There have been crypto winters in the past, but the situation we are in looks different

Although bitcoins (BTC -2.20%) has recovered in recent times, the price of the world’s largest cryptocurrency is still more than 40% down from a year ago.

A crypto winter essentially means that prices have dropped significantly and stayed around that level for weeks or months. There have been a handful of crypto winters since 2017, so they are more common than one might think.

But the situation we are in now looks different from the past crypto winters because many cryptocurrency-related companies have filed for bankruptcy and the scandalous collapse of cryptocurrency exchange FTX has really driven confidence in the sector to an all-time low. Could the current crypto struggles turn into a more sustained winter? Let’s take a look.

Because it looks different

Well, for example there’s a lot less activity across the whole ecosystem. The daily trading volume of cryptocurrencies has recently dropped to levels not seen since before 2021.

FTX’s collapse and eventual bankruptcy, which included widespread allegations of fraud by company founder and former CEO Sam Bankman-Fried, has really taken a toll on cryptocurrency investors.

Many cryptocurrency companies had exposure to FTX, and the failure of the major cryptocurrency exchange triggered a domino effect, triggering the bankruptcies of many other cryptocurrency companies. Many in the cryptocurrency community are wondering if there are any more fraud cases about to come up, which has put them on the sidelines until there are more answers.

The cryptobank Capital Silvergate (YES -8.40%) serves most major cryptocurrency exchanges and many other institutional cryptocurrency exchanges by offering them access to its real-time payments platform, the Silvergate Exchange Network. Earlier this month, Silvergate saw a near 70% drop in deposits as investors fled the sector. CEO Alan Lane said he saw a “crisis of confidence” in the fourth quarter of the year that was very different from what he’s seen in his nine years in the industry:

And so we’ve had clients who were owner traders, market makers who had been doing business with each other for six, eight years, who just stopped doing business with each other and withdrew theirs — they essentially withdrew all of their deposits. We have had a few clients that have moved – these are crypto-native firms that have moved almost completely into US Treasuries.

The largest US cryptocurrency exchange Coin basis (CURRENCY -7.26%) it also recently said it will cut 20% of its workforce, after already laying off 18% of the company earlier this year.

Coinbase CEO Brian Armstrong said on the company’s third-quarter earnings that its goal this year was to be able to operate with a $500 million loss in adjusted earnings before interest, taxes , depreciation and amortization (EBITDA), given the difficult environment . With Coinbase feeling like one of the last major lines of defense in the struggling cryptocurrency industry, it will be important for the company to maintain the trust of its customers and investors.

There is still hope

I still expect the industry to be here for the long haul, and there has been a good rally for Bitcoin so far this year. So maybe conditions will change instantly.

But the challenges appear to be more pronounced than in the past, and major cryptocurrency players appear to be preparing for an extended winter.

Easing inflation and an end to the Federal Reserve’s aggressive rate-hiking campaign may help, but ultimately investors need to be able to walk out the other side of the FTX bankruptcy feeling they can once again trust of the sector. Right now I don’t know how long it will take.

Bram Berkowitz has positions in Bitcoin and Silvergate Capital. The Motley Fool has positions and recommends Bitcoin and Coinbase Global. The Motley Fool recommends Silvergate Capital. The Motley Fool has a disclosure policy.

Add a Comment

Your email address will not be published. Required fields are marked *