Crypto Winter explained: why Solana, Monero, XRP, ICP, BTC crashed

Cryptocurrency prices are going through a prolonged crypto winter that has wiped over $3 trillion in value. While Bitcoin has jumped by more than $10,000 from its lowest level, it remains sharply lower from its highest point on record. 

Other coins and tokens like Monero, Ripple (XRP), Solana, and Internet Computer (ICP) have retreated. So, why is this crypto winter continuing?

ICP, BTC, XRP, Solana chart

Monetary policy changes

Monetary policy is the most important reason why cryptocurrency prices are going through a crypto winter. The world economy has changed dramatically in the past 18 months.

Central banks like the Federal Reserve, European Central Bank (ECB), and Bank of England (BoE) have embraced an extremely hawkish tone to fight the elevated inflation.

The Fed has moved rates from zero to between 5.25% and 5.50% while the ECB delivered its 10th hike in September, pushing it to a record 4%. Other central banks like the RBA, Bank of Canada, and Riksbank have also pushed rates higher.

Therefore, cryptocurrencies have plunged as investors readjust to this new normal of high rates. In the past, it was not uncommon for people to borrow money and invest it in high-risk assets like cryptocurrencies, growth stocks, and venture firms.

Higher rates also impact crypto in other ways. For one, they have made the US dollar and short-term bonds more attractive, Money market yields have now jumped to over 5.50%, the highest point in years. As such, many people are moving from risky assets to the safety of the US dollar.

Also, higher rates raise the risk of a recession. For example, the yield curve has plummeted for a while, As I wrote this week, Jeffrey Gundlach is now raising concerns of an imminent recession.

The US Treasury yield curve is de-inverting very rapidly. Was at -108 bp a few months ago. Now at -35 bp. Should put everyone on recession warning, not just recession watch. If the unemployment rate ticks up just a couple of tenths it will be recession alert. Buckle up.

— Jeffrey Gundlach (@TruthGundlach) October 4, 2023

Fiscal policy changes

The crypto winter is also happening because of the fiscal policy changes, especially in the developed countries. Cryptocurrencies surged during the pandemic as policymakers flooded the market with cash. In the United States, the Trump and Biden administrations provided free money to millions of people.

They also paused student debts and placed a moratorium on evictions. This happened at a time when interest rates were at zero and when most people were staying at home. As such, many of them decided to invest in cryptocurrencies, which were offering strong returns.

Recently, however, things have gone full circle. Millions of people have started paying back their student debt while inflation has become a thorn in the flesh. The prices of everything have gone up in the past two years.

For example, new and used car prices have surged while home prices have hit a record high. Higher interest rates have pushed the cost of servicing this debt much higher than where it was a few years ago.

As such, the new normal of restrictive monetary and fiscal monetary policies have led to the crypto winter. Other concerns are the collapse of companies like FTX and Voyager Digital and the ongoing regulatory scrutiny.

Will crypto prices rebound?

The silver lining of the ongoing crypto winter is that the industry is still huge, with all coins having a $1 trillion market cap. Bitcoin has a market cap of over $545 billion. If it was a company, it would be the tenth biggest company in the world.

Another thing is that the winter has not impacted cryptocurrencies alone. The bond market has crashed while stocks are yet to regain their all-time highs. While the S&P 500 index has jumped by double-digits, these gains were driven by the Magnificent 7. The S&P 493 is yet to recover.

Therefore, since markets move in cycles, there is a likelihood that they will all bounce back when the Fed changes its hawkish tone and starts slashing rates.