What you need to know – Forbes Advisor UK

Since the stablecoin meltdown in early May, all eyes have been on Bitcoin (BTC). That’s the key to the cryptocurrency market, and before the big downturn earlier this week, the price of BTC had struggled to stay close to the psychological threshold of £ 24,000.

But it is not just Bitcoin that has felt downward pressure. Ethereum (ETH) and other leading altcoins, such as Cardano (ADA) and Polygon (MATIC), have all been reduced by more than 60% so far this year.

Meanwhile, major crypto exchanges such as Coinbase and Gemini announced layoffs and layoffs in early June. Shares in Coinbase have fallen 86% from their 52-week highs, and the company has announced plans to lay off about 18% of its workforce when the crypto market joins US stocks in a bear market.

Tyler and Cameron Winklevoss, CEO and president of Gemini, announced in a blog post in June that the industry was entering a contraction that they called “crypto winter.”

“This is where we are now, in the phase of contraction that is about to enter a period of stasis – what our industry refers to as ‘crypto winter’.” The Winklevoss memo cited “current macroeconomic and geopolitical unrest” as a catalyst for this disturbing devolution.

What is Crypto Winter?

The term “crypto winter” probably came from the popular TV series Game of Thrones. In the show, the motto of House of Stark was “Winter Is Coming.” It was considered a warning that lasting conflict could descend on Westeros’ land at any time.

In the same way, a longer period of problems can settle over the crypto market. During this difficult time, you need to be vigilant and be prepared that chaos will sweep across the market without much warning.

To define the term even more literally, cryptocurrency is when prices contract and remain low for an extended period of time. Analysts believe the wheels of the new crypto winter were launched earlier in 2022.

“The crypto market has already felt the effects of world events, especially the Russia-Ukraine conflict that has caused turmoil in global finance,” said Igor Zakharov, CEO of DBX Digital Ecosystem.

Zakharov notes that high inflation has driven rising interest rates in the United States, which is the largest player in crypto. “When TerraUSD and Luna collapsed and started a domino effect in the crypto world, the crypto winter had already begun,” he says.

Since November 2021, the crypto market has fallen 60% – drastically falling from £ 2.5 trillion to around £ 825 billion at the time of writing.

The benefits of Crypto Winter

This is not the first time a crypto winter has hit the market.

The last cryptocurrency winter lasted from January 2018 to December 2020. The term was probably only used in 2018 when Bitcoin lost more than half of its market value, and other cryptocurrencies, such as Ethereum and Litecoin (LTC), fell sharply.

We know from experience that crypto winter is very similar to a conventional bear market, and the results are not so different from bear markets in other asset classes. Long-term, crypto winters weed out young startups and provide an opportunity for top companies to mature and prove their products.

“We’ve seen a lot of new startups in the industry over the last year, and many of them will fail,” said Jake Weiner, founder and CEO of Uncommon.

Weiner notes that as it gets tougher to compete for venture capitalist dollars, more crypto companies will cut budgets. Unfortunately, some will be forced to lay off staff.

“If the market stays in contraction long enough, it’s not just poor companies that will suffer – but some big ones as well,” he says. The good news for these companies is that, unlike previous cryptocurrencies, a lot of crypto [venture capitalists] have already collected war coffins which they will continue to distribute. “

When the crypto winter thawed at the end of 2020, it was a period of incredible growth that lasted for most of 2021.

When does the crypto winter start?

Analysts say that cryptocurrencies usually begin when there is a steep sell-off from an all-time high in the price of Bitcoin.

BTC reached a 52-week high of £ 57,000 in November 2021 before launching an extended downward trend. Over the last seven months, Bitcoin has experienced large losses, falling by almost 70% from November 2021 to mid-June. The last stage down has come in the middle of the Celsius scandal. The original crypto has regained some foothold from the lowest level in 52 weeks to trading at around 18,600 pounds.

Ethereum, the second largest cryptocurrency, has fallen 74% since its peak in November at the time of writing.

Experts say that expectations of more monetary tightening by the US Federal Reserve are exacerbating the downturn in June, and that institutional investors are driving sales.

All investors who have bought Bitcoin in the last year will have experienced losses, as the original crypto has slipped down.

Before the last crypto winter, Bitcoin had peaked at almost £ 16,000 in 2017 before falling below £ 2,700 in 2018, representing a loss of at least 83%.

Crypto as a risk asset

The crypto markets increased late in 2020 through 2021, partly because the US Federal Reserve provided outstanding amounts of liquidity to the financial markets.

This helped to nourish the crypto market, triggering a major hyper-growth phase, with thousands of new crypto projects added in 2021. The massive growth phase continued until the bottom began to fall late last year.

“When liquidity is withdrawn from the markets, the most speculative assets are hit hardest – and I would say there is no more speculative asset class than cryptocurrency,” said Robert Johnson, a professor of finance at Heider College of Business at Creighton University.

Is crypto roaring back?

When it comes to predicting the future of the crypto market, most experts say that the “stronger cryptos” will prevail.

“I do not expect the crypto to come roaring back as it did in 2021, because the tailwind of the Federal Reserve’s monetary policy has actually become a headwind for the asset class,” Johnson said, adding that despite the headwind, we could still see the cryptocurrency market rise from the ashes.

But some investors love the retreat, and see it as a time to double the market in the long run.

When Bitcoin is traded at around £ 25,000, slightly less than half of the 52-week high, investors see it as an opportunity to buy at a discount. They are betting on a crypto revival when the global political and economic crisis has subsided.

“This is my third crypto winter. There have been many ups and downs, but I see it as an opportunity, Fidelity Investments CEO Abigail Johnson told an audience at Consensus 2022 in Austin, Texas. “I was raised to be a contrarian thinker, and then I have this knee-jerk reaction: If you think the basics of a long-term case are very strong, when everyone else falls [out]it’s time to double down and go extra hard into it. ”