The most popular tokens of 2021 – Layer 1s, GameFi, meme tokens, and DeFi 2.0 – are all down over 75% from their all-time highs. While the market braces for a crypto winter, one question swirls around traders’ minds: How low can it go?
Those who endured the harsh crypto winter of late 2018 and early 2019 might remember that BTC dropped 83% the following its 2017 high of $19,665, and ETH dropped 94% to $83 about 11 months after its former peak of $1,448.
Right now, around six months after BTC and ETH’s all-time highs, the two largest cryptocurrencies are down 56% and 59%, respectively. If this cycle copies the last, BTC would sink from highs of $68,789 to $12,000 and ETH would fall from $4878 to below $300.
Of course, no two cycles are the same. “This is uncharted territory. Since crypto started, we’ve been in a decade-long bull run with low to zero interest rates,” DeFi analyst The DeFi Edge told The Defiant. “We’re facing inflation rates at a 40 year high. Crypto needs more money to grow and it’s a horrible environment now.”
Fed Rate Hikes
Indeed, the Federal Reserve has raised rates twice this year to target between 0.75% and 1% – up from near 0% amid the pandemic – flushing money from crypto into more stable assets, such as treasury bonds.
The Fed raised interest rates from 2016 through 2019, meaning the 2017 boom occurred in a similar situation. But crypto prices bottomed out in mid-2019 when interest rates hit a high for the decade.
Ryan Watkins, a former Messari analyst who launched a crypto hedge fund this month, sees the current environment as unprecedented. “We are at the mercy of a broader macroeconomic slowdown which is hurting risk assets across the board,” the hedge fund manager said. “This is something crypto has never been through.”
The crypto market’s different this time around, too. The collapse of the Terra stablecoin network took $25 billion from DeFi, and within two weeks of its crash, the market has shed nearly $700B in value.
Watkins believes crypto has made real progress in the last four years. “Although [the] industry is still immature and most projects are garbage, this time around there are some projects that have product market fit,” he said. The hedge fund manager added that despite differences in the macro environment and increased user traction, the current crypto downturn is more similar to the last than it is different.
And a crypto winter might not be all bad: investors have a lot more distractions. “There was literally nothing to do during the 2018 bear market,” said The DeFi Edge. “DeFi, GameFi, and NFTs didn’t exist yet. So many people lost interest because of how boring it was. Now we have billions in value locked up and more talented builders than ever before.”
A report by Electric Capital published in January measured web3 development activity at an all-time high – but, with monthly peaks of 18,416 active developers, still small. Electric Capital found that developers stuck around during the last bear market, with the bull attracting more.
Longtime holders with sizable crypto portfolios can only hope developers hold on through this bear market, too. Those new to the cold may be shivering.