Is this the start of a long crypto winter?

Looking back, a cryptocurrency bear market started exactly a year ago. How long will this last until fortunes turn around again?

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Cryptocurrencies have suffered from a brutal sell-off the past few months, but the last fortnight has been especially bad for investors.

In the month of May alone, Bitcoin (CRYPTO: BTC) has lost more than 26% of its value in Australian dollar terms.

According to a Coinjar memo to clients on Wednesday night, we are well and truly in a bear market that started exactly a year ago.

“It’s all so clear in retrospect: May 2021 was the end of the bull run,” read the memo.

“Since then, monthly exchange users have been trending down and people have stopped Googling crypto. Even the burst to US$69,000 in November now looks like it was designed to engineer exit liquidity for the big players.”

The flight of capital out of digital assets is not just seen in the devaluation of volatile cryptocurrencies.

“Recent trends show that the amount being stored in DeFi [decentralised finance] protocols is rapidly decreasing and USDC is being cashed out for real USD.”

Why this winter might turn into an ice age

Crypto last went through a bear market over 2018 to early 2020.

Similar to the spectacular gains seen over the COVID-19 pandemic, 2017 was a massive year of gains. But then a “crypto winter” followed for two years.

Coinjar’s assessment is that the new 2022 winter is different.

“Unlike previous crypto winters, this one looks set to unfold against a much changed macroeconomic background,” read the memo.

“Cheap money has dried up and the appetite for risk is marginal. The revolutionary technologies to have emerged during this bull run – DeFi, NFTs, DAOs, layer 2s and, yes, stablecoins – have shown themselves to be largely unready for primetime.”

To add to this, regulators around the world are “sharpening their claws” against crypto and blockchain. 

“It’s hard to believe we’re going to V-shape our way out of this one.”

Why a sunny spring could follow the current freeze

Those who stuck with their investments through the 2018 winter saw their currencies skyrocket again after the coronavirus arrived.

And, believe it or not, prospects look even brighter this time around.

“When things collapsed in 2018, crypto was toxic,” read the Coinjar memo.

“Banks wouldn’t touch it, Google and Facebook both banned crypto advertising and the topic was about as conversationally welcome as an extended treatise on your bowel movements.”

Now there are actual sovereign nations who treat Bitcoin as currencies, even more that are forming crypto strategies, and big finance institutions offering crypto products.

“The biggest companies in the world [are] unleashing web3 projects and the slow, steady adoption by industries as diverse as high fashion, music, gaming, sports, energy, and more.”

Yes, those activities may slow down as crypto rugs up for another winter. But now is the time for consolidation, according to Coinjar.

“As the adage goes: bear markets are for building – and right now there’s a lot of building going on. What will emerge when the frost thaws?”

Motley Fool contributor Tony Yoo has positions in Bitcoin. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin. The Motley Fool Australia has positions in and has recommended Bitcoin. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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