Is the Crypto Winter Over?

No, it’s not over, but the worst of it is past us. After the liquid token market’s remarkable January, some called an early spring. To be sure, January’s returns were extraordinary, with bitcoin up 39%. However, token prices are only back to levels seen prior to FTX’s collapse in November and the industry is still shedding jobs. While the crypto market may seem better than it did last year, we still think it’s premature to declare a Crypto Spring.

The crypto market experienced a significant decline of approximately 70% in 2022, comparable to the decline in bitcoin in the last Crypto Winter (2018), which was the first Winter with institutional investment. Unlike the last decline, which was due to the initial coin offering bubble popping, this decline was driven by industry-specific and macro factors.

At the industry level, a series of related blow-ups (Terra/Luna, Three Arrows Capital, Voyager Digital, Celsius, FTX, and BlockFi) that fell like dominoes over a six-month period drove sentiment and prices lower. The number and scale of these blow-ups define this Crypto Winter, compared to previous winters.

At the macroeconomic level, the rise in interest rates and the strengthening of the US dollar made risk assets less attractive, in general. For example, global fintech declined more than 50% and some large-cap tech companies declined by over 60%. As equity valuations dropped, marginal investment decisions like crypto became less attractive to investors.

Still, we think the long-term outlook for digital assets is positive for a few reasons.

1. Venture capital investment in digital assets reached an all-time high of $32 billion in 2022, which was 11% greater than the prior year. With this capital, venture capitalists and developers continue to expand the infrastructure upon which new applications are being built, and these applications will drive future user adoption.
2. The number of global crypto users increased nearly 40%, from 306 million in January 2022 to 425 million in December 2022, according to Crypto.com.
3. With the focus of digital asset adoption primarily on emerging markets and younger generations, there continues to be a large opportunity set within the wealthiest countries and older generations who have yet to invest in these assets.

While blockchain technology is remarkably robust (the bitcoin network has no effective downtime, nor has it ever been hacked), the broader crypto ecology has potential failure points that could extend this Crypto Winter. Many of these failure points are where the crypto ecosystem interfaces with the rest of the world. Investment firms are having more difficulty finding counterparties. Namely, there are few US commercial banks, accounting auditors, and web hosting providers, and only one dominant global spot exchange remaining to serve the global digital assets community. The failure of any of these entities or any retrenchment from providing these support services pose material risks to the broader ecosystem. Addressing these critical failure points is crucial for long-term growth. The regulatory environment in the United States also remains a significant concern. Finally, since all digital assets are risk assets, any macro risks that apply to risk assets also apply to digital assets.

When will the Winter end? It’s difficult to predict exactly when this Crypto Winter will end, but without further shocks, we suspect digital assets will recover alongside other risk assets. Regardless of market action, 2022 was a foundational year for continued investment and technology development. For investors with a long-term time horizon and a tolerance for volatility, the downturn in crypto prices has increased the attractiveness of public and private digital asset valuations. A modest allocation at these valuation levels may make sense for some investors with sufficient liquidity and a long enough time horizon to ride out the volatility inherent in a nascent technology.