Cryptocurrency prices are known to be extremely volatile at times. Investors that have been in the space for several years, even several months, have experienced the ups and downs that come with crypto price movements. This volatility is only really attractive when the prices of cryptos go up - making investors a decent return on their holdings. But what goes up does come down at some point, and may even stay down for a bit. However, a good investment tends to display an upward trend over the long term, regardless of what the price does in the shorter trend. For the last couple of years, we have experienced a steep incline in the prices of cryptocurrencies. With the recent price drops in the market, investors are wondering if the crypto markets are heading for a crypto winter. In today’s article, we will take a look at what a crypto winter is, as well as discuss what might be factors that lead to a crypto winter. Lastly, we will also take a look at how long a crypto winter lasts on average and we will take a look at why a crypto winter might be a good thing for the markets.
What is a Crypto Winter?
Crypto winter is a prolonged period of flat trading that usually follows a steep incline in prices in the cryptocurrency space. During this period of time, there isn’t much trading activity in the cryptocurrency markets - leaving prices relatively stable and less volatile than usual. It’s at these times that long-term investors are the predominant trading activity in the market as they either stack up on more crypto or cash out some of their profits. It is also a period in the markets where bullish investors cool off a bit and bearish investors start to make their presence felt, since there is a lot more selling pressure than buying pressure in the markets. Let’s take a look at what market bears and market bulls are.
Bears vs Bulls
Investors and traders in the market can be categorized into two categories at any time. They are either bulls or bears. These are terms used to not only describe investors in the cryptocurrency markets but also in other markets such as the forex and commodity markets, etc. These terms are used to create a division between investors and traders who are optimistic in the markets and believe that prices will go up, known as bulls, and people who are pessimistic and believe that prices in a market or a number of markets will go down, known as bears. An investor can either have a bearish or bullish outlook on the markets and can shift between each outlook at any time. It’s not to say that once someone has a bearish outlook on the markets that they will remain that way, and vice versa for someone that has a bullish outlook on the market.
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.
Pandemic and People at Home
The Covid-19 Pandemic was a global pandemic that started affecting the way people across the globe work and socialize back at the end of 2019 and early 2020. The pandemic resulted in a lot of 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 Covid-19 Pandemic 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
Back to our main focus of this article: crypto winters. A crypto winter may not be a bad thing for the market. Looking at the effect of previous crypto winters, the price may retrace significantly after soaring past all-time highs. But, it’s important to look at what the prices were before the boom in the market. Often the case is that the retracement reaches a price that is still significantly higher than what it was before the prices surged. This indicates that over the medium to long term, the prices continue to rise.
Also, building on the previous paragraph, after a drastic bull run and a rise in prices, the markets more than often retrace back to a price that is still higher than before the run - this gives investors the opportunity to work off of a higher base price. Therefore, if they missed the profit-taking opportunity in the run, they will still have an investment that grew if they bought before the run. They can then just wait for the next run and take control of the opportunity.
Lastly, the lowered prices of cryptos in a crypto winter will attract more investors. This is not only the case because they have witnessed the prices reach the levels they did and believe that it will happen again, but also because crypto prices are relatively more stable during crypto winters as a result of the flat trading during these periods of time.
Crypto Winter: Conclusion
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.