:max_bytes(150000):strip_icc()/restaurant-waiters-pandemic-winter-FT-BLOG1220-05d6f1e8149644758c22f8bdef817d96.jpg?w=1200&resize=1200,0&ssl=1 "How to Survive a Crypto Winter")
What is a crypto winter?
A crypto winter is an extended period of low prices for crypto assets compared to previous peaks. Similar to a bear market in stocks, a crypto winter could lead to widespread losses for investors.
Key Takeaways
- A crypto winter or cryptocurrency winter is an extended period of low asset prices in the cryptocurrency markets.
- Crypto winters can be unpredictable and challenging for less experienced investors.
- Long-term investors sometimes look at “buy the dip‘ and benefit from a recovering crypto economy.
How to Know You’re in a Crypto Winter
Crypto winters typically extend from well-known currencies like Bitcoin and Ethereum to non-fungible tokens (NFTs) and lesser-known cryptocurrencies.
Crypto winters can coincide with other economic downturns or a stock market bear market, but that’s not always the case. Cryptocurrencies are a much newer asset class than stocks and have developed independently of other markets.
As newer assets, crypto winters are not as clearly defined as downturns in other markets. If it is treated like a stock market’s bear market, a crypto winter would occur prices fall by 20% or more from recent highs, but this is common in the crypto markets. Prices must fall much further and remain low for a longer period.
There are several barometers used for crypto prices that can be used to assess the markets. These include the S&P Cryptocurrency Broad Digital Market Index (SPCBDM), the Bloomberg Galaxy Crypto Index and the S&P Cryptocurrency Top 10 Equal Weight Index.
However, Bitcoin’s price is generally indicative of general market sentiment and valuation, so simply keeping an eye on it can tell you whether you are in a crypto winter or not. You will also hear investors and the media complaining about it often and loudly.
Should you sell all your crypto during a crypto winter?
In the stock market, many investors believe that the market will eventually recover from an eventual downturn. History proves this to be true, but there is no guarantee that markets will always continue to rise. In reality, only time will tell.
Although investors have a lot of confidence in the stock market averages, cryptocurrency has many fans and skeptics. The oldest stock exchanges in Europe are hundreds of years old, with the New York Stock Exchange tracing its roots back to 1792. This gives investors confidence that the markets will survive the ups and downs of economic cycles.
Bitcoin started in 2009. Although it has been around for several years now, it is still very new compared to traditional investments. That leaves more questions about the future of crypto and its ability to recover from an extended period of falling prices. It’s best to keep the risks of each investment in mind when deciding how much to hold and what you can afford to lose.
5 Tips to Survive a Crypto Winter
If you get a sick feeling in your stomach, like you’re on a roller coaster as crypto prices drop, consider these tips for surviving a crypto winter:
- Don’t invest more than you can afford to lose: Crypto is still quite new. It is very risky and volatile. Smart investors avoid investing more than they can afford to lose. It is not wise to invest your savings in any cryptocurrency.
- Evaluate each crypto project carefully: Each coin and token is associated with a different management entity or volunteer group. Some have proven to be scams. If it feels like a Wild West, it’s important to carefully evaluate each 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 follow everyone’s advice. Online discussion boards are filled with hobbyists who aren’t your friends in real life and wouldn’t care if you lost 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 is a tendency for players not to fold their hand when betting big, even if they think they will lose. It may seem logical to bluff and bet even more to avoid losing what you put in, but if the money is already lost, betting more money to chase your sunk costs will lead to more losses. That’s not necessary HODL your cryptocurrency that’s gone if you think it won’t come back. It’s okay to sell and make portfolio adjustments when you see fit.
- Consider buying the dip: Conversely, if you think a cryptocurrency downturn is temporary, you may want to buy in at lower prices, hoping to buy low and watch the value of your portfolio grow as markets recover.
If you have any questions, it is best to consult a reputable investment professional who has knowledge of the cryptocurrency markets.
How long will a crypto winter last?
It is difficult to predict how long they will last because most crypto prices are a result of sentiment and not underlying value. When investors start to believe that things are coming to an end, they fulfill their own prophecies by increasing the amount they are willing to pay because they believe prices will continue to rise.
Can Crypto Survive a Recession?
Cryptocurrency survived the recession caused by the COVID-19 pandemic. Even though it was the shortest recession in history, it still showed that cryptocurrency can weather a recession. However, it remains to be seen how long a recession the market can withstand.
Should I keep my crypto in a cold wallet?
The only time your crypto should not be in a cold wallet is if you are going to use it. Storing cryptocurrency in a hot wallet is very risky.
The bottom line
While cryptocurrencies hit a rough patch in 2022, investors with a long-term outlook weathered the crypto winter and came out much better than they would have been with a short-term perspective.
Those who bought and held cryptocurrency during this past crypto winter made incredible gains in just a few years. You shouldn’t assume that the recovery and skyrocketing market of the past will happen again, but it is a sign that crypto winters could turn into crypto summers.