Are We Headed For A Crypto Winter Recession?

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Are We Headed For A Crypto Winter Recession?

Cryptocurrency professionals are beginning to issue warnings of a forthcoming “crypto winter,” in which interest in cryptocurrency significantly dies down. But are we truly headed for this eventuality? Or, are there causes for optimism that outweighs these predictions?

What Is a Crypto Winter?

Crypto winter is a relatively new term, and it’s neither a precise nor an objective one. Essentially, the term is meant to describe a period of downward momentum in the cryptocurrency industry. You can think of it as a bear market applied to the world of crypto.

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For several years, cryptocurrencies like Bitcoin have consistently increased in value. They exploded in price as more people entered the market and started talking about cryptocurrency.

If investors start to lose interest in these assets, it makes sense that this momentum would reverse. If things get truly bad, it could mean that crypto prices generally plateau at a low level, potentially never returning to their former heights.

Of course, the word “winter” implies a seasonality to this era. However, even if cryptocurrency does experience a long and challenging winter period, investors can always look forward to the following spring.

Problems Affecting the Crypto World

Why are people talking about a crypto winter in the first place?

Anyone in the crypto industry should know by now that the prices of many cryptocurrency assets — including flagships like Bitcoin, Ethereum, and Litecoin — have plummeted in recent months.

But what are the factors behind this apparent crash? Do these factors potentially lock cryptocurrency into a more prolonged winter in the near future?

Investor Panic

Possibly the most compelling explanation for the plummet is investor panic.

This panic comes from many different places, but the most proximate cause is a significant downturn in the stock market. Despite rallying throughout the COVID-19 pandemic and reaching new all-time highs, the stock market’s momentum has finally reversed and entered bear market territory.

This has been concerning for crypto investors for two main reasons. First, it indicates an overall lack of economic stability. Suppose you lost significant money in the stock market, which is commonly considered even safer and more stable than crypto. In that case, you might consider pulling your assets out of many different investments.

Second, many investors flocked to crypto because they saw it as a hedge against inflation and an overpriced stock market. So when crypto started declining in value, rather than increasing in response to recent stock market downturns, crypto investors may have seen this as a sign that crypto wasn’t the safe haven they thought it was.

For both reasons, investor panic has caused millions of people to sell, perhaps prematurely, resulting in plummeting prices. It remains to be seen how long this panic will remain or if the price of crypto will rebound as people begin to re-enter this perceived safe haven.

Inflation

The United States is suffering from a massive wave of price inflation. Of course, inflation itself is a complex topic, but the bottom line is that prices are rising across the board without a corresponding increase in worker wages.

This is putting a disproportionate burden on many households throughout the country, forcing people to spend more money on housing, groceries, and other necessary goods. With this increased financial burden, people have less money to spend on investments.

Lack of New Innovation

Thanks in part to a talent shortage, there’s been a lack of new innovation in the cryptocurrency space.

Bitcoin has long been the most prominent and most emblematic coin in the crypto world. However, it’s not without its shortcomings — including a massive dependency on energy expenditure to stay running.

Without new coins to solve some of these problems and make up for some of these weaknesses, investors may be second-guessing the value of crypto overall.

Interest Rate Hikes

It doesn’t help that the Federal Reserve has announced plans to increase interest rates gradually over time.

For the past couple of decades, the central bank has kept interest rates artificially low in an effort to stimulate economic activity and make money readily available. The downstream effect is that more people enter into leveraged investment positions. As a result, more people are willing to trade frequently.

With the federal reserve’s recent reversal, leveraged positions are no longer as feasible, and investors are necessarily more conservative in their investing decisions.

Higher Supply

The crypto market could also be described as somewhat oversaturated.

While the biggest names in the industry haven’t changed much, thousands of new coins have emerged in the past few years, diluting the market, confusing new investors, and giving crypto pessimists a strong reason to leave and never look back.

Liquidation

With concerns about the short-term and long-term future of cryptocurrency and the economy in general, consumers are increasingly attempting to liquidate their positions. They would rather hold cash, or true safe haven asset classes, than continue holding an asset they believe to be volatile or risky.

Contagious Sentiments

As more organizations report on falling cryptocurrency prices, the market overall succumbs to contagious sentiments. This happened in reverse in 2017, when Bitcoin exploded in price initially.

Most of this momentum is attributable to overhyped news stories. In some ways, the crypto market is much more sensitive to publicity and hype than other markets.

Reasons to Be a Crypto Optimist

Evidence shows there are many factors influencing recent falls in crypto prices. These factors could very well lead us to the predicted crypto winter to come. However, there are also some very strong reasons to be a crypto optimist.

Crypto is the long-term future.

“True believer” crypto enthusiasts have never deviated from their viewpoint that crypto is the future. On the contrary, cryptocurrency has always attracted attention because of its decentralized, secure, private, and sound money status.

These qualities haven’t gone away. If you believed that cryptocurrency was the future a few years ago, there’s nothing that should change your mind on that front. After winter comes spring.

Dropping prices represent buying opportunities.

Falling prices aren’t necessarily a bad thing for investors.

If you believe that prices will rise again, you can continue holding your current assets without realizing any of your losses. Even better, you can take advantage of this discounted rate and add to your positions.

Weak and flawed coins are revealing themselves.

Challenging periods in the market often reveal weaknesses in flawed and overhyped assets.

Weak and flawed coins are revealing themselves at a record rate, while the toughest and most resilient coins are only suffering modest losses. This is a great learning opportunity for avid coin investors.

Reassessing Your Portfolio

Wherever you stand on the debate about the near-term future of cryptocurrency, this is an excellent time to reassess your portfolio.

If you’re a crypto optimist, this is your chance to pick up some of your favorite coins at rock-bottom prices. If you’re skeptical or concerned about the future, this is your chance to reallocate assets and diversify.

No matter what your opinion is or what your takeaways are, there are ways for you to take advantage of this situation as an investor.

Article by Peter Daisyme, Due


About the Author

Peter Daisyme is the co-founder of Palo Alto, California-based Hostt, specializing in helping businesses with hosting their website for free, for life. Previously he was the co-founder of Pixloo, a company that helped people sell their homes online, that was acquired in 2012.

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