What does a crypto recovery look like?

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Key learning points

  • The crypto market started to decline from its peak price in November 2021, but technically did not enter a “winter” phase until June 13, 2022.
  • Past trends would indicate that the crypto winter will last another three to four months, but it would take another three years for prices to fully recover to their November 2021 glory. Relying on past trends can be a fool’s errand for such a new raw material.
  • Government policies worldwide are likely to impact crypto’s recovery, or lack thereof, and are partly responsible for the slow burn they experienced in 2022. That may be bad for crypto, but good for the planet.

Cryptocurrencies have had a great year. If it were a financially healthy stock and you were a long-term investor, now would be an equally good time to buy. But cryptocurrency markets do not behave like the stock market, making it difficult to judge whether crypto will ever recover.

Why crypto is not as easy to predict as the stock market

Crypto does not have a very long history. Bitcoin, the first current-generation digital currency, launched in 2009. The New York Stock Exchange, by comparison, started in 1792. We can easily look back at historical stock market trends, but we don’t have enough data for cryptocurrency to understand how it functions under different economic conditions.

In addition, the cryptocurrency markets are less regulated than others such as the stock market. While agencies like the Securities and Exchange Commission and FINRA keep a close eye on investment firms in the stock market, crypto firms operate with relatively little oversight. That poses additional risk to investors, including the additional risks of scams and fraud.

Finally, cryptocurrencies operate outside of the support of a major government or central bank. Unlike US dollars and euros, most cryptocurrencies derive value from the communities that use them. They are difficult to value, and few are backed by dollar-based assets.

Unlike investing in stocks, there are no stats for an affiliate company that would give a full story as to whether your crypto investment is a “good” investment or not. While there are plenty of methods for valuing a stock, analysts are struggling to do so for digital assets like bitcoin and ether.

A Brief History of Crypto Winters

Crypto winter is a term similar to a stock market bear market. A crypto winter means a prolonged period of low asset prices compared to recent highs. At the time of writing, crypto prices have fallen significantly from their 2021 highs.

We have very limited data on crypto winters as cryptocurrency has seen only two such events in the past which gives us a meaningful comparison. While it is easy to chart stock market patterns and look for recurring ebbs and flows, that is more challenging with cryptocurrency.

The crypto crash of 2018

Crypto – and Bitcoin in particular – shot up in value in 2017. In January it was below $1,000, but by December it had risen to nearly $20,000. This was not because it suddenly became more popular or in demand, although many started paying attention to it for the first time after its meteoric rise.

Since the price spike may have been caused in part by market manipulation by major investors, price changes may not always have been what they seemed. Specifically, a user with a large wallet known as a crypto whale would engage in two types of manipulation:

  1. Spoof. When someone sends out a fake crypto bid to boost demand, only to withdraw the bid after the price has been artificially inflated.
  2. Wash trade. When someone buys and sells on their own, it appears as if the cryptocurrency is owned and in demand trading at a higher price than it actually is.

The crime was so serious that the Department of Justice opened an investigation. After the artificial price hikes, prices fell in fits and starts until November 2018, when the official crypto winter of 2018 kicked off. The bear market officially started when the price of crypto assets was below what most crypto holders bought them for.

This bear market lasted about four and a half months in total. While crypto exited its bear market in early April 2019, it only started to pick up steam a year later, in 2020, when the pandemic hit.

Our current Crypto Winter

Everyone has reacted differently to the pandemic, but in the beginning it was destabilizing for everyone. Many lost faith in their leaders and governments and joined cryptocurrencies for what they viewed as a “safer” investment than the infrastructure they saw closing around them.

In the following year, it continued its bull run. But in the background, two of the largest crypto mining countries – Russia and China – started working hard against energy-intensive mining activities in 2021 through stricter policies.

This happened at the same time that global inflation was rising and rumors that the US Federal Reserve would soon raise interest rates had started. These circumstances led to investors fleeing the crypto markets en masse.

Digital asset manager Grayscale Insights wrote that the peak market price decline started in November 2021, but we didn’t get into a true crypto winter – or bear market until June 13, 2022.

What Happens After a Crypto Winter?

Just because crypto is coming out of a bear market doesn’t automatically mean prices will return to previous highs, not even close. The last time there was a crypto winter, investors had to wait about a year for prices to rise more consistently. Bitcoin did not recover to its peak of 2017 until early 2021.

From there, it skyrocketed and increased in value for a short period of time. But based on a model where crypto winter and boom cycles occur roughly every four years, it could be 2025 or early 2026 before we see prices return to their peaks in November 2021.

Assuming the four-year pattern holds, this could be an ideal time to buy more cryptocurrencies. But that is an extremely risky decision that is only ideal for long-term investors, as cryptocurrencies are risky and there is no guarantee that they will ever recover.

Will crypto ever recover?

Crypto is likely to correct price from its current downward trajectory, but there is also a good chance it could drop to zero. Moves out of China that restrict crypto could be the first of many, for example as governments and environmentalists fight against crypto’s massive electricity consumption.

Tiny El Salvador has made bitcoin a national official currency, but other countries are considering serious rules and restrictions. Government officials say they need additional laws on digital assets to protect consumers and the environment.

Consider Q.ai’s Crypto Kit to help you get your feet wet in digital assets without buying crypto directly. This investment portfolio uses a mix of assets to give you crypto exposure without jumping through hoops to create a crypto wallet (read account) and control this currency around the clock.

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