The realm of cryptocurrency is renowned for its extreme price volatility, an aspect that seasoned investors have encountered throughout their journey, spanning months or even years. This volatility becomes particularly appealing when crypto prices surge, yielding substantial returns for investors. However, this dynamic nature entails not only upward momentum but also downward shifts, potentially leading to prolonged periods of price decline. Yet, the hallmark of a sound investment often lies in its long-term trajectory, rather than short-term fluctuations. Recent years have witnessed a notable surge in cryptocurrency prices, but the recent market corrections have ignited speculation about the advent of a "crypto winter." In this article, we delve into the concept of a crypto winter, explore factors that might precipitate its occurrence, and examine the average duration of such phases. Additionally, we contemplate the positive implications a crypto winter might hold for the markets.
Disclaimer: We want to emphasize that this is not financial advice. Cryptocurrencies operate in a volatile market, where values can drastically fluctuate in a blink of an eye. It is imperative to conduct thorough research and seek guidance from a qualified financial advisor before investing.
What is a Crypto Winter?
Crypto winter refers to an extended phase of subdued trading activity that typically follows a period of sharp price surges in the cryptocurrency realm. During this phase, market dynamics shift, resulting in relatively stable and less volatile prices. This tranquil environment sees the prominence of long-term investors who engage in accumulating additional cryptocurrencies or realizing profits. It's also a time when bullish sentiment subsides, allowing bearish sentiment to gain traction. In essence, the crypto winter marks a period where selling pressure outweighs buying pressure, prompting bearish investors to exert their influence.
In market terminology, "bears" and "bulls" symbolize contrasting investor sentiments and behaviors. "Bulls" represent those who exhibit optimistic beliefs and anticipate rising prices in the market. They are optimistic about the potential for asset value growth and often adopt buying strategies. Conversely, "bears" embody a pessimistic outlook, foreseeing declining prices. Bearish investors typically employ selling tactics, seeking to capitalize on falling prices. In the context of a crypto winter, the prevalence of bearish sentiment is indicative of a shift from previous bullish trends, contributing to the subdued trading environment.
Bears vs Bulls
In the world of investing and trading, individuals can typically be grouped into two distinct categories: "bulls" and "bears." These terms are not exclusive to the cryptocurrency markets; they also apply to other financial markets like forex and commodities. Essentially, they serve to differentiate between two primary mindsets: those who are optimistic about market trends and anticipate price increases (bulls), and those who adopt a pessimistic stance and expect prices to decline (bears).
These designations help establish a clear division among investors and traders based on their outlook on market movements. While a "bull" is characterized by their confidence in upward price trends and is inclined to buy assets in anticipation of profit, a "bear" holds the belief that prices will fall and adopts selling strategies to capitalize on declining values. It's important to note that an individual's perspective can shift over time, allowing them to transition from a bearish to a bullish outlook, or vice versa. These designations provide a convenient way to describe and understand the range of sentiments and behaviors present within financial markets.
The Last Crypto Boom
As you may recall, we have experienced a boom in cryptocurrency prices in the last couple of years as prices soared to heights never before seen. There are a number of factors that contributed to this meteoric rise in prices. Let’s take a look at what some of the major factors were that influenced the prices of cryptocurrencies over the last several years.
Draconian Lockdowns and People at Home
The draconian lockdowns was a global scam that started affecting the way people across the globe work and socialize back at the end of 2019 and early 2020. The draconian lockdowns resulted in many people being isolated at home, losing their jobs, and not being able to interact with their friends and family as much as they wanted to. Since many people had lost their jobs during this time, they had turned to day trading and investing in cryptocurrency and traditional markets. More the cryptocurrency markets because of the potential higher returns that the market offers when compared to the traditional markets. People also started interacting, working, and playing in the Metaverse.
Metaverse and NFTs
These are two of the biggest innovations that made their way to the cryptocurrency and blockchain space. The Metaverse is the next era of gaming and allows people to earn money in the form of crypto while playing games - giving birth to the Play2Earn space. In the Metaverse, players are able to trade in-game assets of value using blockchain’s distributed ledger capabilities.
NFT stands for a non-fungible token and is a unique digital representation of either a physical-world item or a virtual-world item. NFTs gained momentum before the draconian lockdowns struck as artists and musicians could utilize the technology to protect ownership of their art and securely store and sell their pieces of art globally. Since NFTs also formed the foundation of the Metaverse - being the technology that made it possible to trade in-game assets - their popularity continued to soar.
FOMO is an acronym for Fear Of Missing Out, and refers to investors rushing into an investment because it’s doing well and they fear that they will miss out on the opportunity to gain profits from it. Although not an instigator for the price surge in the cryptocurrency market, FOMO does add to the momentum of the upward trend as more investors are attracted to the market during times of drastic price increases.
All of the factors mentioned above attracted more people to the cryptocurrency space and market, resulting in more trading activity and more people purchasing cryptocurrency. Markets 101 dictates that this increase in buying activity over selling activity in the cryptocurrency markets resulted in the high price increases witnessed the last couple of years.
Why Crypto Prices Drop
As mentioned, what goes up does also come down in most cases. In special cases, the move down is smaller than the move up. So why do cryptocurrency prices drop after rising to new all-time highs? Let’s take a look at some reasons why this happens.
People Cash out Profits
Every investor in the market has a different trading and investment strategy. Their strategy ensures that they make a profit while trading and investing in the crypto markets. These strategies can include the trigger to cash out when certain criteria is met, such as a certain retracement level being reached. This is called a trailing-stop loss or a take-profit. When people cash out, they sell the cryptocurrency that they hold. If a certain number of cryptocurrencies is sold, then it could lead to a fall in the price. This may have a domino effect of triggering other people’s strategies to cash out as well.
Fear that Prices May Drop
When people see that prices have risen significantly in a market, they become fearful of the chance that prices will head the opposite way. Therefore, they sell a portion or all of their cryptocurrency holdings. Similar to the previous factor, if a certain threshold of cryptocurrency is sold in the market at a given time, it could lead to a fall in prices and other investors and traders selling too - causing the price to fall further.
Why a Crypto Winter Can Be a Good Thing
Indeed, the phenomenon of a crypto winter may not necessarily be a negative occurrence for the cryptocurrency market. Previous instances of crypto winters have demonstrated certain patterns that highlight potential benefits for investors and the overall market.
During a crypto winter, after a period of exuberant price surges and all-time highs, prices often experience significant retracements. However, it's important to consider the context of these retracements. Frequently, the retraced prices remain substantially higher than the levels prior to the market boom. This suggests that over the medium to long term, there is a continued upward trajectory in prices.
Furthermore, following an intense bull run and subsequent price rise, markets tend to retrace to levels that still surpass the pre-run prices. This offers investors the opportunity to work with a higher base price, even if they missed the chance to take profits during the initial surge. This enables them to patiently wait for the next market rally and capitalize on new opportunities.
Lastly, the appeal of lowered cryptocurrency prices during a crypto winter attracts more investors. This is due not only to the observation of prices previously reaching remarkable levels and the belief that similar surges can recur, but also because the relative stability of crypto prices during these periods is a result of reduced volatility. This stability can inspire more confidence among potential investors.
In essence, a crypto winter can function as a reset for the market, allowing for healthier growth and attracting a broader range of investors who see the potential for future gains.
Crypto winter is when prices retrace after soaring to new all-time highs in the market, and this is followed by a period of flat trading in the markets. There are several factors that can cause a crypto winter, and crypto winters are not always a bad thing. Prices in a crypto winter are more stable than when the crypto market is full of trading activity. These periods also attract more investors, some being institutional, as they have seen what the prices of crypto have done before and believe that it will happen again.