What Is Crypto Winter? (2024)

The so-called “crypto winter” had a profound effect on the cryptocurrency landscape in 2022. A perfect storm of headwinds sent the prices of leading cryptocurrencies Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), XRP (XRP) and others down more than 55% each.

When Bitcoin prices finally recovered above the psychological level of $30,000 in April 2023, the positive price action had some investors and analysts declaring an official end to crypto winter. However, others warned Bitcoin and other cryptocurrencies hadn’t thawed yet.

What Is Crypto Winter?

Crypto winter is a prolonged period of pricing weakness in the cryptocurrency market.

The phrase likely came from the hit HBO series, “Game of Thrones.” In the show, the motto of the House of Stark was “Winter Is Coming.” It was considered to be a warning that lasting conflict could descend on the land of Westeros at any time.

In the world of crypto, the phrase means an extended period of trouble may be settling over the crypto market. During this difficult time, you must remain vigilant and be prepared for chaos to sweep over the market without much warning.

Prior to 2022, the last crypto winter followed the bursting of the initial coin offering (ICO) market in 2018.

What Caused the Most Recent Crypto Winter?

The 2022 crypto winter was triggered by U.S. inflation surging to multi-decade highs, prompting the Federal Reserve to aggressively raise interest rates.

In response to rising rates, investors began selling risk assets, such as cryptocurrencies and stocks. Falling crypto prices exposed over-leverage among crypto lenders, exchanges and hedge funds.

The collapse of cryptocurrencies Luna and TerraUSD in May 2022 brought down Three Arrows Capital and wiped out $42 billion in investor value. The domino effect continued when crypto lenders Voyager Digital and Celsius Network filed for bankruptcy protection in July 2022.

Liquidity issues and gross mismanagement led to the downfall of FTX in November 2022 and the arrest of founder Sam Bankman-Fried shortly after. FTX had previously been valued at $32 billion. Crypto lender BlockFi followed FTX into bankruptcy just two weeks later.

Crypto Winter Spills Over Into 2023

In March 2023, a combination of rising interest rates, lack of risk management and a regulatory crackdown on financial institutions serving crypto companies triggered runs on crypto banks Silvergate Bank and Signature Bank. Both banks ultimately failed.

Most crypto companies that survived the most recent crypto winter did so by aggressively cutting costs and jobs. Estimates place the amount of crypto market employees who lost their jobs in 2022 at more than 20,000.

During the first quarter of 2023, the crypto industry cut another estimated 2,400 jobs. In January 2023, Coinbase announced another 950 job cuts following 1,100 layoffs in June 2022 and 60 job cuts in November.

London-based crypto exchange Luno announced 330 job cuts in January 2023, roughly 35% of its entire headcount.

Increased Crypto Regulation

Crypto winter got the attention of regulators around the world, who sprung to action to enact tighter protections within the industry.

In March 2023, the Commodity Futures Trading Commission (CFTC) sued crypto exchange Binance, alleging the firm allowed U.S. customers to trade on its platform without the registration required under U.S. law.

Coinbase also disclosed it received a notice from the U.S. Securities and Exchange Commission (SEC) that the regulator had identified possible securities law violations.

More regulation creates hurdles for the crypto community, but it also makes the industry seem more appealing and legitimate to investors concerned about oversight and safety.

Crypto Winter’s Silver Lining

While crypto winter created carnage throughout the industry, there were also some positive takeaways for investors.

First, Bitcoin and other leading cryptocurrencies held up relatively well amid a constant barrage of bankruptcies and other negative headlines. In fact, Bitcoin’s April 2023 rally was yet another demonstration of the crypto’s resiliency.

Any market downturn also purges the industry of its weakest links, including mismanaged exchanges and lenders, nefarious actors and companies with over-leveraged balance sheets.

Is Crypto Winter Over?

In the opening months of 2023, investors got some encouraging news on the inflation front.

Inflation was the primary driver of rising interest rates in 2022, but it was trending steadily lower at the beginning of 2023. As a result, the market started pricing in a Fed pivot from rate hikes to rate cuts in the second half of 2023.

Interest in Bitcoin

Investors grew optimistic that the combination of falling inflation and lower interest rates would be the perfect recipe for a thawing of crypto winter.

Doug Clinton, managing partner at Deepwater Asset Management, says Bitcoin rallies have always been driven by two catalysts: narrative and scarcity.

In April 2023, Google Trends search data indicates interest in Bitcoin was at its highest level in nearly a year, showing the narrative may have shifted from bearish to bullish.

“Greater interest in Bitcoin means more demand for Bitcoin, which means rising prices, which means more interest and so on,” Clinton says

Global Government Crackdown

The second catalyst for Bitcoin prices is the ongoing crackdown on cryptocurrencies by governments around the globe.

Clinton says restricting access to crypto may actually increase scarcity and volatility.

“Bullish buyers and sellers trapped in a hard-to-access marketplace creates the possibility of a demand vacuum where only buyers willing to pay a high price find access, but the ecosystem is only filled with bullish owners hesitant to sell,” Clinton says.

The Banking Crisis: An Unlikely Bullish Catalyst

The March banking crisis served as an unlikely bullish catalyst for crypto prices as well, according to Bank of America analyst Alkesh Shah.

“Digital assets were likely a beneficiary of uncertainty, rising 9% in March, as investors chased price momentum and added risk assets for diversification and as terminal target rate expectations shifted lower than previously anticipated,” Shah says.

“Despite the potentially restrictive regulatory frameworks ahead, we expect clear rules of the road for digital assets to provide a path to mainstream adoption.”

However, David Trainer, CEO of New Constructs, says investors shouldn’t be taking on unnecessary risk in 2023 given the precarious economic climate.

“The market feels a little full of itself, particularly amid the recent strength in speculative areas of the market such as Bitcoin and profitless technology stocks. It is very concerning that we have seen a return to speculative investing behavior over the past month [of March 2023], as that ended very poorly for investors throughout 2022,” Trainer says.