The Third Crypto Winter: "No One Knows Why"

[Financial News]

A cold snap has hit the cryptocurrency market again for the first time in about three years. The bigger problem than this new crypto winter itself is that no one knows exactly what caused the latest price collapse.
Without identifying the cause, it is hard to find a solution. That raises the risk that this winter could be long and harsh.
The Wall Street Journal (WSJ) reported on the 7th local time that the market has been left stunned by the sharp drop in cryptocurrency prices.

Bitcoin, the bellwether of cryptocurrencies, tumbled 16% over the past week and is barely clinging to the 70,000‐dollar level.
Ethereum, the second-largest cryptocurrency by market capitalization, has plunged 59% from its peak.
The problem is that there is no decisive event—a smoking gun—that clearly triggered this crash.
In 2018, the bursting of the bubble in so‐called initial coin offerings (ICOs), in which new cryptocurrencies were listed and sold, led directly into a crypto winter.
Like an initial public offering (IPO), ICOs raise funds by issuing new coins, but they were subject to almost no regulation. Projects ballooned rapidly as teams collected Bitcoin or Ethereum from investors around the world in exchange for new tokens, often on the basis of nothing more than a white paper.
However, many of these projects, which had attracted enormous sums of money, failed to deliver the promised technology. Others turned out to be outright scams created to defraud people, and this revelation cooled the market abruptly.
In 2018, Bitcoin fell more than 80% from its peak, while so‐called altcoins crashed by over 99%, becoming virtually worthless. That period is now remembered as the first "Crypto Winter."
The second winter came in November 2022, when FTX, then the world’s third‐largest and "most trusted" exchange, went bankrupt and it emerged that customer funds had been misused. As confidence in the market collapsed, investors dumped cryptocurrencies en masse.
Following the FTX bankruptcy, the price of Bitcoin dropped about 25%, falling to a two‐year low, while Ethereum plunged around 30%.
Solana, which had been heavily backed by FTX and its founder Sam Bankman‐Fried, sank 70%.
Roughly 200 billion dollars in cryptocurrency market capitalization evaporated in just one week.
This time, however, there has been no such visible, decisive event, which is adding to investors’ confusion.

Market participants broadly point to five possible explanations.
One theory is that new, more attractive investment opportunities have emerged to replace cryptocurrencies.
Prediction markets, gold, silver, and stocks related to artificial intelligence (AI) are believed to have delivered higher returns than cryptocurrencies, drawing capital away from the sector.
Oversupply is also being cited as a factor.
As Wall Street financial firms rushed to launch Bitcoin exchange‐traded funds and derivatives, analysts say investors’ attention has been diverted from Bitcoin itself to related financial products. Because people can now gain exposure without holding actual coins, Bitcoin’s scarcity has been diluted.
One clear macro backdrop is the nomination of noted monetary hawk Kevin Warsh as the next chair of the Federal Reserve System (Fed). The stronger U.S. dollar that followed has hurt cryptocurrencies.
Profit‐taking is another explanation.
After Donald Trump won the 2024 presidential election on a pledge to support the crypto industry, Bitcoin prices had surged more than 80%. Many investors are now believed to be locking in those gains by selling, which in turn has accelerated the price decline.
Legislative setbacks are also being mentioned.
While the so‐called Genius Act, which brings stablecoins into the regulatory mainstream, has passed, the Clarity Act—legislation meant to establish a comprehensive regulatory framework for cryptocurrencies—has stalled amid conflicts between banks and exchanges. Analysts say this has triggered selling by disappointed investors.

Major industry figures such as Michael Saylor, co‐founder of the crypto‐holding company MicroStrategy and often called a "Bitcoin evangelist," and Anthony Scaramucci, founder of SkyBridge Capital and former White House communications director under Trump, remain optimistic over the long term.
They argue that, unlike during the FTX collapse, there are no glaring structural flaws inside the market today and that the underlying infrastructure has become more robust, making the crypto industry more stable.
Saylor did caution, however, that volatility could remain high for some time and advised investors to think in terms of "at least four years."
By contrast, prominent pessimist Nouriel Roubini, an emeritus professor at New York University (NYU) known as "Dr. Doom," insists that cryptocurrencies are not money at all but rather "worthless trash—shitcoins."
Roubini has repeatedly launched scathing attacks on cryptocurrencies in interviews and opinion pieces.
He stresses that while stocks pay dividends, bonds pay interest, and real estate generates rental income, cryptocurrencies produce no cash flow whatsoever and therefore have no intrinsic value—they are nothing more than scraps of paper.
He also argues that cryptocurrencies fail to meet any of the three basic functions of money: a store of value, a unit of account, and a medium of exchange. Above all, their extreme volatility makes them unsuitable as a unit for pricing goods and services, which is their supposed original purpose.
Roubini further contends that, contrary to the slogan of "decentralization," the crypto market is in fact highly centralized in the hands of a few miners and exchanges, and he denounces it as a massive Ponzi scheme that preys on ordinary investors.
dympna@fnnews.com Song Kyung-jae Reporter