Why Are Investors Worried about “Crypto Winter”?

Why are investors worried about crypto winter

A temporary problem or an emerging issue, here’s what you need to know about the crypto winter of 2022.

The crypto market had a great run through 2021. In November, its market capitalization hit US$3 trillion, and Bitcoin reached an all-time high of US$68,000. However, jumping into 2022, the market has experienced some roadblocks. On January 14, Bitcoin fell by 12% to US$36,000, dropping to its new lows since July 2021. Bitcoin’s crash saw a parallel fall in other cryptocurrencies as well, resulting in a total of US$1 trillion being wiped out of the crypto market. 

We have all heard of the saying that what goes up must come down. Clearly, this is true for the crypto market as well. But does this crash at the beginning of 2022 signal a bigger problem? Let’s take a closer look.

The feared crypto winter

The crash of January has made investors fear a crypto winter. This phenomenon is essentially a fall in crypto prices with no uptick in sight for over a year. The term came about during the downturn that cryptocurrencies saw between 2017 and 2018. During this period of downturn, Bitcoin prices had fallen by 84% and had a domino effect on other cryptocurrencies as well.

Many are concerned that this is not a temporary slump but rather the onset of crypto winter, as there is going to be a hike in market interest rates this year. This could push people to switch back to safer assets and lessen the excitement around crypto. Another point of concern is that this year, the U.S. plans on releasing new cryptocurrency regulations. These regulations come after the heavily critiqued infrastructure bill that was passed by the U.S. government in November last year. 

So, should you be worried?

Before you start getting concerned about a crash in the crypto market, it is important to dissect what caused the crypto winter. Some experts believe that the growth of crypto in 2020-21 could be attributed to stimulus checks (money sent by the government to the taxpayer to boost economic growth) that people have received in the past years. Once that stops, naturally, cryptocurrencies would also experience a slump. 

Others believe that the crypto winter has not set in. Instead, the cryptocurrency market is just going through a cooling-off period after all the hype surrounding it in the past year. Some experts call it a correction period (a rapid decrease in the price of an asset after it peaks in value) for crypto. Vijay Ayyar, Vice President of Corporate Development and International at crypto exchange Luno, says, “Corrections for BTC (Bitcoin) usually are in the 30-50 percent range, which is where we are currently, so still within normal correction territory.” He added that if the price drops below US$30,000, it would be a signal of a bear market.

As of writing this article, Bitcoin has at least slightly recovered from its fall earlier this year. So, for right now, it would be safe to say that crypto is out of the woods. 

Another point to note is that Bitcoin has historically gone through a four-year cycle. Every four years, it reaches an all-time high value and then experiences a fall. This fall is never below the highest price set in the previous four-year period. This four-year cycle is a result of a fall in Bitcoin rewards every four years (or every 210,000 blocks).

So, even if this is a slump or the onset of a crypto winter, it won’t last forever. Goldman Sachs even says that the growing crypto adoption would gradually make it a better store of value than gold. This would take its price to over US$100,000 in the next five years. All of this goes to show that the asset will recover and remain relevant in the years to come.

Header image courtesy of Unsplash.

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