Tracing the history of cryptocurrency (Part 4): The Great Crash and ETH’s Mainstream Acceptance

Author: Prashant Jha, CoinTelegraph; Translator: Baishui, Golden Finance

The cryptocurrency market has gone through several cycles characterized by periods of rapid price increases (called bull markets) followed by long periods of downturn (called "crypto winters").

The term crypto winter refers to a phase in the cryptocurrency market characterized by low investor enthusiasm. This is evident from the sharp decline in crypto asset prices and trading volumes from previous highs. Unlike traditional capital markets, the cryptocurrency industry lacks standardized indicators to identify the beginning of a crypto winter.

For related content, please see:

Tracing the History of Cryptocurrency (I): Satoshi Nakamoto’s Response to the Financial Crisis

Tracing the History of Cryptocurrency (II): The Joining of Ethereum and the Surge of Bitcoin

Tracing the History of Cryptocurrency (III): The ICO Boom and the Evolution of Ethereum

However, we observe a pattern that tends to span four-year cycles. This cycle starts with a rise in Bitcoin prices, which undergoes a block reward halving. After the halving, a price decline usually begins after the crypto asset reaches a new all-time high.

The term "Crypto Winter" has not been officially declared by any particular regulator or organization, but the trend of a sustained decline in the prices of various cryptocurrencies has been recognized.

The phase began in January 2018 and lasted until December 2020.

The Great Crash of September 2018

During this period, the value of the two leading cryptocurrencies, Bitcoin and Ethereum, fell by more than 80% from their all-time highs. Bitcoin had previously peaked at nearly $20,000 in late 2017, while Ethereum rose to over $1,400, but both had fallen significantly in value by September 2018.

Of the top 100 cryptocurrencies, 95% have seen significant declines in value.

Multiple inherent industry challenges triggered the 2018 crypto winter. These included an extremely high failure rate for initial coin offerings, with more than 97% of offerings failing to meet their targets, and issues with individual investors being over-leveraged. Regulatory concerns further complicated the situation, leading to a massive investor exodus from the market.

The aftermath of the 2018 cryptocurrency crash profoundly affected perceptions of cryptocurrencies. Financial institutions began to look skeptically at the cryptocurrency market, labeling it as potentially speculative, while governments around the world advised caution in crypto investments.

This period of inactivity changed in July 2019, when investor enthusiasm began to heat up, pushing the price of Bitcoin past the $10,000 mark. However, the recovery in the market's fortunes was short-lived.

In March 2020, the outbreak of the pandemic triggered a severe liquidity crisis that affected global markets, including the cryptocurrency market.

New Plans Emerge on Ethereum's PoS Journey

Despite the sharp economic downturn in 2018, Ethereum also saw key developments. During this period, Ethereum began laying the foundation for its transition to a proof-of-stake (PoS) system, though it faced delays and rescheduled efforts.

In early 2018, the popularity of the blockchain game CryptoKitties led to network congestion. The incident highlighted the need for Ethereum to improve its scalability. In response, Ethereum explored the concept of sharding, a process that divides the blockchain into several smaller, more manageable parts, called shard chains or data layers. Each shard operates independently, allowing information to be processed in parallel, which can significantly enhance the scalability of the blockchain.

However, Ethereum’s transition to a proof-of-stake (PoS) blockchain has been slower than expected, with multiple delays along the way.

According to its 2017 roadmap, Ethereum planned two major upgrades — Metropolis and Serenity — to improve scalability by introducing proof-of-stake and sharding. The Metropolis upgrade was to be implemented in two phases: the Byzantium phase, which focused on privacy improvements, and the Constantinople phase, which would introduce a hybrid proof-of-work + PoS system.

Nevertheless, by June 2018, Ethereum adopted a simpler PoS system, known as Casper 2.0. Although the transition was initially expected to be completed in 2019, it was ultimately completed in 2021, illustrating the complexity involved in upgrading such an important and widely used blockchain platform.

A notable development during this period was the U.S. Securities and Exchange Commission’s (SEC) classification of Ethereum as a non-security in June. The decision made Ethereum the second asset to receive such a designation after Bitcoin, sparking discussion and debate in the following years.

2019: Ethereum’s Year of Mainstream Acceptance and DeFi

In 2019, Ethereum received widespread attention for its technological advancements and the expansion of the decentralized finance (DeFi) ecosystem. During the year, the DeFi sector experienced considerable growth, with the total value locked in DeFi protocols increasing to $667 million as of December 31, 2019.

2019 DeFi TVL chart. Source: Medium

Initially dominated by MakerDAO, which held 1.86 million ETH (worth about $260.4 million at the time), the industry saw an influx of new players by the end of the year.

Decentralized exchanges also experienced significant growth, gaining traction amid the general popularity of centralized exchanges. Uniswap became a major player, with its daily average volume increasing from $25,000 to $1.5 million and liquidity increasing from $500,000 to $25 million.

In addition, Ethereum began to attract attention from all walks of life, including large companies, financial institutions, consumer brands, and celebrities.

Basketball player Spencer Dinwiddie announced a plan to tokenize his NBA contract on Ethereum, creating 90 Ethereum-based tokens. These tokens allow holders to invest a portion of the proceeds of Dinwiddie's futures contracts plus interest. Through this arrangement, Dinwiddie received $13.5 million upfront from his $34 million contract.

Professional basketball team Sacramento Kings launched a rewards program using Ethereum-based tokens to enhance fan engagement through blockchain technology. In the entertainment industry, the Star Trek franchise announced that it would utilize the digital collectibles platform to issue a series of collectible spaceships as non-fungible tokens on Ethereum.

In addition, Samsung launched a developer platform focused on Ethereum and released a new smartphone with an integrated Ethereum wallet.