The cryptocurrency sector has faced all challenges on the book so far in 2022 and seems to have more coming it’s way. That’s no surprise to anyone, but there comes a time when even the biggest crypto fans will start to question where they should keep their ‘diamond hands.’ Cryptocurrency markets have reclaimed the $1 trillion mark after over two months, providing relief to long-term inventors who witnessed the market wipeout over $2 trillion in wealth in less than 10 months. Memecoins, Layer 1 blockchain network tokens, and other utility tokens along with Bitcoin and Ethereum have shown an uptrend in the past two days after a long winter.
The ongoing crypto winter is “only going to get worse” as the industry recalibrates to a higher interest rate world, according to the co-founder of blockchain platform Tezos, Kathleen Breitman. She said:
“A lot of this was inflated on cheap money, and a lot of this was backed by basically, like, VCs trying to pump.”
NFT marketplace OpenSea cited that trading volume plunged from $2.9 billion in September 2021 to $349 million in September 2022, according to data from Dune Analytics.
“Clearly there is a phenomenon that has kind of crested and gone away in a lot of these markets, but meanwhile they’re saddled with a $13 billion valuation. So I think there’s a lot of cheap money that went in, valuations went super sky high, you had people scrambling to make those valuations justified in some form, usually through cheap tactics like yield farming, and now that the easy money’s gone away, all that’s left is we’re getting communities, I hope,” she added.
Usage of the network has increased in 2021 driven by demand from the art world, where digital artists are minting art on the blockchain and trading it. This use is providing one of the only sources of organic growth in the industry more broadly. The notion of the end of the era of easy money in crypto is one that analysts have been discussing in recent months amid the downturn.
Some industry figures believe the recent relative price stabilization of assets such as bitcoin
, which has been trading between $18,000 and $25,000 for the last four months after experiencing massive volatility, is positive for the industry.
It wasn’t just bitcoin that rode this wave of popularity, with altcoins like ether ETH -1.9%eum and dogecoin DOGE -5.7% launching into the arena and minting millionaires along the way. Into 2021 we had celebrities like Elon Musk, Mark Cuban, Paris Hilton, Logan Paul, and Kim Kardashian all talking about crypto.
Though Dogecoin has seen some serious growth over the last few weeks, that is solely due to the fact that it was announced by Elon Musk that Twitter will accept payments in Dogecoin.
The market was incredibly volatile through 2021, with bitcoin falling almost 50% between April and July. It recovered just as quickly, heading back up to almost $70,000 before the current crash began. As of the time of writing, the price of bitcoin is back down below $20,000. Other coins have fared even worse. Ethereum is now sitting at just over $1,600 from a high of over $4,600. Dogecoin has fallen from a high of $0.65 down to the current price of $0.06.
Prior to the 2022 winter, major crypto cycles in 2012 and 2019 lasted an average of four years from peak to trough. Given that the current crypto winter only began over the past few months, this could mean that we’re in for a long winter.
Will the Crypto Ever Recover From the Winter?
By all means, it’s a very difficult question to answer, a difficult question to answer, because bitcoin and other cryptocurrencies don’t have fundamentals like a publicly traded company does.
The company stock has value to an investor because it generates cash flow. The profits that the company makes will generally be, at least partially, paid back to shareholders in the form of a dividend.
This profit can be used to analyze the fundamental value of the company against other companies in the same sector, and to compare whole sectors to others. This isn’t the case with cryptocurrency. It doesn’t have a mechanism to pay income, without some other third party involved such as lending it to someone like you could with Celsius. Of course, if it becomes more widely adopted then it will have a value based on the fact that other people perceive it to have a value. This is known as the ‘network effect’. It’s similar to how we have viewed gold and other precious metals for thousands of years.
Gold does have some use in industry, but the majority of its value is derived from the fact that it is scarce, and we as humans have communally agreed over many generations that it is valuable.
Bitcoin, Ethereum, and some other crypto projects have vastly increased their network effect over recent years. Not only are more retail investors holding positions, but so are Wall Street firms, venture capital funds, and even some major public companies.
We are getting to the stage where the crypto sector will become too much a part of mainstream financial markets do not recover. We may already be there, but it remains to be seen.