A Crypto Winter Is Setting In. Why This One Is Different.

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Between a collapse in prices, layoffs, and high-profile defaults, the winds of the next so-called cryptocurrency winter are blowing for

Bitcoin

and other digital assets. 

Bitcoin was trading near $20,200 late on Wednesday afternoon, down by more than two-thirds from an all-time high near $69,000 hit in November 2021. It is off 56% since the beginning of the year as June nears its end, while the

S&P 500
has lost a bit less than 20%. Other tokens like Ether, Solana, and Dogecoin have fared even worse, and the market capitalization of the entire crypto economy has been reduced to $945 billion from nearly $3 trillion in less than eight months, according to CoinMarketCap.

The consensus is that more trouble is likely on the way for the second half and beyond, making the current slide similar to previous crypto winters, but with important differences.

“We’re definitely still at the start. The crash is relatively recent,” says Clara Medalie, the head of research at crypto data provider Kaiko. “People are going to be humbled by the next six months. It’s pretty clear at this point that we will probably enter a more prolonged crypto downturn.”

Mike Belshe, who has been involved with crypto since 2012, a year before he founded BitGo, an institutional digital-asset custodian that is being acquired by

Galaxy Digital

(GLXY.Canada), is downbeat for the near term as well.

“I think there’s more chips to fall. We’re going to see a little bit more downward pressure,” Belshe says. He estimates that Bitcoin will “continue to hold this $20,000 to $25,000 range with dips below when there are liquidations.”

Liquidations refer to when positions taken with leverage, or borrowed money, are automatically sold if the traders holding the positions fail to post additional collateral. This happens frequently and is a source of short-term volatility.

What some people consider the first crypto winter came in 2014, when the failure of a major exchange saw prices fall from around $1,000 to under $200 in 12 months. The second came after the bull run of 2017, when Bitcoin crashed from near $19,000 amid a bursting bubble in smaller coins. It traded below $4,000 for months at a time, failing to consistently hold above $10,000 until 2020. 

In addition to the price declines, that second crypto winter saw limited fundraising, a drought of venture capital money, and an end to hiring. This time around, “we’re going to see all of that, definitely,” says Belshe. 

Companies including Coinbase Global (ticker: COIN) have already announced layoffs and hiring halts in recent weeks, while major players in the space such as

Voyager Digital

(VOYG.Canada) are under pressure as a result of a breakdown in crypto lending. 

Still, there are ways in which this winter is markedly different from the last ones. 

The first is the link between crypto and the wider market—a relationship that has played a painful role in the current downturn. While Bitcoin should, in theory, trade independently of mainstream finance, it has shown in the past year to be largely correlated with other risk-sensitive assets, like stocks and especially tech stocks. 

The

S&P 500
has entered a bear market as investors worry that the Federal Reserve’s effort to tame inflation with higher interest rates could cause a recession.That has placed more pressure on cryptos. The only way an ugly six months ahead for crypto can be avoided is if there is an improvement in macroeconomic conditions, says Medalie. A stock market rally would help.

Another difference is that, this time around, firms have stronger teams, Medalie says. There has been a significant migration of talent from traditional finance to crypto, which includes critical expertise in navigating complex financial environments. Crypto companies also have more capital than they did in 2018; Medalie estimates that many firms have enough funding to survive two to three years of a bear market.

But perhaps the biggest difference is the level of institutional involvement in the space, which brings staying power.

Goldman Sachs

and more of Wall Street’s biggest players are actively involved in crypto, and the prospect of central bank-backed digital currencies is one of the hottest topics in international finance.

“During the last crypto winter …I didn’t necessarily have 100% confidence that our industry was going to stick around forever—that this was real,” says Peter Wall, the CEO of crypto miner

Argo Blockchain

(ARB.U.K.) “There’s now institutional investors, investment banks, legal firms that are working in this sector that would have laughed you out of the room during the last crypto winter. And those guys I’m still having conversations with.”

Yet the lessons of 2018, which ushered in more than two years of stagnant growth, show that a rebound could be a long time coming. This is likely to flush out weaker projects and see firms refocus on building, honing products and services, and centering their efforts on some of the more resilient aspects of the space.

“As we move through these [winters], we’re getting bigger and the types of risks are looking different,” says Belshe. “There’s going to be a fourth crypto winter, I suppose at some point—and we’ll learn a new lesson.”

Write to Jack Denton at [email protected]