reading this, congratulations, you’re past 2022 and you’re still reading the crypto news.
2022 was a particularly bloody year for the cryptocurrency industry and no one came out unscathed, especially SBF.
Unfortunately – while prices have rebounded slightly over the past week – there are still some significant headwinds to a large-scale bull run in 2023. So, before we analyze when this crypto winter could potentially end, let’s first examine how we got here.
It may seem like a distant memory now, but at this time of last year, BTC and many altcoins were only a month away from their all-time highs. Despite the bullish sentiment at the time, there were a number of warning signs that momentum was about to change.
A year before 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 for its XRP token sale. While regulators around the world have begun to introduce more aggressive legislation, the cryptocurrency industry has done itself no favors by bouncing from one massive fraud to another.
Before significant collapses occurred in 2021, there was a fundamental shift in crypto policy from China. In May 2021, China banned cryptocurrency 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 reducing the decentralization of crypto projects. In addition, China’s population of 1.4 billion has been removed from investing in crypto projects, reducing demand and valuations.
However, the most significant reason we are in the cold in 2022 is the broader global macroeconomic landscape. Depending on who you ask, this is due to a bottleneck in the global supply chain, the war in Ukraine, or the inability of central banks to stop feeding the money printer. Bitcoiners will point to the latter and say that there is a bigger chronic problem with the functioning of fiat money. They were raising alarm bells about the potential for runaway inflation long before traditional banks began to see it develop. Regardless of the underlying problems, the result is still the worst inflation in 40 years. To combat high inflation, central banks have started and continue to raise key interest rates. This marked the end of cheap capital as borrowing became more expensive.
When will the cryptocurrency winter end?
That’s the million-dollar question. It depends on who you ask. There are several conflicting views on when we will see the end of this crypto winter. There are numerous technical analysis (TA) models that attempt to answer this question by looking at historical trends within the cryptocurrency industry. TA examines previous bear market cycles and seeks to extrapolate a coherent narrative based on that data. These patterns are the most bullish and some believe that the worst is behind us and we should already start to see the first signs of a thaw in the markets. The main disadvantage of this view is that it is retroactive. It uses previous data to create models and does not take into account new or upcoming developments.
Another important theory that analysts often point to is Bitcoin’s half-life. Bitcoin is the tide that lifts all crypto ships. While we are starting to see some projects operate independently of bitcoin’s price fluctuation, the general trend remains that when the price of Bitcoin moves in one direction, the same is true for the rest of the market. So, this could be used as a yardstick to predict when we might emerge from this crypto winter. If accurate, the next halving will occur in March 2024, when the block reward will drop from 6.25 to 3.125 BTC. We could start to see a thaw in late 2023/early 2024. However, this model must also consider the changing macro environment.
Ironically, the fiat system from which cryptography is trying to remove us will most likely be the determining factor when we see the end of this crypto winter. Without mass adoption of encryption and only limited acceptance by merchants, we will remain tied to forces beyond our control. High inflation and rising interest rates have devised a toxic cocktail for investment. With capital no longer available cheaply, we are witnessing a slowdown in the economy. Institutional investors can’t borrow so easily, so they can’t invest in crypto projects or hold as many high-risk assets as cryptocurrencies.
For retail investors, the outlook is just as gloomy. They face higher inflation on all their bills or higher interest on larger loans such as mortgages. This is particularly devastating for people with variable mortgages, but ultimately means that everyone has less disposable income to invest in cryptocurrencies. Until we start to see a macroeconomic return to the 2-3% inflation target thresholds, we may be stuck in the cold for a while. It will be significantly longer if there is a recession similar in scale to that of 2008. Then we will enter uncharted territory. Bitcoin has only been around since 2009, which means that the cryptocurrency has never been tested in a recessionary environment.
A light at the end of the tunnel
It’s not all destiny and darkness. Bitcoin has risen by an impressive 20% in the last week, altcoins like Solana and Avalanche have risen by more than 40%. Despite the bad prospects I have presented, there are several reasons to take comfort.
- Crypto is not dead. While valuations have fallen off a cliff for most projects, and the industry’s reputation has taken a hit this year, new blocks continue to be minted every day.
- New projects. Bear markets are when construction happens. The latest bear market has brought innovation in the form of DeFi, NFT and a plethora of exciting projects. Who knows what exciting innovations are happening behind the scenes today.
- Cheap prices. If you believed in crypto projects in November 2021 and liked their pricing, you should love discounted prices now. There’s never been a better time to stack your favorite cryptocurrencies.