The crypto market has been through a wild ride, and many are wondering if the crypto winter is finally over. According to market trends, the decline in prices has slowed down, and some assets have started to recover.
Investors are cautiously optimistic, but it's essential to remember that the market is still fragile. As we discussed in the article, the total market capitalization of cryptocurrencies has increased by 10% in the past month, indicating a potential thaw.
However, it's also worth noting that some experts predict a possible "hibernation" period, where the market will continue to grow slowly but steadily, rather than experiencing a rapid recovery. This could be a more realistic expectation, given the current market conditions.
The fact remains that the crypto market is highly volatile, and prices can fluctuate rapidly. As we've seen in the past, a single event can trigger a significant price swing.
Winter Over
The crypto winter may be over, and there are some positive signs to look out for. Bitcoin gained roughly 150% in 2023, which is a significant jump.
Higher weekly inflows of crypto investment funds are also a good indicator that the market is recovering. This is similar to how mutual fund and ETF net inflows and outflows are measured.
Institutional money is also getting back into the crypto space, with mainstream digital assets being offered by companies like BlackRock and Mastercard.
However, some experts suggest that the crypto winter won't be over until spot Bitcoin ETFs and spot Ethereum ETFs are approved for sale in the U.S. markets. This would be a major catalyst for the end of crypto winter.
Market Analysis
The crypto winter may be thawing, but let's take a closer look at the market analysis to understand what's really going on.
The total market capitalization of cryptocurrencies has increased by over 20% since the beginning of 2023, a sign that investor confidence is slowly returning.
According to data from the past year, the number of active cryptocurrency addresses has been steadily increasing, indicating more users are getting involved in the market.
This uptick in activity has also led to a rise in trading volumes, with daily volumes exceeding $10 billion in some cases.
However, it's worth noting that the market is still highly volatile, with prices fluctuating wildly in response to even minor changes in the market.
Unlike a Bear Market
Crypto winter and a bear market may seem similar, but they're not necessarily correlated. A bear market is a period when stocks are lower in value, often due to economic factors.
The key difference lies in how stock prices and cryptocurrency values are determined. Stock prices rely on fundamental and technical analysis strategies, while cryptocurrencies are still developing their valuation models.
Investors use different approaches to determine target prices for stocks and cryptocurrencies. This can lead to a major disconnect between the two markets.
A down stock market can happen simultaneously with a down crypto market, as we've seen in the 2021 crypto winter.
Market Influencers
The crypto market has been heavily influenced by high-profile failures of significant players. FTX and Binance's controversies have led to a loss of public trust in the market.
Regulators are now calling for improved regulation of the crypto market, which could lead to safer transactions for all. This is often referred to as "taming the Wild West" of the crypto market.
The guilty verdict in the Sam Bankman-Fried trial is a positive step towards holding wrongdoers accountable for their actions. This verdict shows that those who abuse the system will face consequences.
The failures of FTX and Binance have led to increased scrutiny of the crypto market, with many calling for greater oversight and regulation.
Leverage
Leverage played a significant role in the crypto market's decline in 2022.
In 2017, leverage was largely provided to retail investors via derivatives on cryptocurrency exchanges, but this time around, it was provided to crypto funds and lending institutions by retail depositors of crypto who were investing for yield.
Crypto investors built up huge amounts of leverage thanks to the emergence of decentralized finance, or DeFi, an umbrella term for financial products developed on the blockchain.
The nature of leverage was different in this cycle versus the last, with a huge build out of yield-based DeFi and crypto 'shadow banks' from 2020 onwards.
There was a lot of unsecured or undercollateralized lending as credit risks and counterparty risks were not assessed with vigilance.
The inability to meet margin calls has led to further contagion, as funds, lenders, and others became forced sellers due to margin calls.
Crypto Outlook
Digital assets, including cryptocurrency, seem to be affected in different ways by macroeconomic factors than traditional financial securities.
Many investors have turned to crypto to hedge against inflation due to its unique properties, such as a finite number of coins that can be minted.
The set market cap of Bitcoin means there is a limited supply of coins, making it potentially resistant to inflation.
Institutional investors may become more interested in crypto investments as regulation increases, which could lead to an increase in overall market activity.
Once institutional investors begin to adopt cryptocurrency at a wider scale, individual investors will likely see an increase in overall market activity.
Sources
- https://www.cambridgeassociates.com/insight/is-the-crypto-winter-over/
- https://www.investopedia.com/crypto-winter-5496605
- https://www.kiplinger.com/investing/cryptocurrency/is-the-crypto-winter-over
- https://rethinking65.com/is-the-crypto-winter-over/
- https://www.cnbc.com/2022/07/14/why-the-2022-crypto-winter-is-unlike-previous-bear-markets.html
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