<p>Are we really facing a so-called crypto winter? It’s certainly been the looming fear since USD 2.25 trillion drained out of the market in a few turbulent months and is an unavoidable talking point.</p><p>
However, that widely expressed concern is not universal. A CapGemini report, published in June, found that around 70 percent of high-net-worth individuals remain invested in digital assets. That number rises to around 90 percent among millennials, i.e., those under 40. In fact, when it comes to digital assets, cryptocurrencies remain the preferred option above both exchange-traded funds (ETFs) and metaverse investments.
</p><p>Of course, this is not the first time that crypto markets have seen spectacular swings. But, as the market evolves, each cycle tells us something different. This time, we can say with a strong degree of confidence that the increased interest of institutions in crypto will play a crucial role in lifting the market out of the downturn.</p><p>
But, as the first shoots of recovery are observed and confidence is slowly coming back, we have to look at why predictions of a <a href="https://www.financemagnates.com/tag/crypto/" target="_blank">crypto</a> winter persist, and what that tells us about the market and the opportunities it presents. </p><p>
There are three obvious and interconnected ‘cold fronts’ that between them could kill off emerging re-growth.</p><p>
1. The Fed lets fly its inner hawk
</p><p>Crypto is not the only currency with challenges. Inflation in the US is running higher than most people have ever experienced, and a now hawkish Fed has had to abandon its previous super-soft monetary policy. May 2022 saw inflation reach 8.4 percent, leading the Fed to hike benchmark rates by 75 basis points (bps).</p><p>
Thanks to the consequent rise in rates on deposits and loans, investors shifted money out of high-risk assets into protective deposits as they started to provide more attractive returns. Both traditional stocks and cryptocurrencies inevitably felt the impact of the move.</p><p>Of course, as deposit rates rise, so do rates on US government debt in order to remain attractive to investors. And, when the risk-free returns on T-bonds go up, so do the required returns for investments in riskier assets, leading investors to price them down. The companies most affected by this price correction are those not yet earning EBITDA or free cash flow (FCF), in other words, high-growth companies where the bet is on the…
