Memories of 2018 are raising fears that a repeat is playing out now after the world's largest cryptocurrency plunged 50 percent from its most recent high of nearly $69,000 in November.
There are few things scarier for investors than a bear market, unless you're involved in crypto, in which case a winter is worse.
The chilling term refers to a sharp drop, followed by a drop in trading and months of market stagnation, a phenomenon that memorably hit the cryptocurrency market in 2018. The price of Bitcoin plunged by more than 80% to a low $3100 from the end. from 2017 to December of the following year, a period characterized by the boom and bust of initial coin offerings and several large banks shelving their plans to start cryptocurrency trading desks. Bitcoin would not reach a new high until December 2020, according to data compiled by Bloomberg.
Memories of 2018 are raising fears that it is repeating itself now after the world's largest cryptocurrency plunged 50% from its most recent high of nearly $69,000 in November. The crypto universe has lost over a trillion dollars in market value due to growing conviction that the Federal Reserve is ready to start winding down the ultra-accommodative policy settings that fueled a boom in risky assets. The pullback has hit every corner of the crypto ecosystem, from Bitcoin to memecoins to publicly traded crypto exchanges. While the collapse has been loud enough on its own, it has raised even greater concern that the pain could linger for many months, according to UBS.
โThere is the question of how do we characterize that and the closest analogy is probably 2018, which is this idea of โโa crypto winter,โ James Malcolm, head of currency research at UBS, said by phone. โIt seems likely to be quite a difficult and potentially long period and so the crypto winter analogy is quite a good one. Remember, the crypto winter in 2018 was not just during the northern hemisphere winter months. It basically went on for a whole year, so it was a crypto winter that effectively lasted a year.โ
Bitcoin on Tuesday continued to slide, falling as much as 3% to trade at $35,721. The coin has spent more than 60% of the year so far trading lower, recording only nine sessions in the green.
Mentions of โcrypto winterโ and โcrypto ice ageโ have flooded social media amid the latest crash. โGm gm โ Make sure you stay warm, crypto winter is in full effect,โ Twitter user @brycent_ posted on Monday, using the crypto shorthand for โgood morningโ to start his tweet. โEnjoy this #bitcoin winter,โ tweeted user @mir_btc over the weekend.
For Antoni Trenchev, co-founder and managing partner of Nexo, there is definitely a chill in the air. Bitcoin has already satisfied half of its two-part definition of a crypto winter: a sharp drop in prices.
"I'm not looking for a repeat of the last 'crypto winter,'" he said. "Without a doubt, regulatory and macroeconomic storms are brewing, and another stretch to $28,000-$30,000 cannot be ruled out in the current climate of risk aversion."
Unlike the winter of three years ago, investment in the crypto sphere remains strong, at least for now. In January alone, crypto exchange FTX announced the launch of a $2 billion venture fund to target Web3 opportunities, while the Financial Times reported that Andreessen Horowitz is looking to raise $4.5 billion for crypto funds. Of course, a prolonged drop could dampen enthusiasm for the sector.
Outside of venture capital, companies are also looking to expand into the corners of the crypto ecosystem. Documents filed with the US Patent and Trademark Office show that Walmart Inc. is preparing to create its own cryptocurrency and non-fungible tokens. Meanwhile, GameStop Corp. is also reportedly planning to launch an NFT marketplace for gamers later in the year.
For Budd White of Tacen Inc., that push is a sign that the crypto complex is in the midst of a price review, rather than a freeze.
"I don't think we're entering a crypto winter because there's still growing momentum on the build side โ we're just seeing more realistic pricing of what's currently being built," said White, chief product officer and co-founder of crypto development firm software that creates open source software based on the blockchain.
The looming threat of stepped-up regulatory action adds to the risks built into the crypto complex. The Federal Reserve is considering launching its own digital currency, while the use of crypto mining power has drawn scrutiny from the US Congress and foreign governments.
โThe White House may soon reveal some national security challenges posed by cryptocurrencies and the Fed document on central bank digital currencies did not answer any questions about whether we will see a digital dollar or how they might work with stablecoins.โ said Edward Moya, senior market analyst at Oanda Corp. "The regulatory environment has become much cloudier now."
