The bounceback of Bitcoin and its fellow digital assets was a major storyline in 2023, leading many to wonder: Is the crypto winter over?
Indeed, the trial of former FTX CEO and co-founder Sam Bankman-Fried, the head of the collapsed cryptocurrency exchange, drew plenty of attention to the digital asset space.
At one point, FTX had a value of more than $32 billion. However, by November 2022, FTX had collapsed, and a month later, Bankman-Fried was arrested in the Bahamas, charged with seven counts of wire fraud, securities fraud, and money laundering, and extradited to the U.S. to face his charges.
On November 2, 2023, a federal jury in a Manhattan courthouse found Bankman-Fried guilty on all seven counts. The former crypto icon faces up to 110 years in prison. His sentencing is scheduled for March 28, 2024.
"It's a warning, this case, to every single fraudster out there who thinks that they're untouchable or that their crimes are too complex for us to catch or that they're too powerful for us to prosecute or that they could try to talk their way out of it when they get caught," said Damian Williams, the U.S. attorney for the Southern District of New York, as reported by NBC News. "Those folks should think again."
In the lead-up to FTX's collapse, cryptocurrencies were in high demand on Wall Street, with Bitcoin hitting an all-time high of $68,569 in November 2021. Shortly after that, demand fell off a cliff and prices plummeted. And in late 2021 or early 2022, what is described as a "crypto winter" began.
What is a crypto winter?
A crypto winter is loosely defined as an extended period when cryptocurrency prices move lower, combined with a decrease in overall trading volume. They can last months or even years. In that regard, they're not unlike bear markets for stocks.
Unlike a recession, customarily defined by economists as two consecutive quarters of negative GDP (gross domestic product), cryptocurrencies have no specific definition. Therefore, every person's idea of when and what constitutes a crypto winter differs.
The first crypto winter began in February 2011 when Bitcoin dropped by 40% from $1.06 to 67 cents. The next one didn't happen until 2014, when the price of Bitcoin dropped from a high of more than $1,200 entering the year to a low of $180 by January 2015.
However, the term crypto winter only came into common usage in 2018, after 2017's big run from $900 to $20,000, a 2,122% gain over 12 months, to fall back to $3,180 by December 2018.
During 2017's irrational exuberance, publicly traded mainstream companies were changing their names to include the words blockchain or crypto, while others completely pivoted their business models to catch the crypto craze, similar to what occurred during the dot-com bubble in late 1999 and early 2000.
The most recent crypto winter occurred over 13 months, from the all-time Bitcoin high of $68,569 in November 2021 to a December 2022 bottom of below $17,000, a 75% decline.
What causes a crypto winter?
In the most recent crypto winter in 2022, rampant inflation from a post-pandemic world required the Federal Reserve to raise interest rates to dampen the economy, slowing demand and lowering prices.
It began raising the federal funds rate in March 2022, ultimately boosting the federal funds rate 11 times through July 2023, from 0.25%-0.50% to 5.25% to 5.5%%, the highest level in 22 years.
As a result, investors sold their risk-on assets such as crypto and stock, sending prices of both much lower by the end of 2022. It didn't help crypto prices that two cryptocurrencies, Luna and TerraUSD, collapsed in May 2022, followed by bankruptcies by crypto lenders Voyager Digital and Celsius Network. And FTX's bankruptcy in November 2022 put the nail in the proverbial coffin.
Like stocks, crypto winters are often (but not always) caused by bad news, whether self-inflicted wounds such as a security breach or hack, reduced interest from institutional investors, unsettling economic news such as what happened in 2022, or increased regulatory overview.
Over the long haul, these are all signs of a healthy marketplace that adjusts to current market, economic, and regulatory conditions.
How to tell if the crypto winter is over?
With Bankman-Fried set to go to prison for a long time in the first half of 2024, the industry can finally look ahead rather than in the rearview mirror.
Positive signs that the latest crypto winter could be over include Bitcoin gaining roughly 150% in 2023, higher weekly inflows of crypto investment funds – much like how you'd look at mutual fund and ETF net inflows and outflows – and institutional money getting back into the crypto space by offering mainstream digital assets from the likes of BlackRock, Mastercard, etc.
However, some crypto industry professionals suggest that the latest crypto winter won't be over until spot Bitcoin ETFs and spot Ethereum ETFs are approved for sale in the U.S. markets.
"That's the floodgate for large portfolios to allocate 50 basis points of their holdings to Bitcoin," said Greg Magadini, director of derivatives at Amberdata, as reported by Decrypt. "To me, that would be the catalyst to essentially open up ... the end of crypto winter."
Just as there is no specific definition of a crypto winter, there is no rule to indicate when one has ended. As a relatively new asset class, that comes with the territory.
