The crypto winter is an extended period of depressed prices of cryptocurrency assets compared to previous peaks. Similar to a bear market in the stock market, a crypto winter can lead to widespread losses for investors. Here are several key insights on how to survive a crypto winter as an investor.
Key points to remember
- A crypto winter or cryptocurrency winter is a long period of declining asset prices in the cryptocurrency markets.
- Crypto winters can be unpredictable and difficult to navigate for less experienced investors.
- Long-term investors sometimes look to “buy the dip” and profit from a booming crypto-economy.
What is a Crypto Winter?
A cryptocurrency winter is an industry term for a long decline in cryptocurrency prices. Crypto winters typically extend from well-known currencies like Bitcoin and Ethereum to NFTs and lesser-known crypto coins and tokens.
Crypto winters can coincide with other economic declines or a bear market in the stock market, but that is not always the case. Cryptocurrencies are a relatively new asset class that can move independently of other markets.
“When cryptocurrency prices are falling, it’s hard to decide whether you should sell before further losses or wait for a hopeful bounce,” said Michael Anderson, financial adviser at Maranatha Financial in Ventura, Calif. . “Cryptocurrencies are a risky asset that could end up falling to nil value. While I don’t think all cryptocurrencies will fail, quite a few may eventually bite the dust.”
Since its peak in November 2021, Bitcoin has lost more than half of its value. The widespread price decline has severely affected several cryptocurrency and blockchain projects. Notably, the algorithmic stablecoin Terra Luna lost its peg to the US dollar, decimating user savings. The platforms Celsius and Voyager went bankrupt in 2022 during this period, which likely cost depositors a large chunk of their holdings.
The bankruptcy of crypto lending and exchange platforms worries Anderson. “The losses of Voyager, Celsius and the demise of the stablecoin LUNA are good examples of why investors should be extremely cautious,” he said.
How to know you’re in a crypto winter
As a newer asset, crypto winter is not as clearly defined as downturns in other places. If treated as a bearish stock market, a crypto winter would occur when prices fall 20% or more from recent highs.
Perhaps the best crypto price barometer is the S&P Cryptocurrency Broad Digital Market Index. As of this writing, this index is down about 70% from the recent peak, clearly indicating a crypto winter. However, long-term holders are still rising on the three- and five-year horizons.
Should You Sell All Your Crypto In A Crypto Winter
In the stock market, many investors believe that the market will eventually recover from any downturn. History proves it, but there is no guarantee that the markets will always go up. In reality, only time will tell.
“Cryptocurrency prices had big declines and long stretches of stagnant prices before seeing huge rallies, so you can never fully count crypto,” Anderson said. “Although there is a big risk of losses, we have seen people earn 10x, 100x or more in a short time when a successful crypto project takes off.”
While investors are very confident in stock market averages, the cryptocurrency has many fans and many skeptics. The oldest stock exchanges in Europe are hundreds of years old. The New York Stock Exchange has its roots in 1792. This gives investors confidence that the markets will survive the ups and downs of business cycles.
Bitcoin started in 2009. Although it has a solid decade under its belt, it is still very new compared to traditional investments. This leaves more questions about the future of the crypto and its ability to recover from a long period of falling prices. It’s best to keep the risks of any investment in mind when deciding how much to hold and what you can afford to lose.
5 tips for surviving a crypto winter
If you feel a queasy feeling in your stomach like a roller coaster ride when crypto prices plummet, consider these tips for surviving a crypto winter.
- Don’t invest more than you can afford to lose: Crypto is still fairly new. It is very risky and volatile. Savvy investors avoid investing more than they can afford to lose. It is not wise to invest your savings in cryptocurrency.
- Carefully evaluate each crypto project: Each coin and token is tied to a different management entity or volunteer group. Some turned out to be scams. When it feels like a Wild West, it is important to carefully evaluate each crypto project before deciding how much to invest.
- Beware of herd mentality: WallStreetBets and other online communities are fun places to learn and discuss investing, but that doesn’t mean you should follow everyone’s advice. Online chat rooms are filled with amateurs who are not your friends in real life and unaffected if you lose your shirt in the crypto markets. Stay focused on your personal goals and risk tolerance when investing.
- It’s okay to make portfolio adjustments: In poker, there’s a sunk cost theory that says it’s hard to fold a hand even if you think you’re going to lose if you’ve already made a big bet. It may seem logical to bet even more to avoid losing what was bet, but if the money is already lost, betting more to chase your sunk costs leads to more losses. You don’t need HODL on crypto that is down if you don’t think it will come back. You can sell and adjust your portfolio whenever you deem it necessary.
- Consider buying the dip: Conversely, if you think a downturn in cryptocurrency is temporary, you may want to buy lower, hoping to buy low and see your portfolio value rise as markets recover.
According to Anderson, “Don’t let past losses influence future investment decisions too much. Focus on what you think is the intrinsic value of the currency or project and let that guide your decisions. “If you are unsure of the value of something, it may be worth ignoring it. It’s best to keep your investments in assets you understand.”
If you have any doubts, it may be best to consult an investment professional who acts as a fiduciary, meaning they must put your interests first.
Will cryptocurrency prices recover?
Open marketplaces determine the prices of cryptocurrencies. The last trade price sets the currency on each trade. There is no guarantee of future prices or future recovery.
How does cryptocurrency work?
Cryptocurrencies are digital assets managed using blockchain technology. Unlike government-backed fiat currencies, cryptocurrencies are run by volunteers and for-profit companies that develop and update the underlying software.
Where can I buy cryptocurrency?
Cryptocurrencies are sold on centralized and decentralized exchanges. Each has advantages and disadvantages with varying risks and costs. It is wise to research several exchanges to choose the one that best suits your needs.