022.
- Past trends would indicate that the crypto winter will last for another three to four months, but it will take another three years for prices to fully recover to their November 2021 glory. Relying on past trends may be foolish in such a new product.
- Government policies around the world are likely to affect crypto’s recovery, or lack thereof, and are partially to blame for the slowness they’ve been experiencing throughout 2022. That may be bad for crypto, but good. for the planet.
Cryptocurrencies have had a huge down year. If they were financially sound stocks and you were a long-term investor, it would be as good a time as any to buy. But cryptocurrency markets don’t act like the stock market, making it difficult to assess whether cryptocurrencies will ever recover.
Why cryptocurrencies are not 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, was launched in 2009. The New York Stock Exchange, by comparison, began in 1792. We can easily look back at historical stock market trends, but we don’t have enough data for cryptocurrencies. understand how it works under different economic conditions.
Furthermore, cryptocurrency markets are less regulated than others, such as the stock market. While agencies like the Securities and Exchange Commission and FINRA keep a close eye on stock market investment firms, crypto firms operate with relatively little oversight. That puts investors at additional risk, including additional risks of scams and fraud.
Finally, cryptocurrencies operate without the backing of a major government or central bank. Unlike US dollars and euros, most cryptocurrencies derive value from the communities that use them. They are difficult to value and few are backed by dollar-based assets.
Unlike investing in stocks, there are no metrics for a partner company to give a full story on whether or not your crypto investment is “good”. While there are many methods of valuing 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 means an extended period of low asset prices compared to recent peaks. As of this writing, cryptocurrency prices are down significantly from 2021 highs.
We have very limited data on crypto winters as the cryptocurrency has only seen two such events in the past giving us a meaningful comparison. While it’s easy to chart stock market patterns and look for recurring ebbs and flows, that’s more challenging with cryptocurrencies.
The crypto crash of 2018
Crypto, and Bitcoin in particular, skyrocketed in value in 2017. In January, it was below $1,000, but in December, it hit nearly $20,000. This was not because it suddenly became more popular or in demand, although many began to pay attention to it for the first time after this meteoric rise.
Because the price increase may have been driven in part by market manipulation by large investors, price swings may not always have been what they seemed. In particular, a user with a large wallet, known as a crypto whale, allegedly engaged in two types of manipulation:
- phishing When someone submits a fake crypto offer to increase demand, only to rescind the offer after the price has artificially increased.
- Wash trade. When someone buys and sells of himself, it appears that the cryptocurrency is traded and in demand at a higher price than it actually is.
The crime was so serious that the Department of Justice opened an investigation. After artificial price increases, prices fell in fits and starts until November 2018, when the official crypto winter of 2018 kicked off. The bear market officially started when the price of crypto assets was lower than the price for which most crypto holders bought them.
This bear market lasted for a total of about four and a half months. While cryptocurrencies came out of their bear market in early April 2019, they didn’t gain traction again until a year later, in 2020, when the pandemic hit.
Our current Crypto Winter
Everyone has reacted differently to the pandemic, but at first it was destabilizing for everyone. Many lost faith in their leaders and governments and clung to crypto for what they perceived to be 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 largest crypto mining countries, Russia and China, began to crack down on energy-intensive mining operations through stricter policies in 2021.
This happened at the same time that global inflation was taking 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 en masse.
Digital asset manager Grayscale Insights wrote that the drop from the market price peak 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?
The fact that cryptocurrencies break out of a bear market does not automatically mean that prices will return to previous highs, not even close. The last time a crypto winter took place, investors had to wait around a year for prices to rise more steadily. Bitcoin did not recover to its 2017 peak until early 2021.
From there, it shot up, rising in value for a brief period. But based on a model in which crypto winter and boom cycles occur roughly every four years, it could be 2025 or early 2026 before we see prices return to their November 2021 peaks.
Assuming the four-year pattern holds, this may be an ideal time to buy more crypto. But that is an extremely risky decision, ideal only for long-term investors, since cryptocurrencies are risky and there is no guarantee that they will ever recover.
Will the crypto ever recover?
Crypto is likely to correct the course of its current downward trajectory, but there is also a good chance it could drop to zero. China’s moves restricting cryptocurrencies could be the first of many, for example, as governments and environmentalists battle cryptocurrencies’ massive use of electricity.
Tiny El Salvador made bitcoin an official national currency, but other nations 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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