Startup winter and crypto winter

Startup winter and crypto winter

Subject: Economy

Why in the news?

The crypto market has been going through a downward trend with a sharp decline in prices since the beginning of this year.

Further there has been a funding winter for startups too– Funding in the Indian start-up ecosystem has fallen by 40 per cent to $6.8 billion in the second quarter of calendar year 2022

What is crypto winter? 

• The phrase ‘crypto winter’ came into use from the HBO series, Game of Thrones. 
• Crypto winter is used to refer to the crypto market where the cryptos run lower than usual. 
• The poorly performing crypto market where value of most cryptocurrencies have fallen more than the bear market is called the crypto winter
• Generally, a bear market is associated with the period when prices fall around 30% from all-time highs. A bear market is a term used to describe a poorly performing market; it can be stocks, cryptos, or even equities.
• Crypto winter is just a period like a conventional bear market but to an elaborated extent.
• A crypto winter which signifies the negative sentiment across the digital currencies. It warns of trouble settling over the crypto market.

Factors leading to the cryptowinter

• Federal Reserve hiking the interest rates– leading investment in safer assets.
• The de-pegging of the TerraUSDstablecoin in mid-May and relative fall in prices of other cryptocurrencies- due to net selling off.
• Inflation-increases demand for money for transaction motive against speculative motive, as real purchasing power of money declines.

Advantage:

• All bear markets are usually the most suitable periods for price discovery and correction. 
  • Crypto winters filter out the weak projects pushing the most innovative ones to grow and validate their products.
  • The cryptos that can survive this particular period can emerge beyond their positions after the revival phase of winter.

Funding winter for start-ups:

A funding slowdown has hit start-ups across stages, whether it is growth-stage companies unable to raise new funding, or early-stage start-ups that have to settle for lower-than-expected valuations and fund sizes.

Causes:

Market slowdown and economic volatility on account of the prevailing macroeconomic and geopolitical conditions:

• Hike in Fed interest rate– leading to capital outflows.
• Cost push inflation- making day to day business costly leading to liquidity crunch.
• Risk averse investors-Many venture capital firms that have closed new funds continue to invest.