What’s different about this crypto winter?

What is happening in the cryptocurrency space today is very similar to what one would expect from a functioning but overheated traditional financial sector.

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Crypto winters are detrimental to the overall health of the cryptocurrency ecosystem as they reduce demand and slow down development. However, they should not be taken lightly as they also tend to be followed by bull markets. Anyone investing in cryptocurrencies should make sure they are prepared for these events by following predefined strategies and keeping up to date with current events.

Peaks and valleys

Cryptocurrency is a popular way to refer to market conditions where most cryptocurrencies suffer very large and prolonged value losses. The term was coined by Crypto Bobby on September 20, 2018, when he posted a Twitter thread describing how he saw the prices of most cryptocurrencies fall drastically from their 2018 highs.

This time, the crypto winter will be due to several factors, including a liquidity squeeze caused by central banks around the world, government regulations – including the many bans from countries such as China, India, Turkey and potentially Russia – and high-profile hacks such as the attack on the bridge connecting Ethereum and Solana blockchains.

In addition, sales pressure from miners has exacerbated the imbalance between supply and demand, with miners liquidating their coins due to falling prices, rising energy costs and increased competition. Several listed miners collectively sold 100% of their production in May, with the CEO of Bitfarms saying the company “no longer makes HODL” on its daily bitcoin production.

For this reason, Fear, Uncertainty and Doubt (FUD) may continue to dominate the headlines, as many investors choose to wait for the situation to improve before buying.

Unlike last crypto winter, when start-ups raised capital by issuing their own tokens (ICO) and suffered a cryptocurrency, this time the funding landscape is different.

There is more at stake this time

This has led many to fear that Lehman Brothers’ time for crypto is near. Just as lenders’ inability to meet margin calls was a warning of the financial crisis of 2008, crypto has seen its equivalent in the past month: Celsius Network, Babel Finance and Three Arrows Capital have all revealed major problems as digital asset prices plunged and caused a lack of liquidity.

What is happening in the crypto space today, however, is very similar to what one would expect from a functioning but overheated traditional financial sector. The fact that Kim Kardashian is selling a cryptocurrency that collapsed shortly after is one thing, but Fidelity’s plan to offer bitcoin in retirement savings plans could affect an entire generation. Following the end of crypto’s two-year hibernation in 2020, the sector peaked at around $ 3 trillion in total assets last November. For many market participants, this year’s downturn looks much more like traditional financial downsizing due to excess liquidity in the system, poor risk management and a higher cost of capital (rising interest rates) only at the end of the crypto.

Also, unlike last crypto winter, when start-ups raised capital by issuing their own tokens (ICOs) and suffered a cryptocurrency, the financing landscape is different this time. Many start-ups have sought venture capital financing as a more traditional way of raising funds. This means that instead of relying on cryptocurrency wealth, some of the major players have huge reserves of hard currency tucked away to cope with the snowstorm while working on developing new blockchains or building decentralized media platforms. .

Juggernauts like Andreessen Horowitz and Sequoia Capital are among those who together have pumped nearly $ 43 billion into the sector since the end of 2020.

Never two without three?

The world’s largest cryptocurrency has fallen by over 50% this year and over 70% from its highs in November 2021. Putting this in perspective with previous bear markets (2013 and 2018), it is safe to say that bitcoin’s dive was much faster and steeper this time and further downward risks remain if history repeats itself.

  • In 2013-2014, bitcoin lost 85.9% from top to bottom, lasting 14 months, and it took 25 months for the price to reach a new all-time high (ATH).
  • In 2018-2019, bitcoin fell 83.9% from top to bottom, lasting 12 months, and it took 23 months for the price to make another ATH.

A fundamental extrapolation of historical data to the current bear market and the application of an 80% pull from the November high of $ 69,000 yields a price target of $ 13,800, suggesting that bitcoin may reach a bottom around this level. And when that happens, prices tend to recover two years later and reach new heights based on past observations.

Long-term perspective

While some believe that a sustained fall in cryptocurrency prices is inevitable, others are more optimistic and appreciate the recent breakthroughs in the sector. The best way to survive the crypto winter is to have a diversified portfolio, stay informed about developments in space and maintain a long-term perspective. If history is any guide, bitcoin could potentially reach the lowest of this cycle near USD14,000 and possibly hit the $ 100,000 target in the next bull market.

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