The cryptocurrency market has gone through various cycles characterized by periods of rapid price increases known as bull runs, followed by prolonged downturns referred to as “crypto winters.”
Crypto winter refers to a phase in the cryptocurrency market where there is a decline in investor enthusiasm. This is evident through significant drops in crypto asset prices and trading volumes from their previous highs. Unlike traditional capital markets, the cryptocurrency sector lacks standardized metrics to identify the start of a crypto winter.
However, there is a pattern that tends to occur over a four-year cycle. This cycle begins with a rise in the price of Bitcoin (BTC) leading up to the block reward halving. After the halving, there is typically a downturn in prices after crypto assets reach new all-time highs.
Although there is no official declaration of crypto winter by any specific regulatory body or organization, there is a consistent trend of declining prices across various cryptocurrencies.
The most recent crypto winter began in January 2018 and lasted until December 2020.
During this period, Bitcoin and Ether (ETH), the two leading cryptocurrencies, experienced a loss of over 80% in value from their all-time highs. Bitcoin reached a peak of nearly $20,000 at the end of 2017, while Ether surpassed $1,400 before both saw a sharp decrease in value by September 2018.
Among the top 100 listed cryptocurrencies, 95% recorded a significant drop in value.
The crypto winter of 2018 was triggered by several inherent industry challenges. These included the high failure rate of initial coin offerings, with over 97% failing to meet their objectives, as well as individual investors being overly leveraged. Regulatory concerns also played a role, causing a significant withdrawal of investors from the market.
The aftermath of the 2018 crypto crash had a profound impact on the perception of cryptocurrencies. Financial institutions became skeptical of the crypto market, labeling it as potentially speculative, while governments worldwide advised caution when it came to crypto investments.
This period of inactivity changed in July 2019 when investor enthusiasm began to warm up, pushing the price of Bitcoin above the $10,000 mark. However, this revival in the market was short-lived.
In March 2020, the COVID-19 pandemic caused a significant liquidity crisis that affected markets globally, including the cryptocurrency market.
Despite the downturn in 2018, Ethereum made pivotal developments during this period. It began laying the groundwork for its transition to a proof-of-stake (PoS) system, although there were delays and rescheduling efforts.
In early 2018, Ethereum faced network congestion due to the popularity of CryptoKitties, a blockchain-based game. This event highlighted the need for Ethereum to improve its scalability. In response, Ethereum explored the concept of sharding, which divides the blockchain into smaller, more manageable segments called shard chains. Each shard operates independently, allowing for parallel processing of information and enhancing the blockchain’s scalability.
However, Ethereum’s transition to a PoS blockchain was slower than anticipated, with multiple delays along the way.
In June 2018, the United States Securities and Exchange Commission (SEC) classified Ether as a non-security. This decision made Ether the second asset, after Bitcoin, to receive such a designation, sparking discussions and debates in subsequent years.
In 2019, Ethereum gained significant attention due to its technical progress and the expansion of decentralized finance (DeFi) as an ecosystem. The DeFi sector experienced substantial growth throughout the year, with the total value locked in DeFi protocols reaching $667 million by the end of 2019.
Decentralized exchanges also saw significant growth, with Uniswap emerging as a key player. Ethereum attracted attention from various sectors, including major corporations, financial institutions, consumer brands, and celebrities.
For example, basketball player Spencer Dinwiddie tokenized his NBA contract on Ethereum, creating 90 Ethereum-based tokens that allowed holders to invest in a portion of Dinwiddie’s futures contract earnings. The Sacramento Kings launched a rewards program using a token built on Ethereum, and the Star Trek franchise announced the issuance of collectible ships as nonfungible tokens on Ethereum. Samsung introduced a developer platform focused on Ethereum and announced a new smartphone with an integrated Ethereum wallet.