Crypto winter explained: understand what a crypto winter is, how it differs from a bear market, its risks and opportunities, and smart strategies to protect and reposition your portfolio for long-term gains.
Written byPayam Masood · Head of Content and Social Media - Kryptos
A crypto winter starts when there’s a sharp decline in the price of crypto assets, usually between 35-40% following an event or an announcement, and the overall sentiment of the investors turns negative towards the market, making it difficult for the market to recover, forcing it to stay range-bound for prolonged durations.
How long does a crypto winter last?
Although it’s difficult to predict exactly how long does a crypto winter last, as it is dependent on multiple factors like regulatory changes, social and political factors, and technological changes. If we extrapolate from past data, crypto winters can last for as short as 10-14 weeks, and as long as 2-3 years depending on how markets react to the environment.
How does the crypto winter affect the overall crypto industry?
A crypto winter can have a significant impact on the overall crypto industry. During a crypto winter, the value of cryptocurrencies typically decreases, leading to a decrease in market capitalization and trading volume. This can result in a decrease in investment and development in the crypto industry, as well as a decrease in the adoption of cryptocurrencies by businesses and individuals.
As of mid-January 2023, Bitcoin was down 75.64% from its all-time high of $64,800 in November 2021. Ethereum, the second in command of the crypto artillery was down 70.67% from its all-time high of $4,878, pushing altcoins like Cardano, Polygon, Ripple, Litecoin, and Solana into a downward spiral.
The market has been trading sideways since the start of 2022, and this is what experts call a crypto winter, where prices of crypto assets fall sharply and remain stagnant for years. The last crypto winter lasted 35 months starting in January 2018 and extending into November 2020, and the Russia-Ukraine conflict coupled with the FTX collapse might’ve pushed us right into another one.
Therefore, you must understand the intricacies of crypto winter and its implications on your portfolio. And while it appears to be doomsday on the surface, not everything is negative about crypto winters, if you understand it well, you can position yourself in a way that’s extremely profitable when the temperature rises.
What is Crypto Winter?
A crypto winter refers to a prolonged period of stagnant prices in the cryptocurrency market, initiated by a sharp decline in crypto prices followed by a sideways call usually initiated by a mix of political and economic factors, and a lack of investor interest. The figure below shows a BTC vs USD chart and you can see bitcoin trading in a sideways market.
A prolonged crypto winter can wash out huge amounts of investor wealth and test the durability of smaller startups.
The origin of the term “crypto winter” is debatable. While some say that it’s the extension of the “long winter” from the popular HBO series “Game of Thrones” into the crypto space, others believe that the term is a metaphor taken from the traditional business cycle, which has its concept of an "economic winter".
The previous crypto winter was induced by China’s initial jibe at the crypto market and was prolonged by the fall of Terra Luna in June 2022. One important point to consider is that the term “winter” refers to a period in the market when the prices of crypto assets across the sphere are frozen and stay the same unless a string of positive events solicits a recovery.
Is crypto a risky asset?
Cryptocurrencies are backed by blockchains, a digitally native encrypted database. Now, unlike regular fiat currencies backed by physical assets, or shares backed by solid businesses bringing in billions of dollars in revenue. Which makes them more speculative and volatile than other asset classes.
Crypto is a comparatively new space with a shorter correlatable history to predict market movements and add that to the volatile nature of crypto assets and a huge influx of new projects, the risks involved with investing in crypto are most certainly higher than any other asset class.
One should invest in cryptocurrencies only after thoroughly analyzing the project fundamentals, founding members, and the prospects of the project. Also, investing a portion of your investments in stable coins or any other less volatile asset as a hedge against your investment in crypto assets is a smart move for any investor.
What are some advantages of a crypto winter?
Although the negative aspects of a crypto winter cannot be contented, there’s a positive aspect to crypto winters. It shakes off new businesses with weak fundamentals. It allows established businesses to prove their products/services in a tough landscape and uncovers hidden gems from under the rug.
The same goes for investors, the first ones to square off their positions in tough markets are investors with a weak resolve or shaky investment premise. Strong-willed investors with a long-term perspective and a well-rounded understanding of projects hold onto their assets while someone's exit liquidity offers them the opportunity to reposition their portfolio.
Here are some tips to make the most of crypto winters:
Look for bargains: Crypto winter is a good time to buy quality assets at a discounted price.
Diversify your portfolio: Diversifying your portfolio across different coins and projects can help spread risk and reduce overall portfolio volatility.
HODL: HODL" means "hold on for dear life" and suggests holding assets during market downturns instead of panic selling.
Be patient: Crypto winter offers a good opportunity. However, the market may take time to recover, and investors should be prepared to wait for the market to rebound.
Have a long-term perspective: Crypto markets can be highly volatile, and prices can fluctuate dramatically in the short term, have a long-term perspective.
How is a crypto winter different from a bear market?
A bear market refers to a period or prolonged downward cycle where the price of a financial asset is consistently decreasing. A financial market is considered to be in a bear market when the market is down more than 20%, a number collectively decided by financial experts and investors across the globe.
Crypto winter and bear market are similar to each other in some aspects. Both signify a negative sentiment in their respective markets, fueled by a flurry of negative financial and socio-political events.
However, they’re not the same. While stock prices consistently decrease during a bear market, token prices remain stagnant for prolonged periods. Crypto winters begin with a sharp downfall in prices and then freezes at a resistance point. Bear markets on the other end don’t have a bottom and asset prices continuously spiral downwards before a complete reversal.
Layoffs during the crypto winter
“We saw a lot of new startups throughout the industry over the past year, and many of them will fail, If the market remains in contraction for long enough, it is not only poor companies that will suffer—but some great ones too”
says Jake Weiner, founder, and CEO of Uncommon.
The crypto winter is like a recession for the crypto industry, startups fall, people lose their jobs, and projects collapse, throughout the cold wave.
Here are some of the most notable layoffs where well-known crypto behemoths laid off thousands of employees.
In August 2022, Robinhood (HOOD) laid off 23% of its employees
NFT marketplace OpenSea cut its staff by 20% in July 2022
Gemini laid off 10% of its workforce right around that time
What are some of the primary concerns regarding crypto winter?
Some of the primary concerns regarding a crypto winter include a decrease in the value of cryptocurrencies, a lack of overall market interest, and a decrease in the number of new investors entering the market.
Crypto as an industry is comparatively younger and less mature, any crypto winter could be its last, driving prices lower and lower leaving all tokens staring at the abyss. Of course, this is all purely speculative and addresses the concerns of investors in the worst-case scenario(which is highly unlikely).
A more rational concern towards crypto winters is the huge outflow or rather the lack of inflow of funds from venture capital groups that provide that operative and expansive scaffolding for the proliferation of the crypto industry.
How long will the crypto winter last?
There’s no fixed formula to predict the duration of a crypto winter. Some crypto winters have lasted for several months, while others have lasted for up to 3 years. The actual length of a crypto winter depends on a multitude of factors like regulatory changes, socio-political developments, and technological advancements.
The best way to survive a crypto winter is to have a long-term perspective and double down on projects that you truly believe in. Indeed, you can’t predict how long the crypto winter will last, however, by repositioning your investments, you can place yourself in a position of high leverage.
FAQs
1. When does Crypto Winter Start?
A crypto winter starts when there’s a sharp decline in the price of crypto assets, usually between 35-40% following an event or an announcement, and the overall sentiment of the investors turns negative towards the market, making it difficult for the market to recover, forcing it to stay range-bound for prolonged durations.
2. How long does a crypto winter last?
Although it’s difficult to predict exactly how long does a crypto winter last, as it is dependent on multiple factors like regulatory changes, social and political factors, and technological changes. If we extrapolate from past data, crypto winters can last for as short as 10-14 weeks, and as long as 2-3 years depending on how markets react to the environment.
3. How can I protect my investments during a crypto winter?
There are several strategies you can use to protect your investments during a crypto winter:
Diversify your portfolio: Spread your investments across different cryptocurrencies and assets to reduce your risk.
Have a long-term perspective: Remember that the crypto market is highly volatile and that short-term price fluctuations should not be the sole basis for your investment decisions.
Avoid FOMO and FUD: Do not make impulsive decisions based on fear of missing out or fear, uncertainty, and doubt.
4. How does the crypto winter affect the overall crypto industry?
A crypto winter can have a significant impact on the overall crypto industry. During a crypto winter, the value of cryptocurrencies typically decreases, leading to a decrease in market capitalization and trading volume. This can result in a decrease in investment and development in the crypto industry, as well as a decrease in the adoption of cryptocurrencies by businesses and individuals.
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