Is the Crypto Market About to See a Massive Downturn?

Key Points

• Bitcoin lost $87.8 billion in market value over the weekend, while Ethereum shed $46.4 billion.

• Despite the weekend's sharp decline, Bitcoin is still up 77% and Dogecoin has gained 122% over the past 52 weeks.

• This looks more like a healthy correction after recent gains than the start of a crypto winter.

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The crypto market swooned over the weekend. From Friday morning to Monday evening, Dogecoin (CRYPTO: DOGE) fell 13.5% and Solana (CRYPTO: SOL) took an 11% hit. More stable names still suffered; Ethereum (CRYPTO: ETH) dropped 8.5% in this four-day span while Bitcoin (CRYPTO: BTC) saw a 3.8% price cut:

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Bitcoin Price data by YCharts

In a way, Ethereum's and Bitcoin's smaller moves made larger waves. Ethereum's extended weekend slide erased $46.4 billion from its total market value -- more than the entire worth of all Dogecoin. Bitcoin's market cap cut landed at $87.8 billion, nearly reaching Solana's whole value.

The broad crypto retreat was fueled by two intertwined events.

• Many crypto traders cashed in profits after large gains in recent months. Last Thursday's announcement of lower Federal interest rates boosted coin prices but also inspired the idea that this could be a temporary gain and therefore a great time to sell.

• The surging sales resulted in lots of margin calls for many crypto investors making bullish bets with borrowed funds. Data from crypto options trading platform Coinglass shows a massive spike in liquidations of crypto-based options on Sunday, September 21. The volume of forced liquidation sales across a wide range of different cryptos nearly set a 5-year record.

Is this widespread price drop the start of the next crypto winter, or just another unexpected dip in a generally volatile market? Let's find out.

Here we go again with the four-year crypto cycle

The crypto market has tended to soar and slide in four-year cycles so far, centered around the cadence of Bitcoin halving events. This is the fourth turn of the wheel, initiated by the fourth halving of Bitcoin miner awards in April 2024.

The last cycle started in the darkest days of COVID-19, resulted in soaring crypto prices in 2021, and ended with another crypto winter in 2022. Of course, the downturn in this case coincided with a large-scale inflation-fighting crisis. Furthermore, the crypto world was shocked by several economic crises of its own, like the Terra Luna stablecoin collapse and the FTX crypto exchange bankruptcy. So maybe you shouldn't expect the next market cycle to copy that unique situation.

Stepping back to the second halving cycle, around the halving in July 2016, Bitcoin prices soared from $660 per coin at that point to $17,760 in December 2017. That extreme gain was short-lived, backing down to $6,300 over the next 11 months, and then there was a deeper dip to approximately $4,000 that lasted until the 2020 halving.

I'd look at the first cycle too, but that was way back in 2012. Bitcoin was still the only cryptocurrency that mattered, most people had no idea what a digital coin was, and I don't expect to learn any useful lessons from that ancient piece of digital history.

That gives me a really small sample size to work with. Assuming that this fourth cycle has fundamental qualities in common with the previous ones, one might expect Bitcoin prices to soar (and other cryptos to follow along) in late 2025 and most of 2026. The next crypto winter should come after that and last until the next Bitcoin halving in 2028.

Why this cycle could be different

Basing market predictions on older price chart patterns is a form of technical analysis -- and I've never seen much value in that approach. The halving-and-winter cycles in the crypto industry would look very different if the pandemic never happened, or the first Bitcoin ETFs had been approved in 2022 instead of 2024, and so on. Real-world events often put a thumb on the market scales, and that includes crypto prices.

So what else is going on? Well, there are plenty of potentially bullish crypto price catalysts in the air right now:

• Thanks to long operating histories and the arrival of Bitcoin or Ethereum exchange-traded funds (ETFs), institutional investors are more likely to have crypto exposure nowadays.

• The same is true for corporations, following the example of Michael Saylor's Strategy (NASDAQ: MSTR) to put Bitcoin and Ethereum on their balance sheets.

• Several other cryptocurrencies should get ETFs later this year, unless the Securities and Exchange Commission (SEC) punts their approval into 2026.

• A handful of Web3 applications are raising eyebrows in 2025. Examples include several popular games from Mythical Games, the Brave web browser, and a surprisingly Web3-ish travel app from credit card giant American Express (NYSE: AXP). If and when the Web3 concepts of privacy, decentralization, and more personal ownership of online content really take off, demand will soar for a plethora of cryptocurrencies.

I could go on, but those are the key crypto-market boosters right now.

Image source: Getty Images.

Let's not forget the risks

It's not all digital roses and encrypted rainbows, obviously. For example:

• Cryptocurrencies are still new-ish and generally unproven as an investable asset class.

• Legendary investors like Warren Buffett don't see any true value in these digital coins.

• Quantum computers will one day be able to break the encryption that keeps Ethereum and Bitcoin safe today -- will they move on to quantum-safe algorithms before the barbarians storm the proverbial gates?

So there are potential downsides, but these risks have one thing in common. They are long-term concerns, not sudden threats that didn't exist last week.

Putting the weekend's price drop in perspective

In my eyes, the weekend's crypto cuts were a fairly healthy price correction after an early start to the halving-inspired boom of this fourth cycle. Ethereum has still gained 54% in 52 weeks, as of September 23. Bitcoin rose 77% in the same period. Dogecoin? Up 122%. Solana is a relative laggard with "only" 49% price gains in one year.

And in the next few months, I see more reasons to be bullish than bearish about crypto in general. Unexpected price drops just come with the territory of investing in volatile asset classes. And in the long run, leading coins like Bitcoin, Ethereum, and Solana should do more than fine, as long as they can dodge the risks mentioned above.

Long story short, I can never really promise that there isn't a massive crypto downturn just around the corner, but it would be a surprise in the fall of 2025. It's too early to call this a crypto winter, or even a crypto autumn. It's more like someone left the crypto fridge door open.

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American Express is an advertising partner of Motley Fool Money. Anders Bylund has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.