When Will the Crypto Winter End?

The Build-Up

It may seem like a distant memory now, but this time last year, BTC and many altcoins were only a month removed from their all-time highs. Despite the bullish sentiment at the time, there were a number of warning signs that the momentum was about to shift.

A year previous to the November 2021 ATHs, the industry was starting to see a shift towards more aggressive regulators. In December 2020, the SEC fired the first shot by suing Ripple over its selling of XRP tokens. As regulators around the globe began to introduce more hawkish legislation, the crypto industry did itself no favors by bouncing from one massive fraud to the next.

Before any significant meltdowns occurred in 2021, there was a fundamental shift in crypto policy from China. In May 2021, China banned crypto mining and began cracking down on trading, with regulators banning its financial institutions from offering crypto services. This had an impact on a number of levels. Miners were forced to relocate, disrupting the hash rate and lowering the decentralization of crypto projects. In addition, China’s 1.4 billion population was removed from investing in crypto projects, reducing demand and valuations.

Yet the most significant reason we find ourselves out in the cold in 2022 is the larger global macro landscape. Depending on who you ask, this is either due to a throttling of the global supply chain, the war in Ukraine, or central banks’ inability to stop feeding the money printer. Bitcoiners will point to the latter and say there is a larger chronic issue with how fiat money works. They were raising the alarm bells about the potential for runaway inflation long before the legacy banks started to see it unfold. Regardless of the underlying issues, the result is still the worst inflation in 40 years. To combat high inflation, central banks started to and continue to raise prime interest rates. This marked the end of cheap capital as borrowing became more expensive.

When Will Crypto Winter End?

That’s the million-dollar question. It depends on who you ask. There are several competing views on when we will see the end of this crypto winter. Numerous technical analysis (TA) models exist that attempt to answer this question by looking at historical trends within the crypto industry. TA looks at previous bear market cycles and tries to extrapolate a cohesive narrative based on that data. These models are the most bullish, and some believe that the worst is behind us and we should already be starting to see the first signs of a thawing in the markets. The main con of this view is that it is retroactive. It uses previous data to make models and does not account for new or upcoming developments.

Another prominent theory analysts often point to is the Bitcoin halving cycle. Bitcoin is the tide that raises all ships in crypto. While we are starting to see some projects operate independently of bitcoin’s price fluctuation, the overall trend remains that when Bitcoin’s price moves in one direction, so does the rest of the market. So, this could be used as a measuring stick for predicting when we might emerge from this crypto winter. If accurate, the next halving will occur in March 2024, when the block reward will fall from 6.25 to 3.125 BTC. We could start to see a thawing in late 2023 / early 2024. However, this model also needs to consider the shifting macro environment.

Ironically, the fiat system that crypto is trying to remove us from will most likely be the determining factor when we see the end of this crypto winter. Without mass adoption of crypto and only limited acceptance by merchants, we will remain beholden to forces outside our control. The high inflation and rising interest rates have concocted a toxic cocktail for investment. With capital no longer cheaply available, we are seeing a slowing down in the economy. Institutional investors can’t borrow as readily, so they can’t invest in crypto projects or hold as many high-risk assets like crypto.

For retail investors, the forecast is just as grim. They are either faced with higher inflation on all their bills or higher interest on larger loans like mortgages. This is particularly devastating to people on variable mortgages but ultimately means everyone has less disposable income to invest in crypto. Until we start seeing the macro return to target thresholds of 2-3% inflation, we could be stuck out in the cold for a while. It will be significantly longer if there is a recession similar in scale to 2008. Then we will enter uncharted territory. Bitcoin has only been around since 2009, meaning cryptocurrency has ever been tested in a recessionary environment.

A Light at the End of the Tunnel

It’s not all doom and gloom. Bitcoin is up an impressive 20% over the last week, altcoins like Solana and Avalanche are up over 40%. Despite the poor outlook I have presented, there are several reasons to take solace.

1. Crypto isn’t dead. While valuations have fallen off a cliff for most projects, and the industry’s reputation has taken a beating this year, new blocks are continuing to be minted every day.
2. New projects. Bear markets are when the building happens. The last bear market brought innovation in the forms of DeFi, NFTs, and a plethora of exciting projects. Who knows what exciting innovations are going on behind the scenes today.
3. Cheap prices. If you believed in crypto projects in November 2021 and liked their prices, you should love the discounted prices now. There has never been a better time to stack your favorite cryptos.

Stay strong and HODL on.