HOW TO SURVIVE A CRYPTO WINTER?

Crypto winter is an extended period of depressed cryptocurrency asset prices compared with prior peaks. Similar to a bear market in the stock market, a crypto winter can lead to widespread losses for investors.

What is a Crypto Winter?

A cryptocurrency winter is an industry term for a long downturn in cryptocurrency prices. Crypto winters typically extend from well-known currencies like Bitcoin and Ethereum to non-fungible tokens (NFTs) and lesser-known crypto coins and tokens.

Crypto winters may 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.

Since its peak in November 2021, Bitcoin has lost more than half of its value. Widespread price declines severely impacted several cryptocurrency and blockchain projects. Notably, the Terra Luna algorithmic stablecoin lost its peg to the United States dollar, decimating users’ savings. The Celsius and Voyager platforms went under in 2022 during this period, likely costing depositors a large portion of their holdings.

How to Know You’re in a Crypto Winter

As a newer asset, crypto winter isn’t as clearly defined as downturns in other places. If treated like a stock market’s bear market, a crypto winter would occur when prices drop by 20% or more from recent highs.

Perhaps the best barometer for crypto prices 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 up over the three-year and five-year horizons.

Should You Sell All of Your Crypto in a Crypto Winter?

In the stock market, many investors believe that the market eventually will recover from any downturn. History proves this true, but there’s no guarantee that markets will always go up. In reality, only time will tell.

While investors are very confident in stock market averages, cryptocurrency has many fans and many skeptics. The oldest stock exchanges in Europe are hundreds of years old. The New York Stock Exchange traces its roots back to 1792. This gives investors confidence that markets will survive the ups and downs of economic cycles.

Bitcoin started in 2009. While it has a solid decade under its belt, it’s still very new compared with traditional investments. That leaves more questions about the future of crypto and its ability to recover from a drawn-out 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 to Survive a Crypto Winter

If you get a sick feeling in your stomach like a roller-coaster ride when crypto prices fall, consider these tips to survive a crypto winter:

1. Don’t invest more than you can afford to lose. Crypto is still fairly new. It’s highly risky and volatile. Smart investors avoid putting in more than they can afford to lose. It’s not wise to invest your life savings in any cryptocurrency.
2. Carefully evaluate each crypto project. Every coin and token are tied to a different managing entity or volunteer group. Some have proven to be scams. When it feels like a Wild West, it’s important to carefully evaluate each crypto project before deciding how much to invest.
3. Beware the herd mentality. WallStreetBets and other online communities are fun places to learn about and discuss investing, but that doesn’t mean you should take everyone’s advice. Online discussion boards are filled with hobbyists who are not your friends in real life and are not affected if you lose your shirt in the crypto markets. Stay focused on your personal goals and risk tolerance when investing.
4. It’s OK to make portfolio adjustments. In poker, there’s a sunk cost theory where it’s difficult to fold a hand even when you believe you’ll lose if you’ve already made a large bet. It may seem logical to bet even more to avoid losing what’s put in, but if the money is already lost, then putting in more chasing your sunk costs leads to more losses. You don’t have to HODL onto crypto that’s down if you don’t think it’s coming back. It’s OK to sell and make portfolio adjustments whenever you deem it necessary.
5. Consider buying the dip. Conversely, if you believe a cryptocurrency downturn is temporary, you may want to buy in at lower prices, hoping to buy low and see the value of your portfolio grow while the markets recover.

If you have any doubts, it may be best to consult with an investment professional who acts as a fiduciary, meaning that they have to put your best interests first.

The Bottom Line

Cryptocurrencies hit a rough patch in 2022, with prices falling and some companies facing financial problems. It is possible to overcome the fear a little bit with tips for surviving in a crypto winter.