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Crypto Winter: What is Behind the Collapsing Crypto Market?

With a starking drop of Bitcoins’ value to $20,000, the most popular cryptocurrency is marking a massive fall of over 70% from its all-time high of $69,000 in November 2021. And witnessing the trend expert fear that the crypto market might be stepping into a long-anticipated crypto winter.

But, what is crypto winter? What has caused the colossal collapse of the crypto market? And will the crypto market stabilize again?

What is a Crypto Winter?

While there is no hard proof definition; the term, Crypto Winter, is derived from the popular HBO series “Game of Throne” and its iconic phrase, “Winter is Coming.”

Winter in the show highlights gloomy days and conflict in the fictional land of Westeros. In the crypto world, however, a crypto winter signifies a significant price drop of digital currencies for a significantly extended period.

Literally speaking, crypto winter is a period when crypto prices cool down. And the winter is over when the prices rise, stabilize, or heat up. And sitting at now approximately $20,00 per BTC, a 70% fall from the highest value of $69,000 Bitcoin is embarking on the start of crypto winter.

Crashing Bitcoin
Source: CoinMarketCap (14th June 2022)

But, what has led to the record-breaking collapse of the crypto industry?

What Led to the Current Collapse of the Crypto Market?

Many factors have contributed to the crypto market’s crash, including inflation and the Russia-Ukraine conflict. However, here are the top three reasons behind the ongoing crypto winter:

The Great Luna-Terra Crash

The steep crypto crash began two weeks ago with TerraUSA, Luna’s sibling currency, losing its ties to the US Dollar. Since both Luna and TerraUSD are algorithmically connected, Luna practically vanished following the collapse of TerraUSD.

The Digital currency’s value plummeted from $20 billion to nothing only in a matter of days. In a bid to recover, Terraform (the firm behind Terra) devised a strategy to sell all their Bitcoin holdings to restore the $1 peg, which ultimately failed.

As a result, the crypto market lost over $40 billion and snowballed in a trail of investment victims.

Skyrocketing Inflation

The US Federal Reserve has agreed to raise interest rates to reduce inflation. According to a Wall Street Journal story, the Fed will pursue an aggressive plan to raise debt prices, restrict spending, and contain record-high inflation. And the rapid rise in interest rates is widely seen as a leading indicator of an impending recession.

However, following the announcement, both the stock market and the crypto market plummeted; investors lost faith and began selling their digital assets, resulting in a crypto market carnage.

Read More: The Looming Global Debt Crisis: Developing Nations at the Extreme Risk

Celcius Network Freezing It’s Crypto Transactions

On Sunday, a popular decentralized finance platform, Celcius Network, stated that it is feezing all of its crypto transactions, given the extreme market condition. Following the closure, there was a massive sell-off, with all crypto plummeting.

“We are taking this necessary action … to stabilize liquidity and operations while we take steps to preserve and protect assets.”

Celcius Network

Moreover, according to Reuters, the firm has processed $11.8 billion in assets and $8.2 billion in loans as of May 17.

The Catastrophe Followed by the Crypto Winter

The concept of crypto winter doesn’t leave much room for crypto enthusiasts to grow. And the harsher side of the market crash is already shaping many crypto platforms in the form of significant employee layoffs.

For example, companies including Crypto.com. Coinbase and BlockFi have laid off hundreds of employees to survive the bear market.

The crypto bubble is bursting, and businesses in the crypto space are preparing for a steep recession. For example, Coinbase, one of the biggest crypto-based companies, has already laid off 18% of its workforce, accounting for roughly 1,100 employees.

Furthermore, the cryptocurrency market has fallen to a value of less than $1 trillion, merely one-third of what it was about seven months ago. Bitcoin, the most popular digital currency, has seen its lowest to $18,000 (approx) this week, the lowest since December 2002. And following the trend, many cryptocurrencies are devaluing at an astonishing rate.

Crypto Winter: When Will It Be Over?

There are no precise markers that may be used to predict when a crypto winter will end.

However, historical trends show that this isn’t the first time the market has experienced a crypto winter. And it’s reasonable to assume that the crypto winter will end at some point, with the crypto market returning to normalcy.

According to Forbes, the previous crypto winter lasted nearly two years, from January 2018 to December 2020; during which time Bitcoin lost over half of its market worth.

However, the crypto winter is not without a silver lining. Forbes, for example, states that a crypto winter behaves similar to a traditional bear market. It assists honest businesses in proving their investment while also weeding out new entrepreneurs.

“We have seen many Bitcoin corrections since 2011, but Bitcoin has returned strongly. It has been historically observed that bear markets are usually quick to plunge and never last long.”

Edul Patel, the CEO, and Co-Founder of Mudrex

Similarly, post this crypto-winter, the crypto market can expect a consistent crypto price increase, as seen after the 2018 crypto crash.

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