Crypto winter is in danger of turning into an ice age

After a spectacular crash earlier this year, the crypto industry’s most popular tokens have gone to sleep, suggesting that amateur investors have fallen in love with the once-exciting asset class and big funds have decided to keep their distance.

The price of the largest token, bitcoin, has hovered mostly around $20,000 since August, after peaking a year ago at nearly $70,000. Ether, the second largest, has failed to rally since its environmental revamp in September. Bitcoin’s average annualized volatility is now the lowest since October 2020, according to analytics platform CryptoCompare.

At first, the drop in token prices was described as “crypto winter” — one of the periodic declines in the market. But the length of this now lackluster phase, combined with the thousands of job losses in the sector in recent months, suggests this is more of an ice age, with no grand theories emerging as the next source of fuel for rallies. .

“The narrative silence is deafening,” said Edmond Goh, head of trading at crypto broker B2C2. “Eventually a narrative will come that [break the impasse] — maybe inflation or a big regulatory announcement. Maybe something completely unexpected.

Digital asset trading and investment group CoinShares describes this as a “listless time”.

In part, crypto has suffered from the same malaise as other highly speculative asset classes since it became clear nearly a year ago that US interest rates would have to rise rapidly to combat the persistent inflation.

The tech-heavy Nasdaq stock index in the United States has fallen 30% over the past year, one of the worst performers in developed markets. But bitcoin’s nearly 70% decline over the same period is steeper, and May collapse of luna token, and the so-called stablecoin terraUSD, lost an estimated $40 billion to investors and shook confidence in crypto further. The industry’s market capitalization fell from $3.2 billion to less than $1 billion.

Thousands of people lost their jobs after exchanges including Coinbase and Gemini cut large sections of their workforces, while crypto hedge fund Three Arrows Capital and lending platform Celsius Network sank into bankruptcy. High-level industry executives have also stepped down, including former industry CEOs Jesse Powell of Kraken, Michael Saylor of MicroStrategy and Alex Mashinsky of Celsius.

The fixed price deterred speculators, leaving the market to long-term bulls. Known in the industry as “Hodl-ers” – short for Holding On for Dear Life – they seem to be doing just that. Morgan Stanley estimated this week that 78% of all bitcoin units had not been used for any transaction in the past six months, a record high.

Besides the tougher interest rate environment, some of the key arguments behind crypto have been proven wrong. El Salvador’s experiment with bitcoin as official currency fell flat, while crypto failed as an inflation hedge – prices fell even as inflation in developed economies sagged. approached 10%.

Line chart of the price of the flagship crypto token ($) showing that the price of bitcoin has fallen since its peak last year

“[Bitcoin] has not acted, over the past two years, as a hedge against inflation or as a store of value,” said Alkesh Shah, digital asset strategist at Bank of America.

Even a successful shift from energy-intensive crypto mining practices to a low-carbon alternative hasn’t helped lift morale. In September, the Ethereum network performed the so-called Merge, moving to a greener blockchain. The move reduced network power consumption by around 99%, but it has yet to trigger an increase in the value of Ether, the blockchain-linked token.

Other people’s pain may not be over yet. Crypto miners, who typically use computers to solve puzzles in exchange for tokens, are also feeling the pressure. While they must continue to spend ever-increasing amounts of money on energy, the token they are rewarded with is depressed.

US-listed mining company Core Scientific warned this week that it could run out of cash by the end of the year and would have to file for bankruptcy, which would send its shares further down by 70%. In a regulatory filing, the company blamed bitcoin’s low price, rising electricity costs and litigation with now-bankrupt lending platform Celsius.

Line chart of Ether price ($) showing Ether price has also fallen sharply since last year's bull run

Despite the collapse in value, some remain optimistic. Dan Ives, Managing Director of Wedbush Securities, said: “It has been a brutal time for risk assets, including crypto. . . but the asset class is here to stay”. However, he also said that “blockchain and other use cases are critical for crypto in the future.”

In August, Coinbase announced a deal with BlackRock to give the asset manager’s clients access to digital assets in a move seen as a potential watershed moment for traditional crypto hopefuls. The asset management giant said it was “still noticing substantial interest” from institutional clients despite the market downturn.

Nasdaq, Mastercard and BNY Mellon have also announced crypto services in recent weeks, bolstering the argument that institutional interest in digital assets remains despite this year’s crash. But it may take some time before the interest turns into something firmer.

“There are no fundamental principles that underpin crypto, or to the extent that they exist, they have not yet been identified,” said Charley Cooper, chief executive of blockchain firm R3. “The idea that we’re suddenly going to see a dramatic bull run before the broader economy gets a foothold, I think is fanciful.”