Crypto Winter: Why Is the Cryptomarket Crashing?

July 6, 2022

Investment

Ana Rojas

Every market has its ups and downs, and the crypto market is no exception. After rising phenomenally in 2021, Bitcoin and other cryptocurrencies continue to plummet. Some experts refer to it as ‘crypto winter.’

What is a crypto winter? This term basically means that prices have dropped a long way and then stayed low for weeks or months. The signs are everywhere: Terra (Luna) crypto crash in early May dragged the prices even further down, adding to the recession, and later on a lending platform Celsius Network halted withdrawals, prompting a sell-off that pushed Bitcoin to a 17-month low. And even though Celsius has since then repaid a substantial amount of its outstanding debt to Maker (MKR) protocol, signaling that the troubled crypto lending platform was trying to stave off a complete collapse amid credible rumors of insolvency, sentiment among crypto traders remains bearish.

So what is going on with the crypto industry and why is everybody referring to this year’s market situation as the new Crypto Ice Age? In short, why is crypto crashing?

Federal Reserve Tightens Policy

In May, the Federal Reserve hiked interest rates by a half-percentage point, something the world’s largest central bank hadn’t done in over two decades. This is an attempt to combat four-decade-high inflation that was driven, in part, by the unprecedented actions the Fed took two years earlier to stabilize the economy during the onset of the Covid-19 pandemic. How does it concern crypto? These tightening measures, along with geopolitical concerns, have had a dampening effect on financial markets, pressuring stocks and crypto as investors move away from riskier investments. Less investments mean a decline in crypto.

To add to the problem, a tech engineer Robert Metcalfe said that the value of a digital network is proportional to the square of the number of users connected by the ecosystem. If the Fed is hammering high-beta stocks and crypto and driving out the speculative players, they are de facto massively shrinking the network. This is a phenomenon referred to as Metcalfe’s Law. That makes a crypto winter all but inevitable.

Stocks and Crypto Aligned

For the majority of Bitcoin’s 14-year history, crypto markets generally haven’t moved in tandem with equity markets or broader economic trends. However, in the current bear market, both fields are experiencing recession. In fact, crypto has behaved much more like traditional ‘risk’ assets like tech stocks. There has been a significant migration of talent from traditional finance to crypto, which includes critical expertise in navigating complex financial environments. All of this makes the crypto market resemble a traditional stock market, and while the stock market is experiencing a recession, the cryptocurrency industry enters a new crypto winter.

Bitcoin Losing Its Value

The most popular cryptocurrency in the world has shed about 70% of its value since hitting an all-time high of roughly $69,000 in November. The overall market capitalization of crypto assets has dropped to less than $1 trillion from its November 2021 peak of $3 trillion for the first time since early 2021. Bitcoin has declined for nearly 12 straight weeks, marking one of the asset’s biggest slides in its lifetime.

Tether Losing $1 USD Peg

The price of Tether, the world’s biggest stablecoin and a cornerstone of the cryptocurrency ecosystem, slipped away from its $1 peg in May, intensifying worries amid a market-wide crash and plummeting cryptocurrency prices. Stablecoins are supposed to be a relatively safe haven in the otherwise highly volatile crypto markets. They are kept stable by being pegged to other assets – including fiat money like the dollar and tangible assets like gold – or through an algorithm.

With a market capitalization of more than $80 billion, Tether is by far the world’s biggest stablecoin and the third-largest cryptocurrency overall. It occupies a central role in the digital market and is used to complete other transactions and store value. However, regulation may cause these digital assets to lose their value. Global regulators, including those in the U.S., have identified stablecoins as an area of the cryptocurrency market in need of rules and guidance. Regulators are circling the sector, watching for signs of instability that might threaten their infant plans to rein in crypto. Even rules that were announced in spring have had to change in the wake of Terra’s collapse, with some jurisdictions preparing rules to ease the systemic impact of failed stablecoin systems. 

Contributing Factors 

Following the beginning of the crypto winter, companies including Coinbase Global have already announced layoffs and hiring halts in recent weeks, while major players in the space such as Voyager Digital are under pressure as a result of a breakdown in crypto lending. Crypto exchanges such as Gemini – which allow investors to trade digital assets – have also announced job losses. 

Other contributing factors to the crypto winter, according to market analysts, are high inflation and the overall geopolitical situation, including the ongoing conflict in Ukraine, which has heavily influenced the world economy.

Will Crypto Rise Again in 2022?

What worries the common crypto enthusiast the most is the future of crypto. Is this just another crash in the volatile cryptocurrency market, or is this the beginning of the end for this alternative asset class?

Well, first of all, this wouldn’t be the first time Bitcoin loses its value. Despite the long-term rise, Bitcoin has been dogged by periods where it’s fallen precipitously. The most recent has been since November 2021, when the prospect of rising interest rates and reduced liquidity in the financial markets have dropped Bitcoin’s price much lower. The price of Bitcoin is notoriously driven by sentiment. When the market shifts to its ‘greed’ phase, Bitcoin soars. In the ‘fear’ phase, Bitcoin’s price seems to find no traction, as sellers push its price lower amid bad news or general market malaise.

During its existence, the BTC price has shed half of its value more than 5 times. In the next bullish market, Bitcoin would rise again and become even more expensive. And even though this crypto winter is different, crypto-enthusiasts still see a future for the asset class.

Despite this, many traditional journals and experts are skeptical about the crypto market’s future. The Wall Street Journal says the crypto market was ‘built in part on swagger, enthusiasm and optimism,’ all of which are evaporating amid wider economic problems. Bloomberg adds to the negativity by saying that it will be hard for investors to decide which cryptocurrencies will survive or emerge strongly from this downturn.

Among the expected events in the second half of the year are possible regulatory clarity from the Biden administration and Ethereum’s transition to a Proof-of-Stake consensus mechanism. These two events may hold the crypto market from going into a deeper crisis.

Crypto Whales Are Actively Buying Crypto

In addition, the so-called crypto whales are not only holding onto their crypto, they are actively buying it: amid the ongoing crypto crash, on-chain data from IntoTheBlock indicates that so-called Bitcoin whales have been quietly filling their bags with more crypto assets. During massive sell-offs like this, many investors liquidate their positions. This, however, does not appear to be the case when it comes to those who hold more than 1,000 BTC. Blockchain analytics Glassnode said that whales are adding to their balance aggressively, acquiring 140,000 Bitcoin per month directly from exchanges. According to their data, crypto whales own as much as 8.69 million BTC, or 45.6% of Bitcoin’s total supply of 21 million.

Conclusion

The crypto market remains a volatile field that continues to follow its own rules and trends, making cryptocurrencies a risky and often unpredictable investment. However, as the hype around cryptocurrencies is dying down, this may present crypto enthusiasts with yet another opportunity for crypto buys. StealthEX is here to assist you in buying over 450 digital assets at modest prices. You can do this privately and without the need to sign up for the service.

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Don’t forget to do your own research before buying any crypto. The views and opinions expressed in this article are solely those of the author.