Key takeaways
- The crypto market started falling from its peak price in November 2021 but didn’t technically enter a “winter” phase until June 13, 2022.
- Past trends would indicate the crypto winter will last another three to four months, but it would take another three years for prices to recover to their November 2021 glory fully. Trusting past trends may be a fool’s errand on such a new commodity.
- Government policies worldwide are likely to impact crypto’s recovery, or lack thereof, and are partially to blame for the slow burn they’ve been experiencing throughout 2022. That may be bad for crypto but good for the planet.
Cryptocurrencies have had a major down year. If they were a financially sound stock and you were a long-term investor, that would make this as good a time as any to buy. But cryptocurrency markets don’t act like the stock market, making it difficult to assess if crypto will ever recover.
Why crypto isn’t as easy to predict as the stock market
Crypto doesn’t have a very long history. Bitcoin, the first of the current generation of digital currencies, launched in 2009. The New York Stock Exchange, for comparison, began in 1792. We can easily look back at historical stock market trends, but we don’t have enough data for crypto to understand how it functions under different economic conditions.
Additionally, the cryptocurrency markets are less regulated than others, such as the stock market. While agencies like the Securities and Exchange Commission (SEC) and FINRA keep close tabs on investment firms in the stock market, crypto companies operate with relatively little oversight. That puts investors at additional risk, including the added risks of scams and fraud.
Finally, cryptocurrencies operate outside of the backing of a major government or central bank. Unlike United States dollars and euros, most cryptocurrencies derive value from the communities that use them. They’re difficult to value, and few are backed by dollar-based assets.
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Unlike investing in stocks, there are no metrics for an associated company that would give a full story about whether your crypto investment is a “good” one or not. While there are plenty of methods to value a stock, analysts struggle to do so for digital assets like bitcoin and ether.
A brief history of crypto winters
Crypto winter is a term similar to a bear market in the stock market. A crypto winter signifies a protracted period of low asset prices compared to recent peaks. As of this writing, crypto prices are down significantly from 2021 highs.
We have very limited data on crypto winters, as cryptocurrency has only seen two such events in the past that give us a meaningful comparison. While it’s easy to chart stock market patterns and look for recurring ebbs and flows, that’s more challenging with cryptocurrency.
The Crypto Crash of 2018
Crypto – and bitcoin in particular – shot up in value in 2017. In January, it was sitting under $1,000, but by December, it was up to nearly $20,000. This wasn’t because it suddenly became more popular or demand rose, though many did start paying attention to it for the first time after this meteoric rise.
Because the price spike may have been driven partially by market manipulation by large investors, price changes may not have always been what they seemed. In particular, one user with a large wallet, known as a crypto whale, reportedly engaged in two types of manipulation:
- Spoofing. When someone sends in a fake crypto bid to drive up demand, only to rescind the bid after the price has been artificially driven up.
- Wash trading. When someone buys and sells from themselves, it looks like the cryptocurrency is trading hands and in demand at a higher price point than it actually is.
The offense was so serious that the Justice Department opened an investigation. After the artificial price increases, prices dropped in fits and bursts until November 2018, when the official crypto winter of 2018 set in. The bear market officially started when the price of crypto assets was lower than what most crypto holders purchased them for.
This bear market lasted for a total of about four and a half months. While crypto exited its bear market at the beginning of April 2019, it didn’t start gaining steam again until a year later, in 2020, when the pandemic hit.
Our current Crypto Winter
Everyone has reacted differently to the pandemic, but at the onset it was destabilizing for everyone. Many lost faith in their leaders and governments and latched onto cryptocurrencies for what they perceived as a ‘safer’ investment than the infrastructure they saw shutting down around them.
Over the next year, it continued its bull run. But in the background, two of the biggest crypto mining countries—Russia and China—started cracking down on energy-intensive mining operations via stricter policies in 2021.
This happened at the same time global inflation took off, and rumors that the U.S. Federal Reserve would soon raise interest rates had started percolate. These circ*mstances led to investors leaving the crypto markets in droves.
Digital asset manager Grayscale Insights wrote that the fall from peak market price began in November 2021 but we didn’t enter a true crypto winter—or bear market—until June 13, 2022.
What happens after a Crypto Winter?
Just because crypto moves out of a bear market doesn’t automatically mean prices will return to prior highs, not even close. The last time a crypto winter took place, investors had to wait about a year for prices to move up more consistently. Bitcoin didn’t recover to its 2017 peak until early 2021.
From there, it shot upwards, increasing in value for a short period. But based on a model where crypto winter and boom cycles occur approximately every four years, it could be 2025 or early 2026 before we see prices return to their November 2021 peaks.
Assuming the four-year pattern holds, this may be an ideal time to buy more cryptocurrencies. But that’s an extremely risky decision ideal for long-term investors only, as cryptocurrencies are risky, and there’s no guarantee they will ever recover.
Will crypto ever recover?
Crypto will likely course correct from its current downward trajectory, but there’s also a good chance it could fall to zero. Moves from China restricting crypto could be the first of many, for example, as governments and environmentalists fight against crypto’s massive electricity use.
Tiny El Salvador made bitcoin a national official currency, but other nations are considering serious regulations and restrictions. Government officials say they need additional laws on digital assets to protect consumers and the environment.
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