While the global stock market and even the bond market have been tumbling so far in 2022, they are nothing compared to the carnage we’re seeing in the cryptocurrency world. Bitcoin is down over 50% this year, Ethereum is down almost 70%, and many more coins and tokens are down even more than that, with some crashing completely.
These highlight the extreme swings that are characteristic of the crypto sector. It was only a few short months ago that the price of Bitcoin was closing in on US$70,000, with predictions that it would hit US$100,000 in no time. Multi-millionaires were being created overnight, and not just from ‘serious’ projects like Bitcoin and Ethereum, but from meme coins like Dogecoin and Shiba Inu.
What a turnaround we’ve seen since then.
The term ‘crypto winter’ has started to be thrown around lately, and the massive pullback in prices is putting immense pressure on some of the biggest companies in the space.
Crypto winter is a term used to describe a period when crypto prices fall and remain low for an extended period of time. The last crypto winter started in January 2018 and ended in December 2020.
The history of the crypto sector has tended to follow a cycle of price action. Through 2020 and 2021, we saw the parabolic price rises that have occurred at various points throughout the history of crypto. During these periods, mainstream projects like Bitcoin and Ethereum experienced strong price growth and increased coverage in the mainstream media.
Social media adds to the buzz, with YouTube channels and TikTok and Twitter accounts covering the latest in the crypto world surging in popularity.
But the faster they rise, the harder they fall. This is most definitely true in crypto.
Millions can be made in a crypto bull market in an astonishingly short period of time. The flip side is that millions can be lost just as quickly. This dramatic crash usually signals the beginning of a crypto winter.
This term, crypto winter, is used to mark an extended period of low prices. When crypto crashes, it really crashes. With millions lost, many investors get burned and lose interest. The media moves on to the next big story, and the social accounts go cold with rapidly dropping viewer numbers.
Of course, the die-hards stay focused and interested, but it can be a difficult time to remain invested. Crypto winter can last years. This is quite different to the stock market, where the average length of a bear market is just 289 days.
The cryptocurrency industry is already bracing for impact. The second-largest crypto exchange in the US, Coinbase, has recently announced that it’ll be laying off 18% of its workforce. It is not alone, with other industry heavyweights, BlockFi and Gemini, also announcing significant layoffs.
Things are even worse at major DeFi player Celsius, who has recently frozen all assets under its custody, meaning investors are unable to withdraw or transfer their holdings off the platform. Some have been sceptical of Celsius’ business model for a while, given that it has been offering yields (interest rates) of over 18% on crypto deposits.
All in all, it’s going to be a challenging time for companies and employees in the space. There’s been a mass exodus in the tech industry, with engineers and developers leaving traditional tech companies to work at crypto and Web3 startups. Many might be considering whether they made the right call.
But what about investors? With cryptocurrency prices collapsing, it could mean the opportunity to pick up coins and tokens and bargain basement prices. It could also mean catching a falling knife on a project that’s going to zero.
That’s the tradeoff with any investment, but particularly with cryptocurrency. With high potential rewards comes high risk. Investors looking to get into crypto should think of it as a gamble. There’s a chance that you could make a lot of money, but this could be many years away. There’s also a chance that you’ll lose everything you invest.
If you’ve been invested for a while and felt the full force of the crash, you’ve got the same decision to weigh up. If you cut your losses and move your money to more traditional assets like the stock market, your potential returns will be lower, but so will your risk. The chance of losing everything in a diversified portfolio, such as an index ETF is practically zero. That’s not to say it won’t still be volatile, but the entire stock market going to zero basically can’t happen.
By definition, crypto winter is likely to last for some time, potentially years. If you’re already invested or considering investing, make sure you can afford to stay the course for many years to give yourself the best chance for the big payoff in the end.
Also Read: How to Invest in Cryptocurrency
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