The crypto winter is an extended period of low prices for cryptocurrency assets compared to previous highs. Much like a bear market in the stock market, a crypto winter can result in widespread losses for investors.
Here are some key takeaways on how investors can weather a crypto winter.
The central theses
- A crypto winter, or cryptocurrency winter, is a long period of low asset prices in the cryptocurrency markets.
- Crypto winters can be unpredictable and difficult to navigate for less experienced investors.
- Long-term investors sometimes try to “buy the dip” and profit from a recovering crypto-economy.
What is a crypto winter?
A cryptocurrency winter is an industry term for a long decline in cryptocurrency prices. Crypto winters typically range from well-known currencies like Bitcoin and Ethereum to non-fungible tokens (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’s not always the case. Cryptocurrencies are a relatively new asset class that can move independently of other markets.
“When cryptocurrency prices are low, it’s hard to decide whether to sell ahead of further losses or wait for a hopeful recovery,” said Michael Anderson, financial advisor at Maranatha Financial in Ventura, California. “Cryptocurrencies are a risky commodity could eventually go to zero. While I don’t think all cryptocurrencies will fail, a good number could die eventually.”
Since its peak in November 2021, Bitcoin has lost more than half of its value. Widespread price declines have severely impacted several cryptocurrency and blockchain projects. Notably, the algorithmic stablecoin Terra Luna lost its peg to the US dollar, decimating user savings. The Celsius and Voyager platforms went under during this period in 2022, likely costing depositors a large chunk of their holdings.
The bankruptcy of crypto lending and exchange platforms worries Anderson. “Losses in Voyager, Celsius and the demise of stablecoin LUNA are good examples of why investors should be extremely cautious,” he said.
How do you know you’re in a crypto winter?
As a newer asset, crypto winter isn’t as clearly defined as downturns elsewhere. If treated like a stock market’s bear market, a crypto winter would occur when prices fall 20% or more from recent highs.
Perhaps the best barometer of crypto prices is the S&P Cryptocurrency Broad Digital Market Index. As of this writing, this index is down about 70% from its recent peak, clearly indicating a crypto winter. However, long-term holders are still up over 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 a downturn. History proves this, but there is no guarantee that markets will always rise. In reality, only time will tell.
“Cryptocurrency prices have seen sharp declines and long periods of flat prices before staging a tremendous recovery, so you can never completely rule out crypto,” Anderson said. “While there is a great risk of loss, we’ve seen people earn 10x, 100x or more in a short amount of time when a successful crypto project takes off.”
While investors have a lot of trust in stock market averages, the cryptocurrency has many fans and many skeptics. The oldest stock exchanges in Europe are hundreds of years old. The roots of the New York Stock Exchange date back to 1792. This gives investors confidence that markets will weather the ups and downs of economic cycles.
Bitcoin started in 2009. While it’s had a solid decade, it’s still very new compared to traditional investments. That leaves more questions about the future of crypto and its ability to bounce back from a protracted period of falling prices. It’s best to keep the risks of each investment in mind when deciding how much to hold and how much you can afford to lose.
5 tips to survive a crypto winter
If falling crypto prices give you that queasy feeling like you’re on a roller coaster ride, consider these tips to weather a crypto winter:
- Don’t invest more than you can afford to lose. Crypto is still fairly new. It is very risky and volatile. Smart investors avoid investing more than they can afford to lose. It is not advisable to invest your life savings in cryptocurrencies.
- Evaluate each crypto project carefully. Each coin and token is tied to a different administrative entity or volunteer group. Some have turned out to be scams. When it feels like the Wild West, it’s important to carefully review any crypto project before deciding how much to invest.
- Beware of the herd mentality. WallStreetBets and other online communities are fun places to learn and discuss investing, but that doesn’t mean you should take everyone’s advice. Online discussion forums are filled with hobbyists who are not your friends in real life and who are unaffected if you lose your shirt in the crypto markets. When investing, focus on your personal goals and risk appetite.
- It’s okay to make portfolio adjustments. There’s a sunk cost theory in poker that makes it difficult 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 the bet, but if the money is already lost, one more bet to track your sunk costs will result in even more losses. No need to HODL on downed cryptos if you don’t think they’re coming back. It’s okay to sell and make portfolio adjustments whenever you deem necessary.
- Consider buying the dip. Conversely, if you think a cryptocurrency downturn is temporary, you may want to buy at lower prices in hopes of buying low and seeing the value of your portfolio grow as markets recover.
According to Anderson: “Don’t let past losses influence future investment decisions too much. Focus on what you believe to be the intrinsic value of the currency or project and let that guide your decisions. If you’re not sure what something is worth, it might be worth skipping over. It’s best to keep your investments in assets you understand.”
If you are in any doubt it may be best to consult an investment professional who acts as a fiduciary, which means they must put your best interests first.
Will Cryptocurrency Prices Recover?
Open trading venues determine cryptocurrency prices. The last trade price determines the currency on each exchange. 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 both centralized and decentralized exchanges. Each has advantages and disadvantages with different risks and costs. It is advisable to research several exchanges to choose the best one for your needs.