What is crypto winter? When does the encryption winter begin? Cryptocurrency has had better days. As the leader of the wider cryptocurrency market, Bitcoin (BTC) recently hovered around $20000, 65% lower than the peak in November last year. It is not only Bitcoin, ETH and other leading counterfeit currencies, such as Cardano (ADA) and Polygon (MATIC), that feel downward pressure. So far this year, they have all fallen by more than 59%. These disadvantages are also felt in the wider field of encryption. ProShares Bitcoin Strategy ETF (BITO) is the first cryptocurrency ETF, which has fallen by more than 58% so far this year. Experts have called it the next "crypto winter". The last winter of cryptocurrency lasted nearly three years from January 2018 to December 2020. This makes people wonder: can cryptocurrencies withstand such a long period of contraction again?
What is crypto winter?
The word "crypto winter" probably comes from HBO's hit series Game of Thrones. In the program, the motto of the Stark family is "Winter is coming". It was seen as a warning that there could be a protracted conflict on the continent of Westeros at any time.
Similarly, there may be long-term problems in the encryption market. In this difficult time, you must remain vigilant and be prepared to sweep the market without too much warning.
To define this phrase more literally, crypto winter is the time when prices contract and remain low for a long time. Analysts believe that the emerging encrypted winter wheel has been launched in early 2022.
Igor Zakharov, CEO of DBX Digital Ecosystem, said: "The cryptocurrency market has felt the impact of events, especially the Russia Ukraine conflict that led to global financial turmoil."
Zakharov pointed out that high inflation has driven up interest rates in the United States, which is the largest participant in the cryptocurrency field. "When TerraUSD and Luna crashed [in May] and triggered the domino effect in encryption, the encryption winter had begun," he said.
Since November 2021, the cryptocurrency market has declined by 60% - from $3 trillion to less than $1 trillion as of the time of writing.
Intensify winter unemployment
Cryptocurrency itself is not the only thing suffering in this climate. The people and companies behind cryptocurrencies are also facing difficulties. Many cryptocurrency and blockchain companies have suffered huge losses and experienced large-scale layoffs. On August 19, Hodlnaut, a cryptocurrency lender, announced the dismissal of 80% of its employees.
Robin Hood (HOOD), which allows cryptocurrency transactions on its platform, fired 23% of its employees in August, saying that its 8% layoff in early April was not enough to deal with the collapse of cryptocurrency and the overall bear market.
OpenSea, the leading NFT market, cut its staff by 20% in July. This happened after the trading volume on its platform fell by 99% from its historical high in May.
Cryptocurrency exchanges have seen similar layoffs. One month before the OpenSea layoff, the exchange Crypto Com and BlockFi cut 400 employees altogether. At the same time, Gemini laid off 10% of its employees in the same period.
Tyler Winklevoss, CEO and President of Gemini, and Cameron Winklevoss announced in a blog post in June that the industry was entering a contraction period, which they called "encryption winter".
"This is where we are now, in the contraction stage of entering the stagnation period - our industry calls it 'encryption winter'." Winklevoss's memorandum cited "the current macroeconomic and geopolitical turmoil" as a troubling catalyst for decentralization.
Listed companies have not been spared. Coinbase (COIN), the world's only publicly traded cryptocurrency exchange, cut its staff by about 18% in June, and its share price has fallen by 75% so far this year. The report shows that up to 5000 people have been laid off in the encryption field since April.
Advantages of encrypted winter
This is not the first time that cryptocurrencies have swept the market in winter. The last cryptocurrency winter lasted from January 2018 to December 2020. This term may be first used in 2018, when the market value of Bitcoin fell by more than half, while other cryptocurrencies such as Ethereum and LTC also fell sharply.
From that experience, we know that crypto winter is very similar to the traditional bear market, and its results are not very different from those of other asset classes. In the long run, cryptocurrency has eliminated young start-ups in winter and provided top companies with opportunities to mature and prove their products.
Jake Weiner, founder and CEO of Uncommon, said: "In the past year, we have seen many new startups in the whole industry, many of which will fail."
Weiner pointed out that more cryptocurrency companies will cut their budgets as it becomes more difficult to compete for funds from venture capitalists. Unfortunately, some people will be forced to downsize.
"If the market continues to shrink long enough, not only poor companies but also some large companies will suffer," he said. "The good news for these companies is that, unlike the encryption winter in the past, many encryption [venture capitalists] have accumulated war funds that they will continue to deploy."
Once the encryption winter thaws at the end of 2020, an incredible growth period will last for most of 2021.
When does the encryption winter begin?
Analysts said that the winter of cryptocurrency usually begins when the price of Bitcoin drops sharply from its historical high.
BTC hit a 52 week high of $68990 in November 2021, and then began to decline further. In the past ten months, Bitcoin has suffered heavy losses, falling by nearly 65% from November 2021 to early September 2021. The original cryptocurrency has been hovering around $20000, slightly higher than the 52 week low of $17708 set by BTC on June 18.
As of the time of writing, Ethereum, the second largest cryptocurrency, has fallen 67% since its peak in November last year. Of course, many cryptocurrency investors want to know whether the merger of Ethereum can help the recovery of the second largest cryptocurrency. But up to now, the upgrade result is still inconclusive.
The merger is the time when Ethereum will convert from the workload proof agreement to the equity proof agreement.
However, experts said that the expectation of further tightening of monetary policy by the Federal Reserve is exacerbating the current economic downturn, and institutional investors are promoting sales.
Any investor who bought Bitcoin in the past year will suffer as the original cryptocurrency has declined.
Before the last cryptocurrency winter, Bitcoin reached a high of nearly $19500 in 2017, and then fell to less than $3300 in 2018, with a loss of at least 83%.
Cryptocurrency as a risk asset
The cryptocurrency market soared from the end of 2020 to 2021, partly because the Federal Reserve injected unprecedented liquidity into the financial market.
This helped drive the encryption market, releasing a major phase of rapid growth, with thousands of new encryption projects added in 2021. This huge growth stage continued until the end of last year and began to fall back.
"I think the risk of cryptocurrency has increased in recent months. Specifically, speculators were defeated when they saw Bitcoin plummet from more than 68000 dollars to the current price of about 20000 dollars," said Robert Johnson, a professor of finance at Hyde School of Business at Craton University.
Will cryptocurrencies make a comeback?
When predicting the future of the encryption market, most experts said that "stronger cryptocurrencies" would prevail.
But Johnson said, "Bitcoin and other cryptocurrencies are the privileges of speculators. No one should consider buying bitcoin or any other cryptocurrency as an investment", just like buying stocks and commodities.
However, some investors still like the callback, believing that it is the time to double bet on the market for a long time. Once the global political and economic crisis subsides, they place their hopes on the revival of cryptocurrencies.
For example, even with all the negative news surrounding cryptocurrency, Charles Schwab launched their cryptocurrency theme ETF (STCE) in mid August. STCE has managed $7.6 million in assets. ETF tracks companies that can benefit from developing and implementing cryptocurrencies and other digital assets. The 776 company of Alexis Ohanian, the co-founder of Reddit, raised nearly $200 million for a new fund focused on investing in cryptocurrencies. Some investors either did not see or did not believe the obituary of cryptocurrency.