Are We Heading For A Crypto Winter Recession?

Cryptocurrency professionals are beginning to issue warnings about an upcoming “crypto winter,” in which interest in cryptocurrencies wanes significantly. But are we really heading towards this eventuality? Or are there reasons for optimism that outweigh these predictions?

What is a crypto winter?

Cryptowinter is a relatively new term, and it is neither precise nor objective. Essentially, the term is meant to describe a period of downward momentum in the cryptocurrency industry. You can think of it as a bear market applied to the crypto world.

For several years, cryptocurrencies such as Bitcoin have consistently increased in value. They exploded in price as more people entered the market and started talking about cryptocurrency.

If investors start to lose interest in these assets, it makes sense that this momentum will reverse. If things get really bad, it could mean that crypto prices generally plateau at a low level, potentially never returning to their previous highs.

Of course, the word “winter” implies a seasonality to this era. But even if cryptocurrency is experiencing a long and challenging winter period, investors can always look forward to the following spring.

Issues affecting the crypto world

Why are people talking about a crypto winter in the first place?

Everyone in the crypto industry should know by now that the prices of many cryptocurrency assets – including flagships like Bitcoin, Ethereum and Litecoin – have plummeted in recent months.

But what are the factors behind this apparent crash? Are these factors potentially locking cryptocurrency into a more prolonged winter in the near future?

Investor panic

Possibly the most compelling explanation for the drop is investor panic.

This panic comes from many different places, but the most proximate cause is a significant decline in the stock market. Despite rallying through the COVID-19 pandemic and reaching new all-time highs, the stock market’s momentum has finally reversed and entered bear market territory.

This has been worrying for crypto investors for two main reasons. First, it indicates a general lack of economic stability. Suppose you lost significant money in the stock market, which is generally considered even safer and more stable than crypto. If so, consider pulling your assets out of many different investments.

Second, many investors flocked to crypto because they saw it as a hedge against inflation and an overpriced stock market. So when crypto began to decline in value, instead of rising in response to recent stock market downturns, crypto investors may have seen this as a sign that crypto wasn’t the safe haven they thought it was.

For both reasons, investor panic has caused millions of people to sell, perhaps prematurely, resulting in falling prices. It remains to be seen how long this panic will last or if the price of crypto will bounce back as people start to re-enter this perceived safe haven.

Inflation

The US is suffering from a massive wave of price inflation. Of course, inflation in itself is a complex topic, but the point is that prices are rising across the board without a corresponding increase in workers’ wages.

This puts a disproportionate burden on many households across the country, forcing people to spend more money on housing, groceries and other necessities. With this increased financial burden, people have less money to spend on investments.

Lack of new innovation

Thanks in part to a lack of talent, there has been a lack of new innovation in the cryptocurrency space.

Bitcoin has long been the most prominent and emblematic coin in the crypto world. However, it’s not without its flaws – including a huge reliance on energy consumption to keep going.

Without new coins to solve some of these problems and compensate for some of these weaknesses, investors can estimate the value of crypto overall.

Interest rate increases

It doesn’t help that the Federal Reserve has announced plans to raise interest rates gradually over time.

For the past couple of decades, the central bank has kept interest rates artificially low in an attempt to stimulate economic activity and make money readily available. The downstream effect is that more people enter leveraged investment positions. As a result, more people are willing to shop frequently.

With the Federal Reserve’s recent reversal, leveraged positions are no longer as feasible and investors are necessarily more conservative in their investment decisions.

Higher offer

The crypto market can also be described as somewhat oversaturated.

Although the biggest names in the industry haven’t changed much, thousands of new coins have appeared in recent years, diluting the market, confusing new investors and giving crypto pessimists a strong reason to leave and never look back.

Liquidation

With concerns about the short-term and long-term future of cryptocurrency and the economy in general, consumers are increasingly looking to liquidate their positions. They would rather have cash, or true safe-haven asset classes, than continue to hold an asset they believe is volatile or risky.

Contagious emotions

As more organizations report falling cryptocurrency prices, the market generally succumbs to contagious emotions. This happened in reverse in 2017, when Bitcoin exploded in price initially.

Most of this momentum can be attributed to overhyped news stories. In some ways, the crypto market is much more sensitive to publicity and hype than other markets.

Reasons to be a crypto-optimist

Evidence shows that there are many factors influencing recent falls in crypto prices. These factors may very well lead us to the predicted crypto winter to come. However, there are also some very strong reasons to be a crypto-optimist.

Crypto is the long-term future.

“True believer” crypto enthusiasts have never deviated from their view that crypto is the future. On the contrary, cryptocurrency has always attracted attention due to its decentralized, secure, private and sound money status.

These characteristics have not disappeared. If you thought cryptocurrency was the future a few years ago, nothing should change your mind on that front. After winter comes spring.

Falling prices represent buying opportunities.

Falling prices are not necessarily a bad thing for investors.

If you believe that prices will rise again, you can continue to hold your current assets without realizing any of your losses. Even better, you can take advantage of this discounted price and add your positions.

Weak and erroneous coins reveal themselves.

Challenging periods in the market often reveal weaknesses in underperforming and overhyped assets.

Weak and flawed coins reveal themselves at record speed, while the toughest and most resilient coins suffer only modest losses. This is a great learning opportunity for avid coin investors.

Reassess your portfolio

Regardless of where you stand on the debate about the near future of cryptocurrency, this is an excellent time to reassess your portfolio.

If you’re a crypto-optimist, this is your chance to pick up some of your favorite coins at rock-bottom prices. If you are skeptical or worried about the future, this is your chance to reallocate assets and diversify.

No matter what your opinion is or what your takeaways are, there are ways you can take advantage of this situation as an investor.

The post Are we headed for a crypto winter recession? appeared first on Due.