Crypto has gone from soaring to the moon to crashing to the earth. Crypto enthusiasts have been beaten down into silence. All the “buy crypto” chants on social media have come to a halt. Why? Because the average crypto buyer is losing money.
Crypto winter is here.
The question on everybody’s mind is, will crypto ever recover to the highs we saw in 2021, and if yes, when?
Probably not. At least, not anytime soon.
Before we go any further, it’s worth saying that no one can reliably predict how crypto prices will move. If anyone could do it, they would be living on a remote island enjoying their billions, not writing this article.
Always take predictions with a pinch of salt, and don’t let predictions be the sole reason you buy or sell (or not buy or sell) crypto because that could end in tears. So, rather than make predictions, we’ll help you understand why we think crypto is unlikely to recover soon in this article. Let’s dig in.
To understand why crypto is unlikely to recover, we need to understand how we got here.
Before now, crypto enthusiasts would parrot statements like “crypto is a good hedge for inflation” and “crypto’s performance is unrelated to the stock market.” But since November 2021, we’ve seen crypto crash with the stock market, even worse than stocks.
The first thing we’ve learned from this crypto crash is that crypto is not a hedge for inflation and is not uncorrelated to the stock market. The main driver of crypto’s performance was (of course, hype but also) excess money that flooded global financial markets.
Since the 2008 Global Financial crisis, Central Banks in developed nations have been printing trillions of their currency and injecting it into financial markets; this process is called quantitative easing.
They also cut interest rates to very low levels. Some cut interest rates to 0%, others to even negative numbers, which meant you could pay back less than what you borrowed. Central Banks did all of this to stimulate growth in their economy.
They hoped this money would go to entrepreneurs looking to start businesses that would produce valuable goods and services, which would create jobs, increase Gross Domestic Product (GDP), and ultimately economic prosperity.
While some of this money flowed as the Banks intended, some flowed into the financial markets to invest in assets like stocks, real estate, and eventually crypto as it got more hype.
When COVID struck, it looked like the global economy would suffer again as it did during the 2008 Financial Crisis. Central Banks again stepped in and reduced interest rates, and the US Federal Reserve introduced over $5 Trillion into the US economy as stimulus.
Cryptocurrencies flew to the moon.
As more money came into the system, more people bought crypto. As more people bought crypto, prices soared. As prices soared, those on the sidelines got more FOMO, and those on the rocket kept shoving it down their throats. So more people got off the sidelines, increasing the number of people buying crypto.
Then came high inflation
Money is an accounting system for the goods and services in an economy. For example, if all the money in Nigeria today is $1 billion, then the goods and services can be said to be worth that amount. If the Central Bank doubles the money from $1bn to $2bn overnight, then the price of goods has to roughly double to account for the extra money created.
Central Banks introduced all that money into their economies to cause some inflation, but they didn’t hope for inflation to soar to the uncontrollable levels we can see today.
In June 2021, the Central Bank dismissed inflation as transitory when the US saw inflation figures of over 5%. But by November 2021, it became clear that the high inflation numbers the US recorded were not transitory. They had to stop printing money and start pulling money out of the system.
When it became clear that Central Banks would start pulling money out of the financial markets, asset prices began to tumble. Investors started selling down their assets. We heard stories of Elon Musk and Jeff Bezos selling some Tesla and Amazon shares.
Some investors took this as a cue to sell down their crypto positions. This led to the initial decline in crypto prices between November 2021 and May 2021.
In May, one of the most popular stablecoins, Terra (UST), collapsed from $1 to less than 2 cents.
Stablecoins are cryptocurrencies that have their value backed by other assets like gold, the US Dollar, and other cryptocurrencies. As the name implies, they try to maintain a stable value. They play a key intermediary role between hard currencies like the US dollar and Naira and cryptocurrencies like Bitcoin and Ethereum.
Using hard currency to buy crypto can be difficult for traders because settlement is slow, and the price of currencies such as Bitcoin can change significantly. To avoid this, traders use hard currencies to buy stablecoins, which are accepted on many crypto exchanges. These stablecoins allow traders to trade volatile digital assets quicker.
Terra collapsed in May, which caused cryptocurrencies like Bitcoin and Ethereum to fall another 30%.
Celsius and Crypto Lenders Bankruptcy
We can look at how deposit banks lend to understand how crypto lending works. Depositors (in this case, crypto owners) deposit their crypto with the lending platform, and those platforms lend the crypto out to borrowers in exchange for some interest. The crypto lender collects the interest and shares some of it with depositors.
Unlike traditional deposit banks, crypto lending platforms offer higher interest of 10-15% on the crypto that depositors leave with them. Because crypto lenders cannot reasonably charge crypto borrowers 15-20% (so they have enough to pay depositors and make profits), these crypto lending platforms also venture into riskier activities like trading crypto, crypto futures, and investing in new DeFi projects.
This was great for all involved when crypto was going to the moon, but now that it’s crashing back to earth, it made it more difficult for crypto lending platforms like Celsius to pay interest to depositors and even return their initial capital because it’s locked up in investments that have dropped significantly in value.
Since then, large crypto lenders like Celsius and Voyager Digital have filed for US bankruptcy. It remains unclear what will happen to depositors’ funds when they are declared bankrupt.
Some Investors are Still Confident
You might be wondering, why are some investors still confident if things are that bad for crypto?
Crypto winter is here, but early investors are still doing great.
To the person who bought Bitcoin last November at around $66,000 and lost almost 70% of their investment, Bitcoin is doing awful. But, anyone who bought bitcoin at around $5,000 in March 2020 or earlier is still sitting on 3x profit after two years of holding. Early adopters are sitting on significantly more profit.
While the average investor’s crypto account is bleeding, early adopters are still in the green.
When listening to views on crypto’s future price, it’s important to consider when the person bought it. Are they early investors looking to offload their holdings, or are they late investors desperately seeking one last pump so they can sell out, or are they genuine enthusiasts?
It’s easy to believe in a vision when the going is good and everyone is going to the moon. It’s more difficult to believe when the rocket has burst into flames and is crashing to earth.
Cryptocurrency is different from most assets because it’s very speculative. Unlike stocks, there’s no clear way to determine the inherent value of a cryptocurrency. Cryptocurrencies are also really young.
Bitcoin started trading in 2009. It doesn’t have a long track record. That makes it tough to say how crypto will handle this downturn, especially if the entire market continues to drop.
That said, many individual cryptocurrencies have faced extreme volatility in the past and managed to survive. For instance, Bitcoin has lost over 80% of its value on multiple occasions, yet it’s experienced positive average returns over time. Also, in 2018, Ethereum’s price fell by nearly 95%, yet it still rebounded.
While we think crypto may not recover anytime soon, from its history, some coins have recovered from worse. If you’re looking for something less speculative, start a plan with us today.