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The prices of cryptocurrencies such as Bitcoin and Ether have plummeted this year.
Dusan Zidar / Dreamstime
Between price collapses, layoffs and high-profile defaults, the winds are blowing the next so-called cryptocurrency winter for
Bitcoin
and other digital assets.
Bitcoin traded close to $ 20,200 late Wednesday afternoon, down more than two-thirds from a record high of close to $ 69,000 in November 2021. It has fallen by 56% since the beginning of the year as June approaches the end, while
S&P 500
has lost a little less than 20%. Other tokens such as Ether, Solana and Dogecoin have fared even worse, and the market value of the entire crypto economy has been reduced to $ 945 billion from almost $ 3 trillion in less than eight months, according to CoinMarketCap.
The consensus is that more trouble is likely on the way for the second half and beyond, making the current landslide similar to previous cryptocurrencies, but with significant differences.
“We are definitely still in the beginning. The crash is relatively recent, says Clara Medalie, head of research at crypto data provider Kaiko. “People are going to be humble for the next six months. It is quite clear at this point that we are likely to enter a more protracted crypto downturn. “
Mike Belshe, who has been involved in crypto since 2012, a year before founding BitGo, an institutional custodian of digital assets acquired by
Galaxy Digital
(GLXY.Canada), is disappointing in the short term as well.
“I think there are more chips to fall. We will see a little more pressure downwards, says Belshe. He estimates that Bitcoin will “continue to hold this $ 20,000 to $ 25,000 series with falls below when there are liquidations.”
Liquidations refer to when positions taken with collateral, or borrowed money, are automatically sold if traders who hold the positions fail to provide additional collateral. This happens often and is a source of short-term volatility.
What some consider to be the first crypto winter came in 2014, when the failure of a major stock market saw prices fall from around $ 1,000 to under $ 200 in 12 months. The second came after the bull run in 2017, when Bitcoin crashed from close to $ 19,000 in the middle of a bursting bubble with smaller coins. It traded below $ 4,000 for several months at a time, and failed to hold consistently above $ 10,000 until 2020.
In addition to the price decline, the second crypto winter saw limited fundraising, drought with venture capital money and the end of employment. This time, “we’ll definitely see all of this,” Belshe said.
Businesses included
Coinbase Global
(ticker: COIN) has already announced layoffs and layoffs in recent weeks, while major players in the room such as.
Voyager Digital
(VOYG.Canada) is under pressure as a result of a collapse in cryptocurrency lending.
Still, there are ways this winter is markedly different from the previous ones.
The first is the link between crypto and the broader market – a relationship that has played a painful role in the current downturn. While Bitcoin should in theory trade independently of ordinary finance, the past year has proven to be largely correlated with other risk-sensitive assets, such as stocks and especially technology stocks.
The
S&P 500
has entered a bear market as investors worry that the Federal Reserve’s efforts to curb inflation with higher interest rates could lead to a recession. It has put more pressure on crypto. The only way an ugly six months ahead for crypto can be avoided is if there is an improvement in macroeconomic conditions, says Medalie. A stock market rally would help.
Another difference is that the companies this time have stronger teams, says Medalie. There has been a significant migration of talent from traditional finance to crypto, which includes critical expertise in navigating complex financial environments. Cryptocompanies also have more capital than they had in 2018; Medalie estimates that many companies have enough funding to survive two to three years with a bear market.
But perhaps the biggest difference is the level of institutional commitment in the room, which gives perseverance.
Goldman Sachs
and several of Wall Street’s largest players are actively involved in crypto, and the prospect of central bank – backed digital currencies is one of the hottest topics in international finance.
“During the last crypto winter … I did not necessarily have 100% confidence that our industry was going to stay forever – that this was real,” says Peter Wall, CEO of Crypto Mines
Argo Blockchain
(ARB.UK) «It is now institutional investors, investment banks, law firms working in this sector that would have led you out of space during the last crypto winter. And the guys I still have conversations with. “
Nevertheless, the lessons from 2018, which ushered in more than two years of stagnant growth, show that a recovery may be a long way off. This is likely to flush out weaker projects and see companies refocus on building, refining products and services, and centering efforts on some of the more resilient aspects of space.
“When we move through these [winters], we are getting bigger and the risk types look different, says Belshe. “It’s going to be a fourth crypto winter, I guess at some point – and we’ll learn a new lesson.”
Write to Jack Denton at [email protected]
