What is the “crypto winter” and why bitcoin has lost half its value in 6 months
When things are going well, in financial jargon investors are said to be “risk on.”
But when the global economy is going through a difficult time, as it is now, big capital prefers to take refuge in safer investments.
Well, nowadays diners don’t feel like trying exotic dishes and are asking the waiter to bring a more traditional menu to the table.
Since there is no risk appetite, cryptocurrencies are the first to lose their value because it is not stable, which is known as high volatility.
More and more experts are warning about the possibility that the world is on the verge of a “crypto winter”, a concept used among investors to refer to a sustained drop in the price of digital currencies.
Since the beginning of this year, many have been warning about the arrival of black clouds on the horizon.
One of them, David Marcus, an American entrepreneur, former head of the cryptocurrency sector at Facebook, and former president of Paypal, gave signs in January that the cold had arrived.
“It is during crypto winters that the best entrepreneurs build the best companies,” Marcus said.
This Monday bitcoin, the largest of the cryptocurrencies by its market value, triggered the alert when it suffered a sharp fall that led it to accumulate a loss of half its value in the last six months.
From an all-time high near $68,000 per bitcoin in November, it plunged to $33,000.
The fall of the main electronic currency dragged down the rest of the cryptocurrency market, which in this black half year has lost around US$1 billion as a whole. Why Is Crypto Crashing?
Why did bitcoin crash?
“Cryptocurrencies are a high-risk asset, even though there are people who expect the price to rise in the long term and be a safe haven asset,” says José Francisco López, content director at Economipedia.
When the stock markets fail, he tells BBC Mundo, “investors prefer to get rid of the most volatile assets.”
On Wall Street, the shares of the technology companies grouped in the Nasdaq index have fallen, “following a correlation with the fall of bitcoin,” explains Diego Mora, senior analyst at the consultancy XTB.
This is because both digital currencies and shares of technology companies have served investors “to look for easy money.”
But since the Federal Reserve of the United States (Fed, for its acronym in English) began to raise interest rates, there is greater interest from investors to look for safer assets, such as Treasury bonds or the dollar.
“In these circumstances, people sell their riskiest assets,” explains Mora.
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Even more so, when the prospects suggest that interest rates will continue to rise in different parts of the world to control inflation.
In addition to the rise in interest rates (which last week included large economies such as the United Kingdom, the United States, and Canada), other factors are added that help increases uncertainty about the direction of the economy, such as the confinements in Shanghai due to the covid-19 and geopolitical tension over the war in Ukraine.
Where does the concept of crypto winter come from?
When the price of cryptocurrencies cools and falls steadily for several months, experts speak of crypto winter.
The concept refers to what happened in 2018 when bitcoin fell as much as 80% from all-time highs.
The crash sent the cryptocurrency market into a panic and caused the vast majority of digital currencies to plummet in unison.
It wasn’t until mid-2019 that crypto markets showed signs of recovery, buoyed by record investment by traditional institutions such as banks and large investment funds.