The biting wind of winter or the downfall of a season?
‘No winter lasts forever, and no spring skips its turn’. We all may find a certain sort of comfort from the writings of American author Hal Borland. Quotes, whether in a Tweet or a meme, explain better our emotions and the general sentiment in crypto better than we can individually account for.
The familiar term “crypto winter” probably had a lot to do with Sean Bean’s short-lived portrayal of grim-faced snow-bred warden in HBO’s take on Game of Thrones. The saying ‘winter is coming’ was considered in the series to be a synonym for an ominous warning regarding future trouble and constant vigilance. Currently, a similar period of trouble is taking over the crypto market as well.
We can’t ignore the signs (more like the loud facts, really) that the crypto market is performing poorly. And this isn’t just digital assets that are being battered. It’s across the entire sector, including NFTs, including metaverse and blockchain gaming projects that we’re hugely supportive of.
While price isn’t the sole market of success or failure, it signifies negative sentiment and lower average asset values due to a broad swath of cryptocurrencies. In simpler words, a crypto winter is a period in time featured by lower cryptocurrency prices.
The overall impact is not dissimilar to bear market outcomes. Long-lasting crypto winters tend to devastate young startups and squeeze out short- and medium-term investors.
Take a look at Decentraland, for example, supposedly the biggest brand and crypto (MANA) in the metaverse category. But with only about 25 users with less than $5 of volume over less than 40 transactions every day for the past 30 days (10 October data from Dappradar), can we really say that this is a healthy sector? If the biggest of them all is doing this poorly, how can this augur well for the smaller projects?
Some analysts think that the wheels of the crypto winter began turning earlier this year and that the dreaded season is already upon us. Similar to other markets, crypto was feeling the effects of world events and turmoils in global finance. The occurrence of high inflation has driven rising interest rates in many countries, not least the United States, known as the biggest crypto player in the global finance scheme.
The straw that broke the camel’s back was when Terra and Luna crashed in May to set in motion a domino effect in the crypto market.
However, this is not the first crypto winter we have gone through. The former crypto winter (from whence the term came) lasted from January 2018 to December 2020, and was widely covered in the media as a bubble that was about to burst. This was the second crypto winter since many consider the first having taken place in 2014 when 1 BTC was trading for slightly more than $1,000 on 6 January, only for prices to drop the next day and remain below $1,000, never recovering until February 2017.
Hence, former crypto winters lasted a few years, and many experts now consider that the current winter is going to extend beyond 2022 as well. If history is any kind of guide, the contemporary downtrend could drag on for some time.
But is this merely another cycle to live through or is this the end of all seasons? Could it be, as they say, the third time’s a charm?
The chilling impact of the 2022 crypto winter
Aside from the obvious impact on the value of cryptocurrencies during any crypto winter, digital currencies are not the only things suffering in such a climate. Companies and people who deal with crypto in any manner are going through troubled times as well. Many blockchain and crypto companies experienced losses and witnessed severe layoffs, from small businesses to publicly traded companies such as Coinbase. As indicated by reports, there have been approximately 5,000 layoffs in the crypto business world since April 2022. Analysts think that there is some additional pain ahead for many companies since crypto firms are already struggling to pay off their debts and process client withdrawals.
The downfall of the crypto market had a direct impact on the active number of crypto users as reported by the Bank of America. Specifically, there was a more than 50% drop in the number of active users between the peak of approximately 1 million users in November 2021 and roughly 500,000 active users in May 2022. The negative sentiment towards the crypto market increased in 2022 between April and June following the Terra collapse, contagion-related risks, and severe selloffs. In June, the focus shifted to recession and contagion fears in the crypto community with Bitcoin closing down 40%.
When talking about contagion risks, there is an interesting fact to point out. The value of NFTs has fallen nearly 83% since the beginning of 2022. Hence, the early stages of crypto winter had an indirect impact on the digital art and collectibles market as well. However, NFTs may be a ticket out of the crypto winter as the relationship between crypto prices and NFTs is quite muddled.
While digital currencies lost $2 trillion in value between the 2021 peak and July 2022, NFT collections were still able to command high asking prices. The relationship between cryptocurrencies and NFTs may be described through a parent-child analogy as the market was weak and dependent on the crypto market in the beginning, and similar to teenagers who overestimate their readiness for the outside world, the NFT market rebelled and experienced a critical hit. After realizing reality may be harsh, the NFT market matured and according to some, it may be just capable enough of surviving the winter.
The crypto winter survival guide
Don’t panic. There is nothing unusual about the crypto winter. The ongoing financial crisis in the world triggered the downtrend of the crypto market as well. It is not really clear when the crypto market turbulence will finally settle. Even gloomy times have their advantages. As we all know, what doesn’t kill you makes you stronger.
For example, crypto winters are great times to build on past failures, namely on the fact that not many products have found their market fit without any issues for users. For market expansion and mass adoption, the crypto world needs more such products and services. Secondly, winters are harsh and that characteristic is often associated with the survival of the fittest. Industries prosper when they are filled with those that have the potential to survive.
If this is your first crypto winter, welcome aboard.