Every investor has talked about the crypto winter downturn at some point or another. As we are all familiar with, the crypto market has suffered a significant downturn this year. Losing almost $2 trillion of its worth.
In November, bitcoin was at its all-time high of $69,000, now off 70%. This fall has resulted in what we call the “crypto winter.” There have been other occurrences of the crypto winter in 2017 and 2018. However, the current one is different.
Crypto Winter – 2018 to 2022
In 2017 many tokens were at their peak, and shortly after, in 2018, bitcoin and some others experienced a sharp decline. A research director from Kaiko, Clara Medalie, told NBC. “The 2017 crash was largely due to the burst of a hype bubble.”
However, the recent crash began earlier this year due to macroeconomic factors such as rampant inflation. This resulted in the Federal Reserve of the United States and central banks raising interest rates. These factors were not the case in the previous cycle.
Another significant difference is that Wall Street players were not using high leverage positions in the previous downturns, according to Carol Alexander of Sussex University.
The stablecoin Terra USD or UST was meant to be pegged one to one with the original U.S.dollar. Once it lost its dollar peg, its sister token Luna collapsed. This collapse resulted in a knockdown effect on many corporations that relied on UST.
In Medalie’s words, “The collapse of the Terra blockchain and UST stablecoin was widely unexpected following a period of immense growth.”
Leverage has been different in this crypto winter downturn versus the previous ones. In the 2017 downturn, leverage was mainly given to retail investors through the benefits of crypto exchanges. When the crypto markets crashed in 2018, retail investors’ positions were instantly liquidated on exchanges because they weren’t meeting margin calls.
High Yields and High Risk
One example of this is a company called Celsius. They were considered sort of like a bank. They would take crypto that was deposited and lend it to other users for a higher yield. The users, of course, would use the crypto for trading. The profit Celsius ended up making was given to the investor who initially made the deposit.
Last month Celsius paused withdrawals to customers. Alexander from the Sussex university says, “Players seeking high yields exchanged fiat for crypto used the lending platforms as custodians, and then those platforms used the funds they raised to make highly risky investments – how else could they pay such high-interest rates?”
Three Arrows Capital
The Singapore-based crypto hedge fund was a prominent victim of the crypto downturn. The Luna crash affected them greatly. 3AC couldn’t meet a margin call from crypto lender BlockFi and was then liquidated. The hedge fund finally defaulted on over $660 million in loans from Voyager Digital. As a result, 3AC went into liquidation, in addition to filing for bankruptcy under Chapter 15 of the United States Bankruptcy Code.
Is the downturn over?
We don’t know when the crypto winter downturn will end. Some analysts expect the market to fall a little more as crypto firms are struggling to pay debts.
James Butterfill from the research department at Coin Shares believes that the next group to fall will be crypto exchange and miners. He said, “We feel that this pain will spill over to the crowded exchange industry. Given it is such a crowded market, and that exchanges rely to some extent on economies of scale, the current environment is likely to highlight further casualties.”
The most established corporations have been affected by the downturn. Coinbase, for example, laid off 18% of its employees to cut down on the money being spent. Butterfill explains, “We have also seen examples of potential stress where miners have allegedly not paid their electricity bills, potentially alluding to cash flow issues. This is likely why we are seeing some miners sell their holdings.” Miners’ work comes at a high cost for the equipment and the constant flow of electricity required to keep their machines running efficiently around the clock.