Is a crypto winter upon us?

TL;DR: It’s getting chilly for crypto and here’s what you should know.

If you’ve been paying attention recently, you’ll have noticed that cryptocurrencies have been having quite a trouble-filled couple of months. A week ago Tesla sold off 75% of its Bitcoin holdings which it spent $1.5 billion on and was worth about $2 billion at the end of 2021. It converted the coins into fiat currency citing uncertain COVID times as the main reason. This is huge news in the crypto space because Elon and previously Tesla were one of the biggest backers of cryptocurrencies. Tesla’s backing significantly improved the market value of Bitcoin and this development comes at a crucial time of falling crypto prices. Bitcoin has lost 50% of its value this year falling from an all-time high of $69,000 per coin in November last year to now hovering below $30,000 per coin. Cryptocurrencies have fallen from a market cap of $3 trillion in November 2021 to now $1 trillion. In May this year TerraUSD, a supposed stablecoin that was backed on the dollar, fell below its $1 per coin value. Its sister coin Luna fell alongside, completely losing its value and causing one of the biggest crypto shocks in years.

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The entire crypto market is currently feeling the heat as demand and value plummet. In June crypto billionaires and owners of the crypto exchange Gemini, the Winklevoss brothers announced via their blog that they were laying off 10% of their workforce and bracing themselves for an incoming ‘crypto winter’ which they described as “a contraction phase that is settling into a period of stasis”. They are not alone in this as Coinbase, the largest cryptocurrency exchange in the US by trading volume reported a 27% loss in revenue and has laid off 18% of its workforce recently.

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Crypto winter is a term that describes bear market for crypto. It is essentially a period of decline in prices and demand for crypto.

With these recent shake-ups in the market, the question of where crypto is headed comes up more and more. Cryptocurrencies witnessed a significant boom in covid times and a number of reasons have caused this downward spiral. If we can understand the cause of the downturn then we can figure out where this downturn is heading. A few reasons for this current crypto downturn include:

• Investor panic

The market value loss of crypto cited above was largely triggered by investor panic. A 24-hour sellout and panic led to a $2 trillion loss. The crash of Luna was also triggered by massive selloffs. This investor panic is not limited to crypto. The stock market in general has been experiencing a downward spiral. Between rising interest rates and the COVID pandemic, there is economic instability in the US and the world at large. Crypto, especially stablecoins which are supposed to mitigate this downward economic spiral are also losing value further causing investors to lose money and become risk shy.

• High supply, less demand

The cryptocurrency trading space is over-saturated with coins. With no new changes in the blockchain space and a market full of unregulated assets, investors are losing the value of their already purchased coins and there’s barely any demand for newer coins currently flooding the market. High inflation and rising interest rates in the U.S are also affecting individual liquidity and the ability to invest in volatile assets such as crypto. This has led to significantly less demand for cryptocurrencies.

• Lack of innovation and adoption

There have been few revolutionary Blockchain innovations or growth. Even for already popular assets, like cryptocurrencies, Blockchain assets use is still limited. This limited use and lack of growth is a burden for both current investors and skeptics. Cryptocurrency already suffers from a problem of belief and interest which further affects its acceptability and use.

• Lack of regulations

Lack of blockchain and largely cryptocurrency regulations has caused both investor panic and constant fraud and losses. Unregulated guerilla markets have cost investors billions of dollars in losses and further resulted in dwindling faith in cryptocurrency. This lack of laws has opened the market up to more risks and this has contributed to the cooling of interest in crypto causing this crypto winter.

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What now?

Despite these market crashes, there is still some optimism for the future of crypto. This is not the first downward turn or crypto winter. Over time in its existence, cryptocurrencies have lost and regained value over and over.

In 2018 Bitcoin, Ethereum, and other coins such as Litecoin dropped sharply in price and value which led to a period of downturn from 2018 to 2020. There has been a period of high growth since 2021 due to the Federal Reserve adding lIquidity to financial markets but this peaked early this year.

Some experts advise holding strong as winters are seasonal and this will pass. Cryptocurrencies have always been volatile and high-risk assets but with impending regulations, these risks may be significantly reduced and this will allow more real-world use for blockchain technology and this will lead to further innovation and growth to cater to the influx of users and investors.

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Crypto like most assets follows real-world bear market principles which means the value of these assets will go up again. The long-term benefit of holding unsellable assets whose value may never fully recover is debatable but selling right now is both bad for investor pockets and the market.

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As long as the digital world exists there will always be a need and use for digital assets. Right now Blockchain technology is the best available option for creating these assets and this innovation has revolutionized the world beyond tech. This crypto winter will be one of the many tests of the theory that blockchain technology will disrupt the world as we know it.

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