What is crypto winter?
Crypto winter is the unofficial name for a stage of the crypto market, which is characterised by low demand for cryptocurrencies and a drop in their average value. Thus, by definition, a crypto winter is a negative phenomenon, the mere mention of which makes investors frantically sell digital assets and prepare for a crisis. The crypto winter also illustrates the mood of the market, namely the unwillingness of investors to take risks, buy currency in large volumes or invest in new projects.
What does crypto winter mean in terms of measurements and statistics? Unfortunately, now there are no generally accepted criteria or norms regarding how much prices should fall for this to indicate the arrival of crypto winter. However, you can determine its onset by analysing the price history of the most famous cryptocurrencies. Basically, take a look at Bitcoin, Ethereum, Dogecoin, Tether, BNB, USD coin, Cardano and Polygon. If the decline in prices for these cryptocurrencies is almost synchronous or follows each other, and also represents a double-digit percentage, then this indicates that the crypto winter has come.
This is not to say that crypto winter is an anomalous or irreversible phenomenon that investors need to be afraid of and that will inevitably destroy the market. Like any other stage of the market, the crypto winter is always temporary; it is a natural stage of the cycle, just like periods of growth. However, it can lead to a huge gap between cryptocurrencies and the stock market, although sometimes both areas go through the “winter” at the same time.
Crypto winter vs bear market
A bear market is a period of continuous depreciation of the financial assets’ value by more than 20%. This stage is often characterised by pessimistic investor sentiment and irrational behaviour, resulting in the depreciation only gaining momentum and worsening (for example, due to investors selling their assets in a panic). On average, the bear market lasts from a few weeks to 6–7 months, but in the worst case, it can drag on for 20 years. This type of bear market is called a “secular” one.
What is the main difference between a crypto winter and a bear market? Well, in a bear market, the price of assets decreases continuously without ceasing, while during a crypto winter, the drop is sudden, but is a one-time thing. That is, the price falls once and that’s it, it doesn’t move even with all the efforts of investors and other interested parties. That is why such a period is called “winter” – the entire industry gets frozen.
What triggers crypto winter?
Crypto winter can come about for absolutely any reason since this state is due to the very nature of cryptocurrencies and is an integral part of their development. Thus, price volatility, which applies to all cryptocurrencies without exception, is also a consequence of their nature and structure. The price of Bitcoin, for example, changes every day and is determined by its supply and demand ratio, which in turn is shaped by other external factors: statements by industry leaders, the environmental situation, inflation of traditional currencies, etc. Therefore, all these factors can also serve as an impetus for the onset of crypto winter.
Quite often, crypto winter, like any other crisis, is preceded by serious social upheavals, for example, an epidemic, changes in global foreign policy, the outbreak of military conflicts, and so on. One can say that crypto winter is extremely unpredictable, it is largely a spontaneous phenomenon rather than a natural one, and therefore it is impossible to say exactly what triggered it this time.
Advantages and disadvantages of crypto winter
The obvious disadvantages of crypto winter are:
- Individual investors and crypto projects suffer serious financial losses as a result of a sharp drop in prices. Some companies eventually go bankrupt and are liquidated.
- There are fewer tech startups, with some of them closing down. This in turn slows down technological advancement.
- Rising unemployment as a result of lay-offs.
At the same time, the longer the crypto winter lasts, the more enterprises and startups are weeded out, so it often acts as a kind of “barrier” or filter. So, contrary to the way the majority sees crypto winter, it also has positive aspects. For example:
- Mature and large companies get the opportunity to improve their marketing strategy, dedicate time to upgrade products and strengthen customer relationships.
- Novice investors who could not enter the market due to a lack of budget can also purchase the desired cryptocurrency at the lowest price. Crypto winter is a great time to start your business!
According to Vitalik Buterin, the founder of the world’s second most popular cryptocurrency Ethereum, crypto winter is an opportunity to review your investment portfolio and abandon useless offers in favour of promising and sustainable ones. Indeed, the crypto winter period eliminates both young projects and weak, ill-conceived, focused on short-term profit and “fraudulent” ones. So, during the crypto winter, it will become clear which companies are striving to develop and cooperate with the traditional economy, and which are really just a “soap bubble”. In this case, the crypto winter gives the market a chance to renew itself, update the composition of its players, and rise to a new level.
How to predict crypto winter
Predicting exactly when the crypto winter will start is currently impossible. But you can try: what you should do is keep track of news in the cryptocurrency world, politics, economics, healthcare and other areas, as well as monitor social media (especially Twitter, Discord and Reddit). By following the changes in the mood of investors and the company plans, you will be able to at least notice the “alarm bells” go off and have time to prepare for the onset of crypto frosts.
According to analysts, crypto winters usually start with changes in BTC. The crypto winter history confirms this:
- Crypto winter of 2014-2015. The first crypto winter in history, when the BTC rate plummeted from $1148 to $196 due to the ban on cryptocurrencies in China and the Mt.Gox exchange hack.
- Crypto winter of 2018. Another crypto winter was triggered by rumours about the ban on cryptocurrencies in South Korea and subsequent market failures, namely: the compromise of Binance API keys, the hacking of the Japanese over-the-counter cryptocurrency market, and the ban on ICO advertising and token sales on Facebook and Twitter. This crypto winter began in January 2018 and lasted until September, lowering the price of all cryptocurrencies by over 80%.
- Crypto winter of 2021. In May, the price of Bitcoin dropped by a record 30%, while ETH fell by 40% and Dogecoin by 45%. This happened due to a number of reasons: Elon Musk’s criticism of mining, Tesla’s ban on accepting payments in BTC, new sanctions from the Central Bank of China, pressure on crypto exchanges in India, and regulatory attention to the Binance platform. So, compared with their peak price, Ethereum coins lost up to 67% of their value in total.
Experts believe that in 2022 the market experienced the fourth crypto winter, when, according to preliminary estimates, Bitcoin fell by 73%. However, saying for sure whether this is a crypto winter will be possible only in 2023 after the market stabilises. This is expected to be facilitated by Ethereum’s transition from the Proof of Work protocol to Proof of Stake.
How long will the crypto winter last?
To determine how long the crypto winter will last this time, you need to look at how long past crypto winters lasted. Thus, the Grayscale Investments digital asset fund considers June 13, 2022 to be the start date of the fourth crypto winter (although at that time the BTC price had already dropped by more than 60%). Since experts have not yet officially announced that the end of crypto winter has come, we can assume that it continues to this day.
Significant crypto winters in the past lasted up to a year on average. However, some believe that the period from 2012 to 2019 is one big crypto winter, which was simply accompanied by periodic “thaws”, which investors mistakenly took for the end of frosts. If you believe this hypothesis, then the crypto winter lasted four years, which means that the crypto winter of 2022 cannot be shorter, or could be even longer! According to the most pessimistic forecasts, it could last until 2026.
In any case, the end of the crypto winter always comes thanks to a trigger or catalyst that re-ignites interest in cryptocurrency and Bitcoin in particular. In 2012 (before the start of the next crypto winter), the catalyst was the opening of the Mt. Gox exchange and the rise of the Silk Road. It turned BTC into a real means of payment that one could use to pay for various things.
In 2017, the market moved from a crypto winter to a bull market (which means a period of unprecedented growth), thanks to the birth of a huge number of altcoins and the launch of new innovative startups. It also spurred the resurgence of BTC. Thus, we can say that the crypto winter is directly related to the state of Bitcoin: it starts when the price falls to historical levels and ends when BTC returns to its all-time high. Therefore, there is no point in predicting the next crypto winter or waiting for this one to end. Instead, investors are encouraged to adjust to current conditions by choosing sustainable projects and forgoing risk.