Crypto falls on inflation news. Will Crypto Winter ever end?

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A slight increase in inflation caused crypto prices to plummet.

Key points

  • Crypto investors could find themselves in the cold for a bit longer.
  • Disappointing inflation data raised fears that the Federal Reserve may continue its aggressive rate hikes.
  • Crypto prices have fallen across the board as rate hikes are not good for risky assets.

Stock and crypto prices fell yesterday on worse than expected inflation news. The latest Consumer Price Index (CPI) figures showed inflation rose 0.1% for the month and 8.3% year-on-year. Economists were hoping for a slight decline. For consumers, this means high prices are not going away. For investors, this means continued pressure on the prices of high-risk assets.

The sub-optimal numbers make it more likely that the Federal Reserve will raise interest rates by 0.75% later this month. Rate hikes are pushing people out of riskier investments such as crypto, and many economists fear aggressive Fed action could trigger a severe recession.

Attempt to take over crypto stopped dead

Crypto leader Bitcoin (BTC) had been pushing steadily higher this week. After dipping below $19,000 a week ago, BTC had reached over $22,600 before the inflation announcement. It then fell to nearly $20,000 yesterday, according to data from CoinMarketCap. Several crypto analysts are predicting further declines.

Ethereum (ETH) is on the verge of its momentous merger, a shift from proof-of-work mining to proof-of-stake that will significantly reduce its power consumption. Ethereum briefly tipped above $2,000 in mid-August on merger optimism, erasing some of this year’s losses. However, this was not enough to support its price in the face of economic headwinds, as Ethereum fell around 10% yesterday after the CPI was announced.

The total crypto market capitalization, which had finally pushed past the $1 trillion mark in recent days, slipped to $957 billion. With new economic challenges on the horizon, we can expect the crypto price struggles to continue.

What is a crypto winter?

The term crypto winter basically refers to a long period of depressed prices – much like a bear market but for crypto. It’s talked about a lot, although there isn’t much consensus on what constitutes winter, or when it might end. The challenge with cryptocurrencies is that they are high risk assets and a number of projects could fail before we hit spring.

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Indeed, skeptics warn that the whole industry could still collapse. It’s still a relatively new market and we don’t know a lot about its evolution. That’s why it’s important to manage the risk you take and only invest the money you can afford to lose. Position yourself so that you can benefit from all the gains, but won’t face financial disaster if blockchain technology doesn’t do what many hope it can.

Will the crypto winter ever end?

Crypto investors have seen the value of their portfolios decimated so far this year and are unsurprisingly tiring of the cold. Many top cryptos are down 90% from their all-time highs, and it is unclear when, or if, they will recover.

Keep in mind that the last crypto winter lasted nearly three years (from early 2018 to late 2020) and given that the macroeconomic conditions that partially triggered the crisis show no signs of abating, it may take some time before prices recover.

One of the challenges is that the conditions that pushed prices to extraordinary heights in 2021 may not be repeated. Low interest rates and COVID-related stimulus payments both fueled the frenzy, and many new investors felt they couldn’t be wrong. Not only are interest rates rising and household budgets tightening, but increased regulation may also prevent a repeat of the cryptomania we saw last year.

Additionally, investor confidence has taken a huge hit. In addition to dramatic price declines, the collapse of crypto Terra (LUNA) and other high-profile crypto platforms has caused some to lose their life savings. As we face a potential recession and an international energy crisis, those hoping for an imminent price hike will likely be disappointed.

That said, for long-term investors, what matters is how you see crypto performing over the next ten or even 20 years. It is a risky investment. But there are reasons for optimism. For example, Ark Invest believes Bitcoin could take over a chunk of the international remittance market and several other industries. The innovation company predicts that the price of BTC could eventually reach $1 million.

At the end of the line

Some see extended price dips as a chance to buy crypto at a discount. But there are no guarantees. Much depends on your vision of how the industry might develop and your own financial situation. Prices may well fall further and it could be years before they start to recover again.

Long-term crypto enthusiasts have survived previous winters, and many investors are hibernating right now. If you own a crypto and still believe in its long-term potential, the most important thing is to hide, avoid panic selling, and wait for the freeze to thaw.

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