The crypto winter is looking long and cold.
A crypto winter refers to an extended downturn in digital currencies. Bitcoin, the flagship cryptocurrency, has been languishing all year and is unlikely to see a major rebound in the near term, given the rising risk of global recession.
The flagship cryptocurrency has struggled to remain above $20,000 for the past month or so, marking a massive decline from its peak of almost $70,000 nearly a year ago. In fact, just since the start of this year, bitcoin has shed some 60% of its value. Similarly, Ethereum, the second-largest cryptocurrency, is down more than 70%, and other tokens have seen similar declines.
Investors were hopeful months ago that the declines were just a temporary blip and that bitcoin and other cryptocurrencies would stage a rebound, but that prospect has dimmed as the weeks morphed into months and bitcoin dipped ever lower.
Alongside bitcoin, traditional assets like stocks have also experienced declines. That is due in large part to the Federal Reserve’s efforts to bring down inflation through a historic interest rate-hiking cycle. The Fed has raised rates at an aggressive pace, which has caused investors to fear that a recession is inbound.
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By raising rates, the Fed slows demand and thus commerce. Because the central bank has had to raise rates more than anticipated, the likelihood of economic stagnation and recession has grown.
The Nasdaq, which is heavy on technology stocks, has fallen by more than 27% since the start of the year. David Sacco, a practitioner in residence at the University of New Haven finance department, pointed out that cryptocurrency prices have declined in tandem with traditional assets.
“What’s happened is we’ve seen huge inflation around the world and crypto dropped while that happened. So I think what crypto has become more like is [that] it trades very much like technology stocks do,” he said.
Many in the cryptocurrency space last year thought that bitcoin could be seen as a hedge against inflation. For instance, when bitcoin hit its zenith of $69,000 in November 2021, inflation was running hot at 6.8%, according to the consumer price index.
That narrative proved to be unfounded as the flagship digital asset began shedding value, even as inflation continued to tick up month after month this year, cresting at 9.1% in June before now settling down to a still-hot 8.3%.
Why this seems to have occurred is less about inflation and more about risk, according to Sacco. During economic upheaval, or when there is an expectation that the economy will soon languish, investors tend to flee risky assets in favor of safe havens.
Bitcoin is a new and undoubtedly risky asset, meaning that because of the Fed’s rate hikes and the notion that there could be an economic downturn, traders have sold off their cryptocurrency holdings in favor of parking their investments in safer spaces.
Cryptocurrency entrepreneur Travis Bott told the Washington Examiner that because of the overall sentiment in the markets more generally, combined with the novelty of cryptocurrencies, prices would be expected to fall.
“I think people overreact to its price adjustments relative to what’s going on in the economy,” he said. Bott predicted that the value of bitcoin could decline a bit more than it is now, although he thinks the value will start slowly moving up again in 2023 and 2024.
Because it is unclear if and when a recession will take hold, or how low the traditional stock market will fall over the coming months, Sacco said he isn’t ready to predict that bitcoin has reached its bottom quite yet. If inflation stays stubbornly high and the Fed is forced to raise rates even more, stocks could keep declining.
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“If we’re close to a bottom in the stock market, then we’re probably close to a bottom in crypto and bitcoin specifically. If not, then it remains to be seen,” Sacco said. “I wouldn’t call a floor on bitcoin until we call a floor on the stock market … which I’m certainly not ready to call yet because the Fed still has a lot of work to do on the inflation front.”
The Fed met this week and conducted another 75 basis point rate hike.
