If you’ve been paying attention to crypto, you probably know that we’re in the midst of a major crash. While crypto was once touted as a legitimate way to make extra money, things look a little different now.
For some, the current state of affairs means it’s the perfect time to “buy the dip.” Others might be more skeptical. Let’s take a look at why now might be a good time to reevaluate your strategy now that we appear headed into crypto winter.
Price peaked last year
One of the biggest reasons some believe crypto winter has arrived is the huge drop seen by some of the top cryptocurrencies, as well as the smaller cryptos.
As of July 5, 2022, bitcoin (BTC) is down 58.85% on the year. However, it’s down even more dramatically when you consider that bitcoin peaked above $67,000 in 2021. Likewise, ethereum (ETH) is also down dramatically from its peak above $4,800.
With these big drops, there is speculation that perhaps these cryptocurrencies won’t be able to regain their high prices. Others, though, might see this as a pullback that could provide consolidation — and it might be a buying opportunity. However, if prices don’t recover, buying now could lead to losses later.
Huge crash in terra and luna
One of the biggest applications for blockchain technology has been in the financial space. Crypto projects involving the idea of decentralized finance (DeFi) — a way to manage financial transactions and make money without the need for banks — have been very popular.
TerraUSD (UST) was a stablecoin pegged to the U.S. dollar. Its sister currency, luna (LUNA), was designed to help maintain that peg to the dollar, as well as provide a basis for the financial ecosystem. Plunging crypto prices led to UST falling below its peg to the dollar and both cryptocurrencies crashed.
There are attempts to revive luna, but it hasn’t been going well, and some believe that the huge crash is a setback for the DeFi space.
Some companies are laying off workers
Major players in the cryptocurrency space are announcing layoffs, in a sign that they are concerned about their financial positions.
Coinbase (COIN) is a publicly-traded company and the first crypto company to become a part of the Fortune 500. When announcing layoffs amounting to about 18% of its workforce, CEO Brian Armstrong brought up the possibility of a crypto winter, according to Time magazine.
Major cryptocurrency exchanges Gemini and Crypto.com have also announced layoffs.
Suspended withdrawals from crypto projects
On top of that, the market conditions have led to some crypto projects halting withdrawals and rewards. Celsius, a crypto company specializing in lending and promising huge returns, announced that it was halting withdrawals from the platform in June.
Digital asset broker Voyager has also halted trading and withdrawals, as well as suspended rewards for users. With platforms reeling from the huge market crash in crypto, investors are left with their assets locked up — and no promise that they’ll get them later.
Crypto backers liquidating
Another concern is the liquidation by capital backers for various crypto platforms. One example is Three Arrows Capital Ltd., a crypto hedge fund that was preparing to potentially acquire the exchange FTX US. However, the company was ordered to liquidate its assets by a court in the British Virgin Islands.
The Three Arrows situation also impacted Voyager, as well as FTX US. If other capital backers of digital asset projects have similar issues, it’s possible that the overall liquidity of the crypto market will continue to be impacted. This could potentially lead to more difficulties with digital asset exchanges and brokerages.
More tech people are backing off support
Some of the most prolific and high-profile developers in the cryptocurrency space are backing away from providing support and development.
For example, Andre Cronje, a developer involved in numerous crypto projects, announced that he was leaving the world of crypto. One of his collaborators announced that they would be terminating about 25 apps related to DeFi.
With tech people leaving development, the space is in some level of disarray, and it could indicate that crypto enthusiasts could lose access to some of the apps they’re used to. Plus, it’s hard to keep a blockchain project going if there aren’t developers available.
Super Bowl ads
It might seem counterintuitive to see Super Bowl ads as an indication of crypto winter, but some think the hype was a bit much. With the hype of crypto by major celebrities — some of whom didn’t have a connection to crypto — prices rose on speculation.
Indeed, many people wanted to learn how to buy cryptocurrency. However, many people might not understand crypto, and a crash shortly after might not bode well for the long-term viability of crypto.
Riskier assets are being sold off
Also impacting the crypto landscape is the reality of the economy and other markets.
During times of uncertainty and potential recession, people tend to sell off their riskier assets. And, despite promises by many crypto enthusiasts that this new asset class would be a hedge against inflation and move opposite of the stock market, none of that has panned out.
In fact, the International Monetary Fund released a report earlier this year indicating that stocks and crypto are closely correlated — and becoming more correlated. As a result, a crypto winter could be exacerbated.
With the current volatility in the stock market, both stocks and crypto are likely to see crashes as people look for safer investments.
Oversaturated cryptocurrency market
It’s also important to note that there are more than 20,000 cryptocurrencies and more than 500 cryptocurrency exchanges, according to CoinMarketCap. This oversaturation makes it difficult to figure out which coins will succeed — if any of them do.
With so many cryptos, and many of them existing without a real-world use, there’s a good chance that thousands will fail, contributing to a crypto winter.
While there are plenty of reasons to worry about the onset of a crypto winter, it’s not all doom and gloom. Some crypto enthusiasts believe that a crypto winter could potentially be good for the overall digital asset ecosystem.
There are still people interested in non-fungible tokens (NFTs), even though that market crashed. And some think that culling some of the cryptocurrencies could be good for the crypto space.
However, before you invest, make sure you know how much you can afford to lose. Get started with one of the best cryptocurrency exchanges and take steps to limit your total exposure to crypto in your investment portfolio.