Do Crypto Winters Spark Innovation?

What is a Crypto Winter?

Any seasoned cryptocurrency investor can tell you about the volatile nature of cryptocurrency. Spectacular highs and lows have been a well recorded phenomenon in the crypto space. Currently, we’re in a crypto winter, also sometimes referred to as a bear market (although that might be changing soon). The CoinDesk Bitcoin Price Index (XBX) defines a cryptocurrency bear market as “a change of 20% …followed by at least 90 days in which bitcoin does not return to its previous high (or low)”. They even include a helpful graph, seen below.

This is definitely not the first time crypto has been in the winter season. Previous crypto winters span roughly between 2013-2016 and 2018-2020, so what changed during these crypto winters that sparked bull markets? In addition, this might indicate trends in markets to keep an eye out for.

Early History: 2013-2014

The history of crypto winters goes back to 2013, when bitcoin was just coming out of its infancy. In February of 2013, Coinbase reported selling 1 million USD worth of Bitcoin in just one month. However, just a month later in March, Bitcoin would suffer a major malfunction that forced developers to halt all trading in the currency, and Bitcoin fell 23%. This glitch was solved by rolling back a version, to keep the blockchain nodes that verify the ledger consistent. This ended up being a hit to the market that attracted the eye of US regulators, who then legislated that miners were money service businesses. This would be the first of many incidents involving bitcoin and cryptocurrency in 2013.

Later scandals in 2013 would include three major events. The seizure of Mt. Gox accounts, and the US Drug Enforcement Agency (DEA) seizing roughly 11 bitcoins, marking their first seizure of cryptocurrency. In October of that same year, the FBI seized 26,000 bitcoins from the arrest of Ross Ulbricht and the subsequent takedown of the Silk Road, a dark web network dedicated to the sale of drugs and other contraband.

2013 ended up having a lot of tragic moments for bitcoin, but things began to calm down for currency holders the next year, following Ulbricht’s arrest. Infamously, Mt. Gox would file for bankruptcy in 2014 after reporting over 700,000 bitcoins stolen. Despite all of this, 2014 was still a big year for the adoption of the currency. Microsoft and Dell began to accept bitcoin as payment and the CFTC listed its first bitcoin swap.

The Arrival of Spring: 2015-2020

After Mt. Gox was off the market, Coinbase managed to raise 75 million USD in a C series funding round. Investors included banks and the New York Stock Exchange, alongside some notable venture capitalists.

After the Silk Road seizure, bitcoin’s reputation was also clearing up. It was no longer viewed as just a tool for criminals and a market for “sin”, according to the paper linked above. At this point, bitcoin had attracted some serious talent and investment. Academic papers about bitcoin and cryptocurrency had boomed, the cabinet of Japan recognized bitcoin as having a function similar to money. This served as a huge boost to bitcoin as Japan had been quick to jump onto the bitcoin craze and was once the home of Mt. Gox. The bull market would hit the crypto space in the summer of 2016.

A one-two punch of FUD and big bank policy would launch the second crypto winter. After bitcoin’s price had fallen below the 6,000 USD mark. This was hot off the heels of JP Morgan, Bank of America, and Citigroup all deciding to ban customers from buying cryptocurrency with their credit cards. There was also a large-scale sell-off as well, in the fears of repercussions after the CFTC subpoenaed Bitfinex and Tether. This was briefly ended in 2019, during a short-lived and frankly quiet bull market before it would slowly descend into a bear market again up until 2020 when covid-related fears began rearing their ugly head.

Trends and Preparation

The historic trend of bitcoin seems a bit predictable, given what is known about its history. Crypto winters seem to be primarily caused by lost confidence in major institutions. Big banks, financiers, and even entire nations rejecting cryptocurrency or legislating its regulation, has the potential to cause a winter. Network effects and mismanagement can also launch crypto winters.

On the flip side, what pulls bitcoin out of winter and into summer? Innovation helps, but innovations such as the lightning network aren’t what the trend indicates. Acceptance and adoption of cryptocurrencies like bitcoin, add more to its value than modest software updates, based upon historic trends above. The average investor may not be all that concerned about add-ons such as the lightning network. Overall network speed seems to assist in increasing the value proposition of cryptocurrencies but is not relevant to all currencies.

Another huge step in getting out of crypto winters is simply reputational. Investors want to feel good about what they’re investing in. While bitcoin was associated primarily with drug-related crimes and even accusations of assassinations, it was difficult to gain investor confidence. Loss of confidence in bitcoin for environmental reasons may be producing similar FUD effects that the Silk Road held over bitcoin for a long time.

Innovators Working During the Winters

The people that see through the FUD and the hype are the innovators. They are working on pushing the technology forward regardless of what is happening to the price of assets.

In each winter that I described above, there is one constant thread, and that is the innovators working behind the scenes. There are more on-ramps, and businesses built up around cryptocurrencies than ever before. This says that at the very least, the bear markets were not bearish enough to completely decimate the industry.

The companies that innovate through the winters actually end up being more resilient as they have suffered the consequences of innovating during the downtime. As such, they are rewarded during the summers that follow.