Crypto falls on inflation news. Will crypto winter ever end?
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A small increase in inflation caused crypto prices to fall.
Important points
- Crypto investors may find themselves out in the cold for a while longer.
- Disappointing inflation data fueled fears that the Federal Reserve will continue its aggressive rate hikes.
- Crypto prices fell across the board, as interest rate hikes are not good for risky assets.
Shares and cryptocurrencies fell yesterday on worse than expected inflation news. The latest figures for the consumer price index (CPI) showed that inflation rose by 0.1% for the month and 8.3% year-on-year. Economists had hoped for a small drop. For consumers, this means that high prices will not disappear. For investors, this means continued price pressure for assets with a higher risk.
The suboptimal numbers make it more likely that the Federal Reserve will raise interest rates by 0.75% later this month. Interest rate hikes are causing people to pull out of riskier investments like crypto, and many economists fear that aggressive moves by the Fed could trigger a severe recession.
For now, the crypto boom stopped in its tracks
Leading crypto, Bitcoin (BTC) had pushed gradually upwards this week. After tipping below $19,000 a week ago, BTC had reached over $22,600 before the inflation announcement. It then fell to nearly $20,000 yesterday, according to CoinMarketCap data. Several cryptoanalysts predict further declines.
Ethereum (ETH) is on the verge of its momentous merger, a transition from proof-of-work mining to proof-of-stake that will dramatically reduce energy consumption. Ethereum briefly tipped above $2,000 in mid-August amid optimism surrounding the merger, erasing some of the year’s losses. However, that wasn’t enough to support the price against economic headwinds, as Ethereum fell around 10% yesterday following the CPI announcement.
The total market cap for crypto, which had finally pushed back above $1 trillion in recent days, fell to $957 billion. With further economic challenges on the horizon, we can expect the crypto price battles to continue.
What is a crypto winter?
The term crypto winter essentially refers to a long period of depressed prices – a bit like a bear market, but for crypto. It gets thrown around a lot, although there isn’t much consensus about what winter is, nor when it might end. The challenge with cryptocurrencies is that these are high-risk assets and a number of projects may fail before we reach spring.
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In fact, skeptics warn that the entire industry could still collapse. It is still a relatively new market, and there is much we do not know about how it will develop. This is why it is important to manage the risk you take and only invest money you can afford to lose. Position yourself so that you can take advantage of any gains, but don’t want to face financial disaster if blockchain technology doesn’t do what many hope it can.
Will crypto winter ever end?
Crypto investors have seen the value of their portfolios decimated so far this year and, unsurprisingly, are starting to tire of the cold. Many top cryptocurrencies are down as much as 90% of their all-time highs, and it is not clear when, or if, they will recover.
Keep in mind that the last crypto winter was almost three years long (from early 2018 to late 2020), and given that the macroeconomic conditions that partially triggered the downturn show no signs of abating, it may take some time for prices to recover.
One challenge is that the conditions that pushed prices to extraordinary heights in 2021 may not repeat themselves. Low interest rates and covid-related stimulus payments both fueled the frenzy, and many new investors felt they could do no wrong. Not only are interest rates rising and household budgets tightening, but increased regulation could also prevent a repeat of the cryptomania we saw last year.
In addition, investor confidence has taken a big hit. On top of dramatic price drops, the collapse of high-profile crypto Terra (LUNA) and other crypto platforms has caused some to lose their savings. As we face a potential recession and international energy crisis, those hoping for an imminent price rise are likely to be disappointed.
That said, for long-term investors, what matters is how you see crypto evolving over the next ten or even 20 years. It is a risky investment. But there are reasons for optimism. Ark Invest, for example, believes that Bitcoin can take part of the international money transfer market and several other industries. The innovation firm predicts that the price of BTC could eventually reach as high as $1 million.
The bottom line
Some see prolonged price drops as a chance to buy crypto at a discounted price. But there are no guarantees. Much depends on your view of how the industry can develop and your own financial position. Prices may well fall further and it may take years before they start to rise again.
Long-term crypto enthusiasts have survived past winters, and many investors are hibernating right now. If you own crypto and still believe in its long-term potential, the most important thing is to buckle down, avoid panic selling and wait for the freeze to thaw.
