Why the 2022 ‘crypto winter’ is unlike previous bear markets

On Jul 14, 2022

There’s something about the latest crypto crash that makes it different from previous downturns.

Artur Widak | Nurphoto | Getty Images

The two words on every crypto investor’s lips right now are undoubtedly “crypto winter.”

Cryptocurrencies have suffered a brutal comedown this year, losing $2 trillion in value since the height of a massive rally in 2021.

Bitcoin, the world’s biggest digital coin, is off 70% from a November all-time high of nearly $69,000.

That’s resulted in many experts warning of a prolonged bear market known as “crypto winter.” The last such event occurred between 2017 and 2018.

But there’s something about the latest crash that makes it different from previous downturns in crypto — the latest cycle has been marked by a series of events that have caused contagion across the industry because of their interconnected nature and business strategies.

From 2018 to 2022

Back in 2018, bitcoin and other tokens slumped sharply after a steep climb in 2017.

The market then was awash with so-called initial coin offerings, where people poured money into crypto ventures that had popped up left, right and center — but the vast majority of those projects ended up failing.

“The 2017 crash was largely due to the burst of a hype bubble,” Clara Medalie, research director at crypto data firm Kaiko, told CNBC.

But the current crash began earlier this year as a result of macroeconomic factors including rampant inflation that has caused the U.S. Federal Reserve and other central banks to hike interest rates. These factors weren’t present in the last cycle.

Bitcoin and the cryptocurrency market more broadly has been trading in a closely correlated fashion to other risk assets, in particular stocks. Bitcoin posted its worst quarter in more than a decade in the second quarter of the year. In the same period, the tech-heavy Nasdaq fell more than 22%.

That sharp reversal of the market caught many in the industry from hedge funds to lenders off guard.

As markets started selling off, it became clear that many large entities were not prepared for the rapid reversal

Clara Medalie

Research Director, Kaiko

Another difference is there weren’t big Wall Street players using “highly leveraged positions” back in 2017 and 2018, according to Carol Alexander, professor of finance at Sussex University.

For sure, there are parallels between today’s meltdown and crashes past — the most significant being seismic losses suffered by novice traders who got lured into crypto by promises of lofty returns.

But a lot has changed since the last major bear market.

So how did we get here?

Stablecoin destabilized

TerraUSD, or UST, was an algorithmic stablecoin, a type of cryptocurrency that was supposed to be pegged one-to-one with the U.S. dollar. It worked via a complex mechanism governed by an algorithm. But UST lost its dollar peg which led to the collapse of its sister token luna too.

This sent shockwaves through the crypto industry but also had knock-on effects to companies exposed to UST, in…