Crypto Falls on Inflation News. Will Crypto Winter Ever End?

A slight increase in inflation caused crypto prices to tumble.

Stocks and crypto prices tumbled yesterday on worse-than-expected inflation news. The latest consumer price index (CPI) figures showed that inflation increased 0.1% for the month and 8.3% year on year. Economists had been hoping for a slight drop. For consumers, it means high prices aren't going away. For investors, it means continued price pressure for higher risk assets.

The suboptimal figures make it more likely that the Federal Reserve will raise interest rates by 0.75% later this month. Rate hikes cause people to pull out of riskier investments such as crypto, and many economists fear that aggressive moves from the Fed could trigger a severe recession.

Tentative crypto upswing stopped in its tracks

Leading crypto, Bitcoin (BTC) had been pushing gradually upwards this week. Having tipped below $19,000 a week ago, BTC had reached over $22,600 before the inflation announcement. It then fell to almost $20,000 yesterday, according to CoinMarketCap data. Several crypto analysts predict further drops.

Ethereum (ETH) is on the edge of its momentous merge, a switch from proof-of-work mining to proof-of-stake that will dramatically cut its energy consumption. Ethereum briefly tipped above $2,000 in mid August on the back of optimism around the merge, erasing some of this year's losses. However, it wasn't enough to support its price against economic headwinds, as Ethereum dropped around 10% yesterday following the CPI announcement.

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

What is a crypto winter?

The term crypto winter essentially refers to a long period of depressed prices -- kind of like a bear market but for crypto. It gets thrown around a lot, although there's not a lot of consensus around what constitutes winter, nor when it might end. The challenge with cryptocurrencies is that these are high-risk assets and a number of projects could fail before we reach the spring.

Indeed, skeptics warn that the whole industry could still collapse. It's still a relatively new market and there's a lot we don't know about how it will unfold. This is why it's important to manage the risk you are taking on and only invest money you can afford to lose. Position yourself so that you can benefit from any 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 getting tired of the cold. Many top cryptos are down as much as 90% on their all-time highs, and it isn't clear when, or if, they will recover.

Bear in mind that the last crypto winter was almost three years long (from early 2018 to late 2020) and given that the macroeconomic conditions that partially triggered the slump show no signs of abating, it may be some time before prices recover.

One challenge is that the conditions that pushed prices to extraordinary highs in 2021 may not repeat themselves. Low interest rates and COVID-related stimulus payments both fed the frenzy, and many new investors felt they could do no wrong. Not only are interest rates rising and household budgets tightening, but increased regulation may also prevent a repeat of the crypto mania we saw last year.

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

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

Bottom line

Some see prolonged price dips as a chance to buy crypto at a discount price. But there are no guarantees. A lot depends on your view of how the industry might develop and your own financial position. 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 hold crypto and still believe in its long term potential, the most important thing is to hunker down, avoid panic selling, and wait for the freeze to thaw.