The Crypto Winter – What We Know So Far

Written by BTSE

July 15, 2022

The Crypto Winter – What We Know So Far

Written by Antonio Liao, Researcher at BTSE

At a Glance: 

  • There is no sugarcoating to the current market conditions, especially when crypto markets were down roughly 70% from their all-time highs in November 2021.
  • Highly similar to equities markets, the crypto market is heavily affected by macroeconomic and geopolitical events such as inflation, interest rate hikes, and armed conflicts.
  • From top lending platforms to multi-national hedge funds, reports of liquidations and insolvencies emerge almost on a daily basis, while leading crypto exchanges and companies resort to mass layoffs and cutting marketing deals to curtail operational costs.
  • On the regulatory end, this crypto market crash will catalyze stricter regulatory efforts across jurisdictions.


Yes, We Are in the Worst Crypto Winter

The news is in: Bitcoin, the largest crypto by market capitalization, just registered its worst quarterly loss in 11 years, exacerbating the worst crypto winter ever seen. 

We know that the crypto market is known for its volatility, but this is an unprecedented market downturn that we have so far seen the crypto market capitalization plummeting from roughly $3 trillion to $940 billion in less than eight months. 

With Bitcoin being down 35% and Ether being down 43% in 2022 from their highs, it is now an indisputable fact that we are in a bear market. From retail investors to highly-established institutional investors and deep-pocketed hedge funds, their crypto portfolios continue to dwindle in value amid this market downturn. 

While the crypto winter is still a rapidly developing story abounded with speculations and rumors, we will talk about some significant events and trends we have observed so far to keep abreast of the latest developments.


Plenty of Macro Pain 

Seeming detached from the greater scheme of things, crypto this time can no longer escape from all the mess happening around it. From the Russia-Ukraine conflict to inflation, every major global event has cast a shadow on the crypto market. 

With crypto becoming an increasingly popular investment tool, the skyrocketing inflation rate and a looming recession are forcing investors, particularly retail investors, to tighten their purses when investing in something as volatile and risky as crypto. 

Faced with the highest inflation in over 40 years, the Fed and most central banks are raising interest rates at an unprecedented rate. With a further rise of 50-75 basis points on the horizon, lending and borrowing in traditional financial markets are largely discouraged, as more people veered towards saving to earn higher interest. 

Crypto mining is another often overlooked activity that can affect the price of crypto, given its susceptibility to macroeconomic developments. As public and private miners suffer soaring operational costs, specifically energy costs, many are now forced to offload their mined crypto to stay afloat in this bear market. As the price of Bitcoin fluctuates, it is no news for miners to sell more than what they mined, which puts more pressure on crypto prices. 

That said, given that there is currently no sight of end to recession and inflation in sight, it is highly likely that more regulatory measures will be taken to dampen the long-term impacts of these economic events. The protracted conflict between Ukraine and Russia can also bring more economic pains with higher energy costs.


Margin Calls & Liquidations 

Perhaps the most eye-catching developments apart from the plummeting crypto prices are those involving insolvency and forced liquidations of high-profile funds and lending protocols. 

Unlike the implosion of Terra that took place in the early days of the crypto winter, various “crypto darlings” such as Three Arrows Capital, BlockFi, Celsius, and Voyager have fallen victim to the macro crypto downturn. 

Of course, the stories behind the fall from grace of these highly successful platforms are not that simple. In fact, they are all intertwined and related to each other in some way. 

Perhaps the worst hit “crypto darling” is Three Arrows Capital (3AC), who was once among the largest and most successful crypto hedge funds. With over $10 billion in assets under management during its heyday, 3AC’s collapse began to spiral with the Terra debacle, in which the fund suffered a loss of roughly $200 million following UST’s crash, but 3AC’s trouble did not end there. 

As the market condition continued to deteriorate and 3AC’s insolvency fears spread, a number of exchanges also started to liquidate 3AC’s positions after the fund failed to meet its margin calls with over-leveraged mismatches. On 27 June, a court in the British Virgin Islands ordered the liquidation of 3AC to pay down its debts after Voyager Digital issued a notice of default to 3AC. 

What is even more significant about 3AC’s collapse is the spillover effect on the broader DeFi ecosystem, as the fund acts as a major investor for numerous projects and companies and holds leveraged long positions with lending providers such as BlockFi, Celsius, and Genesis. 

Today, most companies and projects related to 3AC are facing certain liquidation challenges, followed by talks of mergers and acquisitions from better-performing players. 

That said, the impacts of the crypto winter are still rapidly unfolding, with news of withdrawal suspensions and restructuring emerging every day. Whether or not we will see an ever-consolidated DeFi market landscape remains to be seen. 


No One Is Spared  

In this crypto winter, those who are connected to the crypto space, regardless of their role or amount of crypto holdings, have been affected in some way or another. 

Hammered by the tanking crypto prices and concerned about the grim macroeconomic outlook, crypto exchanges are now faced with tough choices to dampen the impacts of a bear market. Unfortunately, the most effective and timely measure for these exchanges is mass layoffs. 

Since the crypto winter began, news of layoffs from several exchanges, such as, Coinbase, Gemini, Bitpanda, Bitso, and Banxa, began to emerge as they aim to curtail operational costs while trade volume plummeted. For Coinbase, the first crypto company to join the Fortune 500 list rescinded accepted offers for onboarding employees because it “over-hired” during the crypto bull run. 

The effort to curtail operational costs does not stop at mass layoffs as crypto companies look to drop marketing deals. Compared to paycheques, marketing cost is overwhelmingly the largest expense for most crypto companies, with billions of dollars spent on sponsorships and naming rights. With the crypto winter hammering on revenues, numerous marketing deal talks have either been dropped or postponed

On a more positive note, while some companies have hit the brakes on hiring and marketing deals, other companies such as FTX, Binance, Kraken, and Opensea are tapping the burgeoning pool of talents and reasserting their hiring efforts to accelerate growth. 


A Tighter Regulatory Grip?  

Perhaps one of the most discussed topics in the crypto space as stories of insolvency and liquidations unfold is regulatory directions across jurisdictions. 

As a loosely regulated sector, crypto lending and trading are not FDIC-insured to provide the level of protection we see in traditional finance. Since the beginning of the Terra debacle and following into the crypto winter, regulators and authorities have voiced their intentions to prompt more regulatory oversight for the sector. 

Here are a couple of more prominent examples of what we know so far: 

In the wake of the Terra debacle, the US Congress introduced a bipartisan crypto bill – the Responsible Financial Innovation Act – that is considered the most comprehensive crypto bill to date. 

Some of the key terms of the bill focus on the legal definition of crypto assets and virtual currencies, guidance on crypto payment and taxation, whether digital assets are commodities or securities, and regulatory clarity specifically for stablecoins and their issuers. 

As the crypto winter unfolds and casualties continue accumulating, the Monetary Authority of Singapore (MAS) is eyeing more safeguards for retail crypto investors. In January 2022, MAS issued guidelines restricting how crypto companies could advertise to the public. Announced in early July, the host of additional safeguarding measures may include limiting retail participation and rules on the use of leverage in crypto transactions. 

Meanwhile, the EU has recently agreed on a package of rules for the crypto industry, a landmark move amid heightened market turmoil. The highly complex and comprehensive set of rules will target various facets of the crypto industry, such as business registration, customer protection, the legal entity crypto assets, transparency requirements for stablecoins, and carbon footprints from crypto mining. 

So far, the crypto space remains loosely regulated compared to traditional financial markets. However, the burgeoning crypto adoption and increasingly volatile market are undoubtedly facilitating the tightening of regulatory grip in the space. 


An End in Sight? 

As blockchain analysis firm Glassnode puts it, the current crypto bear market is “the worst ever recorded,” with Bitcoin dipping well below its 200-day moving average. Whether you might argue that FUD has permeated the crypto or not, the demise of some of crypto’s biggest names clearly suggests that as Warren Buffet once said, “when the tide goes out, you get to see who is swimming naked.” Unfortunately, not only are institutions “swimming naked,” plenty of retail investors are as well. 

Meanwhile, judging from the recent developments in the crypto market and the directions of the price of BTC, it has become clearer than ever that there is a mildly growing correlation with the broader equity market, especially with more people considering crypto as an investment. 

Throughout the brief history of crypto, seasoned investors and crypto enthusiasts are no strangers to crypto crashes, as 2011, 2013, and 2018 all underwent major crashes in the space, albeit none as severe and pervasive as the 2022 crash. 

Although we cannot predict when exactly this winter will end or how many more casualties will be incurred, the DeFi and Web3 communities are showing their endurance and aspiration to thrive. With an ever-increasing need for decentralization, dApps across the board, such as GameFi and blue-chip NFTs, have posted tremendous resilience amid extreme market turmoil. 


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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.

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