There's no denying that we've slipped into a crypto winter - a period of depressed prices marked by bouts of heavy selling - but that doesn't mean crypto is "dead" or that investors should panic.
It's been a rough tumble from last November's highs. Bitcoin is down more than 70% (74% its most recent low); Ethereum is down about 78%. Other top cryptos like Cardano, Solana, and Polkadot are all down at least 85%.
And the pain has gone beyond plunging prices.
The collapse of the TerraLuna ecosystem in May caused $68 billion of losses. The ripple effects from that debacle soon snared crypto lender Celsius, which had a lot of exposure to TerraLuna. Celsius froze withdrawals for its 1.7 million customers - trapping some $8 billion worth of deposits.
Finally, the sharp drop in prices has forced several overextended crypto exchanges to lay off employees. Coinbase cut 1,100 people (18% of its workforce), Gemini cut 1,000 (10% of its workforce), Crypto.com cut 260 (5% of its workforce), and BlockFi cut 170 people (20% of its workforce).
But don't let all this get to you. Don't panic sell your crypto - you only lock in losses that way. Stay patient. Believe me, the market will eventually bounce back.
Those of you who've been following me a while already know the evidence for this claim: crypto adoption is surging, and there's been a huge, coordinated effort by Wall Street and the fintech sector to incorporate blockchain tech into their business models.
But that's the "how" of it. Today, I want to talk about the "why" of it - specifically, why "crypto winter" is necessary to get where we need to be, and what good things happen during slumps like the one we're in now.
Bottom line, you'll be much better off if you "HODL" and dollar-cost average in on select cryptos through winters like this. Here's the deal...
We've Been Through These Cycles Before
As a crypto veteran, I've been through several crypto winters that were just as bad or worse than the one we're having now.
When I was mining Bitcoin on my home computer in 2011, BTC crashed 93%, from $29 to $2.10. Three years later, starting in 2014, Bitcoin tumbled 85%, from $1,135 to $175. The most recent, before this one, started in 2018, when Bitcoin fell 84% - from $19,640 to $3,185. The latter two lasted more than a year.
Each time Bitcoin, which leads the crypto markets, recovered to hit a much higher all-time high. I believe it will do so again.
But this is not just a waiting game. There's more to it than that.
But just like in nature, when trees and plants go dormant to gather strength for blooming when the weather warms up, there are things that happen during a crypto winter play a big part in making the next rally - "crypto spring" - possible.
Why Crypto Winter Is Ultimately a Good Thing
One of the benefits of crypto winter is that it tends to purge weak, high-risk projects and companies. This time around the headline failures are (so far) TerraLuna and Celsius.
It's likely we'll see more crypto failures before this crypto winter is over. But such pain is necessary for the industry to move forward.
"One positive of a bear market is that it does weed out projects that can hide their shortcomings in a bull market," Jawad Ashraf, CEO and co-founder of NFT marketplace Terra Virtua, told Verdict. "Although we don't want to see anyone lose money, ultimately it's a positive for the industry to lose projects that do not have a sustainable and long-term future."
Another major benefit is the space a crypto winter gives to developers. In other words, with less media attention and hype focused on the industry, developers can better focus on building and innovating. Some of those innovations become the basis for the next rally.
This is a pattern venture capital firm Andreessen Horowitz identified two years ago. They call it the "Crypto Price-Innovation Cycle."
The idea is that each big rally that produces new all-time highs draws fresh developers into crypto. They spend the crypto winter that follows building. When these projects and startups mature a few years later, they help trigger the next big rally.
The first cycle fell between 2009 and 2012, when Bitcoin soared from less than $1 to $29. That attracted the first wave of innovators.
"Entrepreneurs realized you could create businesses in crypto. This was when many of today's largest exchanges, miners, and wallets were founded," the original Andreessen Horowitz report says. That gave early adopters ways to obtain and trade Bitcoin - tools helped fuel the next big rally.
The second cycle fell between 2012 and 2016. The Bitcoin price peak here was in November 2013.
"This cycle brought roughly 10x more developers and startups into the space," the report says. "It was also when important projects were created and funded, most notably Ethereum, which drove a lot of the excitement in the third cycle in 2017."
The third cycle ran from 2016 through 2019, with the price peak coming in December 2017.
Once more the number of developers grew by a factor of 10.
"Crypto moved from the fringe to become a bona fide startup sector," the report says. "The 2017 cycle spawned dozens of exciting projects in a wide range of areas, including payments, finance, games, infrastructure, and web apps."
Crypto prices peaked again last year, setting up a fourth cycle. That means developers no doubt are hard at work right now building out the innovations that will power the next crypto rally.
That's where the biggest opportunities for profit lie...
Where to Find Crypto Profits "Come Spring" in the Next Rally
While some crypto innovations that emerge in the next year or so will be surprises, you can bet that some of the crypto tech we know about now will get a major push forward.
Those are the projects investors should try to seek out during crypto winter - when you can buy at a discount.
Here are some ideas to get you started:
- AI + Crypto = Major Disruption: Artificial intelligence is a powerful disruptive technology, and yet, like crypto, is still in its infancy. So there's a massive opportunity where the two intersect: AI-oriented cryptocurrencies. They've been badly battered by crypto winter, but should shine brightly in the next rally. We've talked about one of these coins with our paid-up Members.
- NFTs Move Beyond Bored Apes: Non-fungible tokens in the form of cartoon art were one of the biggest successes of the third crypto-price innovation cycle. But those art collections, popular as they are, represent just a tiny slice of what NFT technology can do. NFTs hold great promise for creating a better system for compensating artists, photographers, and musicians. NFTs show proof of ownership, and with a smart contract can be designed to generate royalties when the NFT is re-sold. Artists finally will be able to bypass middlemen who historically have taken a large cut of the sales of creative works. NFT tech could also become the way we buy tickets to concerts and other events. Look for projects working on NFT use cases like these.
- The Metaverse Matures: The metaverse - virtual worlds where people can play games, buy things, socialize and even work - is another 21st century disruptive technology. Like the aforementioned AI cryptos, Metaverse cryptos are deeply oversold, which makes crypto winter a terrific time to buy.
- Putting the "Currency" Back in Cryptocurrency: One of the long-standing knocks on crypto, especially Bitcoin, has been that it is difficult to spend. The ability to serve as a medium of exchange is required to qualify as a "currency." But over the span of this crypto winter, that will be changing. Leading credit card companies Mastercard and Visa have both launched cards that allow people to use their crypto as currency. According to a recent survey by Deloitte, three out of four retailers are planning to accept crypto payments within the next two years. And both of the top cryptocurrencies, Bitcoin and Ethereum, have upgrades in the works to scale their networks so they can handle a much greater number of transactions. In fact, Bitcoin and Ethereum stand to gain the most from this trend. Being widely accepted as currency will be a fresh catalyst for BTC and ETH in the next rally.
As I said above, some of the biggest names in finance are starting to come around to the incredible potential of crypto.
In fact, there's a Wall Street insider - famous for being a conservative investor - who's even more bullish on Bitcoin than I am. For a long time, he was a huge crypto skeptic, but now he's saying it's the best investment opportunity to come along in the past 30 years.
Skybridge Capital's Anthony Scaramucci has a bold Bitcoin price prediction that's been making headlines, and you can see it right here, along with his advice on what every American should do right now...
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.