During the November rally, crypto exchange CEOs and price analysts were confident that Bitcoin would soon reach $100,000.
It didn’t come close. Today, it trades for under $23,000 – 67% down from its all-time high.
Fear is in the air. Crypto companies are failing left and right. Theories of an extended “supercycle” bull market have expired and been replaced by acceptance of the “crypto winter.” The only question that remains is: when will it end?
Read below to learn what to expect for cryptocurrency prices based on previous bear market cycles. We’ll also examine the key differences surrounding this particular winter, and where industry experts think the market goes next.
What is a Crypto Winter?
A Crypto winter is when cryptocurrency prices have dropped substantially, and stayed low for many weeks or months. It often follows a historic rally to all-time highs, from which the market corrects by as much as 80%.
Crypto has always been a highly volatile asset class, so such troughs are both familiar and expected among industry veterans.
Reviewing Previous Crypto Winters
Crypto winters (and their counterpart “crypto summers”) have historically alternated in periodic four-year cycles. The years 2013, 2017, and 2021 each marked rallies to new all-time highs, whereas 2014 and 2018 made for pronounced bear markets.
Four-year cycles are thought to be triggered by Bitcoin’s supply issuance schedule. The cryptocurrency is programmed to cut rewards for Bitcoin miners approximately every four years, creating supply shocks that pump its price about a year down the line.
These have historically culminated in overzealous market bubbles which eventually burst, thus creating a crypto winter.
For example, Bitcoin experienced a reward “halving” on July 9th, 2016 from 25 BTC to 12.5 BTC per block. The asset entered a year-long bull market afterward, touching $19,000 before retracing to $3200 in December 2018.
What’s Different About Crypto Winter 2022?
Well, it’s been another four years since 2018, and we’re in another bear market. Same same, right?
Not exactly. While crypto did seem to rise and fall on schedule, new forces are guiding the market’s movements besides Bitcoin’s code.
A New Type of Leverage
Leveraged trading has been around for years, but has taken on a new form over the past few years. In 2017, it was mostly provided through crypto trading platforms to retail investors through derivatives products.
By contrast, leverage in 2022 was highly concentrated among trading and lending firms using retail depositors’ money. These firms – the modern equivalents of shadow banks – attracted depositor money through the promise of yield generation on their crypto assets. That brings us to the second point:
From defi protocols to centralized lending, crypto today is rife with promises of unsustainable yield dwarfing anything available in the fiat market.
Similar Ponzi schemes have taken off in previous cycles (see BitConnect). However, modern platforms have often presented their yield products as risk-free “savings” or “interest” accounts. This lures unsuspecting investors into gambling away their funds.
For instance, former “stablecoin” TerraUSD once generated 20% APY for holders on Terra’s Anchor Protocol but has since lost virtually all of it value.
Crypto lending platform Celsius offered 17% APY on some assets before June’s market collapse. It became the first platform among many to publicly halt user withdrawals as it hurriedly paid down highly leveraged positions in the defi space. It has now filed for bankruptcy, with no guarantee that users will see their funds again.
3AC and Crypto Contagion
The industry’s risky lending practices extended not only to defi, but to one another. In June, crypto hedge-fund Three Arrows Capital (3AC) was liquidated on multiple loans and rendered insolvent.
This led to liquidity issues at numerous other platforms. As dominos continued to fall, crypto exchange FTX had to step in with capital to stop the bleeding.
Yet even the better-managed crypto heavyweights have been battered in recent months. Mass layoffs have been announced everywhere from lending firms like BlockFi to ASIC providers like Compass, to exchanges like Coinbase.
OpenSea – the world’s largest NFT marketplace – announced a 25% downsizing this month. When explaining the decision, CEO David Finzer blamed an “unprecedented combination of crypto winter and macroeconomic instability.”
This brings us to our final point:
Central Bank Pressure
The crypto winter timeline has coincidentally lined up with historic interest rate hikes from the Federal Reserve. In its war to combat raging inflation, the Fed has sent waves of fear throughout not just crypto, but the entire stock market.
Unlike historic cycles, Bitcoin and cryptocurrencies now trade in near tandem with high beta tech stocks. In other words, when something hurts the stock market, it hurts crypto too – and worse.
When Will the Crypto Market Bottom?
With so many different factors at play in 2022, how can we know what’s next for the market?
Technically, we can’t – but we can make informed estimates based on historic events. Here’s what industry leaders and analysts are predicting:
Grayscale: 250 Days to Go
Grayscale – the single largest Bitcoin fund in the world – claimed in its July 2022 investment report that the bear market has only just begun.
Specifically, it marked June 2022 as the beginning of a new cycle and crypto winter after Bitcoin’s market price fell beneath its realized price. In crypto, “realized price” is the average price at which all coins were last purchased.
Based on comparisons to when the indicator had flashed in prior cycles, Grayscale estimated that the crypto market will bottom in about 250 days.
Korbit: Before the End of the Year
The South Korean crypto exchange Korbit predicts that Bitcoin will rise before the end of Q4, as the Federal Reserve loosens monetary policy.
“This market downturn is similar to the ‘third crypto winter,’ which the markets experienced between the end of 2018 and early 2019,” said Jeong Seok-moon, the head of Korbit’s research unit.
According to Jeong, a tightening of monetary policy had sparked market downturns towards the end of 2018 as well. Likewise, he believes forecasting the crypto market’s recovery will largely relate to forecasting the central bank’s next move.
SBF: The Worst Has Passed
Sam Bankman-Fried – a crypto billionaire and CEO of FTX – sees little reason to think the worst of crypto’s crash may not have passed already.
The CEO has been involved in numerous institutional rescue attempts and bailouts amid the latest market turmoil. As someone with an insider’s perspective, he claimed early this month that only a few small exchanges are still at risk of total failure.
In an interview later that week, he claimed Bitcoin’s retrenchment below $30,000 was driven by the macroeconomy, rather than crypto-specific factors. Overall, he thinks it’s oversold.
“At this point, the current we’ve seen in markets I think is out of line with what three percent interest rates would normally represent,” he said.
Conclusion: Will Crypto Rise Again in 2022?
Though theories vary slightly, there’s overlapping agreement that Federal Reserve policy will play a hand in crypto’s short-term fate. Meanwhile, the crypto-specific crises may have already subsided.
Most don’t expect the industry to stay underwater for more than a year. Some investors are choosing to buy now before prices rise again – whenever that may be.