The unstable nature of cryptocurrencies is known to every digital money holder. Such surges attract those who want to make a quick buck on virtual coins. However, cryptocurrency quotes do not always move upward. There are long bearish cycles that strike fear into even seasoned investors.
"Cryptowinter is coming," market participants joked in 2021, disbelieving rumors of an impending cryptocurrency winter. Crypto-enthusiasts were split into two camps in the run-up to the depression – some believing bitcoin was unshakable, others believing cryptocurrencies were a global scam and the market would surely collapse in 2022.
Indeed, 2022 began with a sharp collapse in cryptocurrency rates. The bearish trend "cut" the capitalization of the crypto market, and miners were left without their usual income. Cryptocurrency projects began to cut employees and long-term hodlers began to sell off their assets. For some, the current crypto-winter has turned to losses, while others have seen in it new opportunities. What does this concept mean, how has the cryptocurrency winter affected market participants and how can you make money from it – this and much more we will consider further.
- The meaning of the term
- Fundamental reasons
- Depth and duration
- Mood of crypto market participants
- Positions of hodlers and miners
- How is the current cryptowinter different from previous ones?
- Who has been hit by cryptowinter ?
- Who benefited because of cryptowinter?
- How long will cryptowintera last?
- When will the new cryptowintera start?
What is cryptowinter?
The current year was the 5th time the bitcoin cryptocurrency chart has fallen below its 2-year moving average. The recession is likely to continue into Q3 and Q4 of 2022. Such a period is called the cryptowintere of 2022. What does the term mean and how is it different from other declines in cryptocurrencies?
Over the years, the number of bitcoin holders has doubled every year. Between 2014 and 2019, the increase in the number of users correlated with the coin's appreciation at all. Bitcoin's appreciation has slowed in 2020, but the number of holders is growing continuously. Were it not for the sagging U.S. stock markets, bitcoin would have solidified at the $60,000 mark in 2022. However, in 2022, cryptowintera began and disrupted the plans of crypto enthusiasts.
Cryptowinter is a period when bitcoin and altcoins show extremely low values. Low value refers to market quotes that fall well below multi-year highs. Investors try to get rid of cryptocurrency and stage a panic sale. The news backdrop becomes sharply negative, exacerbating the situation for crypto holders. Fear reigns in the market, traders stop opening long positions due to lack of financial motivation, bears take the initiative. There are many more circumstances, as there are global factors triggering the collapse. That's why crypto-winter is so named.
Any recession has good reasons, cryptowinter comes for the following fundamental reasons:
Huge energy consumption. Any cryptowinter is accompanied by claims that bitcoin generation requires a huge amount of electricity, comparable power is spent to power Sweden or Egypt. This is the reason why Tesla refused to accept bitcoin as payment for cars. This factor is not key.
Bitcoin ceases to act as a protective asset. The market crash shows that bitcoin was called "digital gold" prematurely. It was expected that because of inflation, people would start buying up digital assets to protect their fiat savings from depreciation. However, investors preferred physical gold, real estate and other classic assets that have been proven for centuries. Bitcoin is unlikely to be a safe haven for investors in the future, since new U.S. legislation means that gains will be taxed. Bitcoin is also an untested risk hedging tool because it has not been "tested" during global crises.
During a depression, growth drivers come to an end. The market stops reacting to big purchases of "whales", positive innovations of the industry remain unnoticed. But rumors about key rate increase or new Biden's tax laws collapse cryptocurrency quotations immediately after the announcement. The market reacts quickly to negativity, you could say that "the rocket ran out of fuel".
Over-regulation of the industry. Even before the crypto-winter, news of China's mining ban began to affect the bitcoin exchange rate. Cryptocurrencies are also competing with the classical credit and financial system, which is not satisfactory to conservatives. New laws related to cryptocurrency are another factor that can affect the value of assets.
Market cyclicality. There are different models for valuation, the 4-year cycle associated with bitcoin halving is usually highlighted. The reward for a mined block decreases regularly. In 1.5-2 years after the halving, the price peaks, then there is a pullback. The cryptocurrency market develops unevenly, but cyclicality has a huge impact on it.
Market euphoria. The participants get greedy, and cryptocurrencies start to be bought up at any price. Experienced participants begin to lock in profits, the higher the volume of sales, the more bearish sentiment begins to encompass traders. Profit fixing is the trigger for the start of a panic sale of coins. Even those who had planned to hold bitcoin for decades join in.
Cryptowinter in 2022.
Analysts have learned how to find the answer to the question – when will cryptowinter end? A special parameter called "depth of cryptowinter" has been developed. It is a comparison of historical maximums (ATH) with cycle minimum values. It is the depth that shows the impact of cryptowinter on the market as a whole.
How long will the cryptowinter of 2022 last – the duration can be estimated by comparing the current "winter" with all previous ones:
Cryptowinter 2015 caused bitcoin to roll back from $1148 to $196, a drop of 82%;
Cryptowinter 2018 – market players faced bitcoin at $3128, the pullback was from a peak of $19891, a drop of 82% as well;
crypto-winter in 2022 – the preliminary estimate of the drop is 73%, which is similar to the beginning of the coronavirus pandemic in 2020.
Given the fact that the last bitcoin rise was not so dynamic and prolonged, the current correction of 73% may be enough to push back from the local bottom and go up. But it is too early to rule out a deeper correction. Experts say that bitcoin's strongest support is near the $9000-13000 mark.
The end of the crypto-winter is near, as previous recessions lasted 12 months in 2015 and 6 months in 2018, respectively. In any case, there will be a prolonged cryptowinter this year as the Fed's aggressive policy is now in full swing. The above allows us to draw cautious conclusions about how long the cryptowinter will last. It will not last more than 12-15 months, which means the beginning of the recovery cycle as early as 2023.
Mood of crypto market participants
The most important characteristic of any crypto winter is the mood of investors and their subjective attitude to what is happening. Everyone sees the prospects differently, but holders' assessments are extremely important for analyzing strategies of different groups of investors, hence for the dynamics of the value of coins in the medium term.
There are two main indicators to estimate the psychological situation in the market. NULP – an indicator of net unrealized profit or loss. It reflects the difference between the market value of the asset and the actual selling price of the asset. If the actual price of bitcoin is significantly lower than the purchase price, a bearish trend and a massive sale of coins begins.
The history of NULP shows that cryptowinter get "softer" with each season. However, investors get desperate and sell off all their assets, expecting an even stronger decline. Keeping the price at minimum levels are loyal hodlers, who do not react to what is happening because they plan to keep bitcoin for a very long time.
Another important indicator assessing market sentiment is the Bitcoin Fear and Greed Index. This unique tool allows us to understand if there will be a cryptowinter and how traders will behave in a given period of time. The index is made up of volatility values, trading volume, material from social networks, surveys and various trends.
The index shows that the current cryptocurrency winter has one thing in particular: extreme investor fear. The tool appeared in 2018, so it caught the previous recession, then the fear level stopped at 10. This year, the indicator arrow fell to the 6 mark, which means incredible terror and complete hopelessness of the cryptocurrency. The event dealt a terrible blow to the psyche of the participants, which will have far-reaching consequences.
The positions of hodlers and miners during the crypto-winter
Hodlers are long-term investors who are not afraid of sharp price drops. They make a special contribution to cryptocurrencies. During recessions and global sell-offs, hodlers provide stable demand for coins, support prices and create a base for the next market cycle.
Long-term investors have a great deal of experience, thanks to it they do not succumb to emotions, and they are more accurate in predicting local lows and highs. The main bitcoin supply is controlled by hodlers, so we see waves on the chart – when the market overheats they sell some coins, and when the market capitulates they buy in huge quantities. Such tactics have the greatest effect and differ from the behavior of other crypto market participants, who buy at the highs and then sell assets at the lowest price in a panic.
The dominance of hodlers has reached historic levels, they control approximately 65% of the total number of bitcoin coins. Also, when analyzing any cryptowinter, you need to consider the reserve risk. This is the ratio of the bitcoin price to the total stock of coins placed in hodlers' wallets. This value reflects cryptocurrency holders' confidence in buying coins at a given price.
Minimal reserve risk values are marked just in 2022, which means that cryptowinter becomes the best time for long-term investments. The risk of getting losses becomes zero.
Miners are another category affecting cryptocurrency pricing. Two major coins (ether and bitcoin) use proof-of-work algorithm. Consequently, cryptomainers must regularly invest in asics and graphics cards, space rent and cooling. They also have to cover the costs associated with electricity costs. Coin miners are therefore extremely sensitive to a drop in the value of coins below the profitability level of mining.
Under such conditions, miners begin to sell off accumulated assets to maintain further ability to mine cryptocurrencies. Hashrate is a concept reflecting the computing power of devices continuously connected to the network to find solutions. Even during the crypto-winter, the hash rate does not stop growing. Devices start to get cheaper, so big players buy them up and channel them into coin mining.
There are only two exceptions – cryptowinter 2018 and China's mining ban in 2021. During these periods, the hash rate of the network began to fall, stagnation lasting several months in each case. Overall, the increasing hash rate is a positive development. The large number of participants speaks to the decentralization of cryptocurrencies, which also increases security.
Powell's multiplier allows estimating the profitability of mining in dollar terms. The indicator reflects periods of surrender for miners, as well as time periods when miners make super profits. Miners can also feel a strong recession, but the current winter does not yet allow us to talk about a complete surrender. Although the current cryptowinter has not reached local lows. When the cryptowinter ends, many of the miners will have already left the industry for good.
Another echo of uncertainty is Ethereum's transition to a new algorithm. If there is no merger in mid-September 2022, cryptowinter 2017 will seem "soft." The market will start another bearish rally. Therefore, much will also depend on the developers of this coin.
How is the current cryptowinter different from previous ones?
It is already clear that the current cryptowinter will not be too severe – the forecasts show that bitcoin rate should have collapsed below $12,000, but it didn't happen. Also, the current cryptowinter will be longer than the 2018 recession. But when the cryptowinter of 2022 ends, we should expect a more rapid rise in quotations than during the previous cycle.
There is another feature related to bitcoin holders – cryptowinter has shown that financial literacy among average holders is declining. This suggests that cryptocurrencies are becoming a mass phenomenon and holders are no longer only professional traders.
Indeed, the latest cryptowinter has other differences. For example, the emotional state of traders and coin holders has become more unstable. Spontaneous trading decisions are much more common now. Cryptowinter 2022 is characterized by a particular fear among investors, which has not stopped for a long time. It is intensified by extreme panic. Fear and panic have definitely increased this year.
Also, the current period is characterized by the influence of fundamental factors on coin prices, rather than the news background, as in previous cryptocurrency crises. They have more impact on bitcoin and other coins than rumors, tweets, and news reports.
Another difference is the transparent and clear nature of the downturn. Reserve risks are at a minimum, the network hash rate is growing steadily, and hodlers remain loyal. All this suggests that the future of bitcoin and major altcoins is not threatened.
Who has been hit by cryptowinter?
Many market participants suffered financial damage from the cryptocurrency winter. Let's take a look at the industries and areas that suffered the most:
Mass layoffs – Real people who were once employees of cryptocurrency-related companies were affected. In the first 5 weeks of the recession, about 2,000 people were laid off. For example, Coinbase cut 18% of its workforce (1,180 people).
Funds. Investors began withdrawing funds en masse. Assets managed by crypto investment funds reached a record low of 37% less than in May 2022.
Disappearing cryptocurrencies and unstable Stablecoins. The most prominent examples are Terra, USTC, and HUSD.
Lending platforms and other projects. Celsius was the first major platform to shut down withdrawals for its customers. Three Arrows Capital and Vauld also collapsed.
Cryptocurrency exchanges were also no exception. They suffer losses and pay for them from their own budget. The following projects closed – CoinFLEX, 2gether, Zipmex.
Miners and ordinary coin holders. The price of mining equipment plummeted, miners have to pay huge loans because they bought the equipment at a completely different price. Holders have also suffered because of the collapse in capitalization. Exiting the position threatens significant losses, for many it means blocking funds.
The list is incomplete, as there are many more affected.
Who benefited because of cryptowinter?
The main beneficiaries are the whales. It is the long-term holders who are buying up cheaper coins en masse in order to sell them at a higher price in a few years. The following participants are also profiting:
Visa, Mastercard, Robinhood, Revolut, Square – payment systems receive huge rewards for cryptocurrency transactions, cryptowinter is not an obstacle to this process;
huge companies – Tesla, MicroStrategy, Grayscale, the average purchase price for these companies is always below the market, so they are always in profit despite temporary difficulties;
Holders of certain coins – many coins go against the market, such as Ethereum Classic, Shiba Inu, Ergo and others;
manufacturers of mining equipment – low prices allow to purchase equipment, maintain it and prepare their miners for the new bull rally.
For many, cryptowinter opens up opportunities. Therefore, many should reconsider their positions and try to find the positives from a financial point of view.
How long will cryptowinter last?
The market is beginning to recover from the fall, but it is too early to talk about a full recovery. The most accurate forecast was given by specialists of Grayscale Investments. They believe that we have passed the "equator" of the cycle, which began in 2020. The cryptowinter itself, according to the fund analysts' estimates, began only on June 13. The company calculated the date by finding a certain point at which most assets are held below the value at which they were bought.
How long will the cryptowinter last – it should take 250 days from its beginning. That's what the experts who made the calculations say. Its end will be in March 2023. After the winter there will be a long recovery period. Experts assert that the next bull cycle which everybody expects so much will begin only in 2024-2025.
The protracted nature of the event doesn't mean that one should wait 2-3 years and only then invest in cryptocurrencies. This period can be spent profitably, even if you don't have much money. It is enough to buy popular meme coins, which will start to take off in a few years. Their features allow not only "to sit out the winter", but also to get a good income in the long run.
When will the new cryptowinter start?
First, we should wait for the end of the bearish trend. Then a bull rally will start in 2024, which will correlate with bitcoin's halving. The reward per mined block of the main cryptocurrency will drop to 3.125 BTC in 2024. The deflationary mechanism will have a positive impact on the value of crypto assets.
The end of a new long-term uptrend and will be the beginning of a new crypto-winter. This event could start as early as the end of 2025. There is also a concept of "altcoin season", it may not coincide with bitcoin cycles. Therefore, much will also depend on the duration of altcoin's future dominance in the market.
Another indicator of the onset of the new crypto-winter is the return of BTC to the $6000-65000 per coin mark. After the recovery, a rally will begin, probably with an expected target of $100,000 per bitcoin. Only after that a global correction will begin.
It is also worth remembering about corrections and not to confuse them with the cryptocurrency winter. If the price of the asset fell by 10-20%, it is a short-term correction, 50-83% – at these values we can talk about a serious recession. All future winters will be milder, analysts say. The number of users of cryptocurrencies is increasing, they are firmly embedded in people's lives. Over time, these trends will intensify, holders will be less likely to give up coins and will not hold global sell-offs.
Therefore, over time, cryptocurrencies will soften. It is worth remembering that cryptocurrencies will take decades to develop. Therefore, the easing process will be gradual.
All of the above allows us to draw practical conclusions:
The current cryptowinter is considered "soft", if you translate past cryptowinter to the current one, the price of bitcoin would be $9000-11000;
the recession will be prolonged, this suggests that the rally will also start suddenly and will be powerful;
the literacy of participants is not increasing – many investors are prone to reckless actions;
hashrate is growing steadily, so the future of cryptocurrencies is not threatened;
the market began to rely on fundamental factors, this indicates the formation of cryptocurrencies as independent exchange-traded assets; the news background ceases to have a significant impact.
Negative processes are not only occurring in the cryptocurrency world. For example, even experienced participants did not expect such a tumultuous inflation that manifested itself in the United States. If the U.S. government does not curb the dollar, the consequences will affect not only cryptocurrencies, but also other assets that are traded on classic exchanges.
Experts predict that the U.S. will emerge from the crisis only in mid-2023. This factor will also strengthen the position of cryptocurrencies. The year 2022 was the year of the global recession, so cryptowinter may intensify. How long will cryptowinter 2022 last – it has another 8-9 months to spare.