The cryptocurrency market is in turmoil, with steep price falls across the sector.
Industry leaders are warning of a “crypto winter”, with prices staying low for a long time.
Major crypto exchanges are firing staff and freezing recruitment.
But some remain confident in the sector’s longer-term future.
Cryptocurrency prices have been crashing this year, with the digital currency market proving vulnerable to the global economy’s wider problems. This has led some in the industry to declare the arrival of a “crypto winter”.
A “crypto winter” basically means that prices have dropped a long way and then stayed low for weeks or months. The signs are everywhere – the failure of the TerraUSD crypto project this May sent an icy blast through the market, then the cryptocurrency lending platform Celsius Network halted withdrawals, prompting a sell-off that pushed Bitcoin to a 17-month low.
Cryptocurrency turmoil
Crypto exchanges such as Coinbase and Gemini – which allow investors to trade digital assets – have announced job losses. Coinbase will cut 18% of its workforce, while Gemini’s bosses have warned of tough times ahead. “This has all been further compounded by the current macroeconomic and geopolitical turmoil,” they say. “We are not alone.”
Other contributing factors to the crypto winter, according to market analysts, are high inflation, rising interest rates and the financial turmoil that has followed Russia’s invasion of Ukraine. Crypto markets had soared in late 2020 and in 2021, partly because the US Federal Reserve was pumping so much money into markets in response to the COVID-19 crisis. But with central banks tightening monetary policy, that’s over.
“When the liquidity is pulled from the markets, the most speculative assets are hit the hardest,” Robert Johnson, Professor of Finance at the Heider College of Business at Creighton University, told Forbes. “I would say that there is no more speculative asset class than cryptocurrency.”
Crypto versus inflation
The downturn has got many thinking about how crypto fits into a world where inflation is rising fast.
Crypto’s big moves in 2021 led some investors to believe it could provide protection against inflation – but that’s now in doubt, says digital bank Ally’s Chief Markets and Money Strategist, Lindsey Bell.
“Some investors are already using Bitcoin and other cryptocurrencies as a hedge against inflation,” she says. “This could prove to be a savvy move, but that remains to be seen for now because it is such a youthful investment asset class. Its risk is less understood and more difficult to compare with other securities.”