Crypto Winter was a phase in the history of crypto markets from Nov 2021 – Jan 2023 where the inflow of funds into crypto markets almost dried up, Bitcoin dropped to $16k from $69k, and several crypto projects failed due to lack of both revenue and funding.
However, a few of them survived, projects like Das Crypto which as been around since 2020, has lurked in the corners during the wild days in the markets, just to come out and shine later.
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Crash in Markets During Crypto Winter
Bitcoin made a high of $69k on 10 November 2021 and began to drop. Many of us though that this was a healthy correction and would later recover.
However, to our surprise, by March 2022, the small recovery failed to sustain. Bitcoin’s price recovered to $47k by mid-March yet to fall again by May 2022.
May 2022 was also the same period where several big crypto projects failed as a result of Terra’s terrible crash. As per the estimates by Das Crypto, Terra wiped out nearly $64 billion in funds (validated by CNBC). Its LUNA cryptocurrency (now LUNC) crashed to less than 1 cent within a week (May 09 – May 15) and its algorithmic stablecoin declined more than 95%.
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Things worsened and most people lost trust in crypto. Bitcoin, Ethereum and several others continued their fall to reach one-third of their 2021 highs.
By December 2022, Bitcoin was struggling to hold $16k and Ethereum was struggling to hold $1k.
Drying of Revenue for Crypto Projects
Several well-known crypto projects were dead as a result of the market crash. NFT Evening was one such project.
Resurgence of Value-based Crypto Projects
By Jan 2023, only a handful of projects survived. Those which did, had a value based approach towards their businesses. Memecoins, FOMO and hype-based projects went out of the markets.
Blockchain games which had little to offer vanished. One such game was Attack Wagon.
However, when the markets began to breathe again, there was a ray of hope. Bitcoin crossed $24k by end of Jan 2024, which was nothing less than light at the end of the tunnel.
Projects began building again.
Factors Behind the Crypto Winter
There were several internal and external factors that were the cause of crash in the crypto markets.
Rising Interest Rates
The entire crypto markets witnessed a bull rally in 2021 because of COVID-led stimulus packages all around the world. Below is a share of economic stimulus by different countries around the world as a share of their GDP.
Unable to spend the money while sitting at homes, people began to see crypto as a quick rags to riches formula and began experimenting with it. This experiment saw the fastest rise in crypto prices till that date.
Below is the subsequent rise in the overall crypto market cap.
Quality Issues with Crypto Companies
Several crypto companies began faltering as they mis-interpreted the risks associated with crypto lending.
Three Arrows Capital (3AC), a crypto hedge fund, was one such company which collapsed because it failed to meet the margin requirements of its lenders. At its peak (March 2022) the company had AUM of $10 billion. By July of the same year, the hedge fund was in bankruptcy court.
It was found that 3AC and several others had a good amount of their funds in Terra USD which was an algorithmic stablecoin and had fallen in May 2022 due to a death spiral. It was estimated that this death spiral was caused by shorting (in derivatives).
Another victim of bad management was Voyager Digital which also filed a bankruptcy in July 2022. Voyager could not pay $670 million it had bought from the 3AC.
Here is an infographic from CNBC which shows how the collapse of Terra Luna led to troubles in several different companies.
Ethical Issues with Crypto Projects
Projects like FTX has a whole different set of issues. The executives of the crypto exchange were found to siphon off funds from user accounts to fuel their own bets against the markets. One of the associated companies called Alameda Research was instrumental in these risky trades.
Later, the executives of both companies, including Sam Bankman-Fried and Caroline Ellison were arrested. After prosecution, Sam faces prison in the USA till he turns 80.
Challenges in Crypto Winter
There were several challenges which made it almost impossible for markets to go ahead without addressing them. One of them was the case of high gas fees on Ethereum.
Another major challenge was the legal actions and regulation of crypto markets. USA, China and India which were the major crypto markets began serious crackdowns on crypto companies. These were in the form of financial regulations, fines, jail to crypto project owners, and high taxes.
