The crypto market drew in a bunch of new investors in 2021 — and they are now experiencing their very first “crypto winter.”
Bitcoin, the largest cryptocurrency on the market, started the year trading at almost $48,000 but saw its value quickly erode during the springtime and fall all the way to under $18,000. It’s currently trading at almost $22,000, a year-to-date loss of around 55%. Similarly, ethereum, the second-largest crypto, was trading at almost $3,800 at the start of the year and is now close to $1,700.
This isn’t the first time the market has experienced a crypto winter, but investors are finding this time just hits differently. Experts say that’s thanks in large part to last year’s influx of new investors, and a complicated mix of flawed expectations and classic crypto market volatility.
“Clearly, there has been some irrational exuberance about where crypto prices are going,” he says. “People were living in a media bubble without paying attention to the hidden systemic risk built into all of these things,” says Dr. Benjamin Cole, a business professor at Fordham University and a fellow at the British Blockchain Association.
Experts say the current crypto winter could last a while. Here’s what that means for investors.
What Is a Crypto Winter?
Crypto winter is what they call the bear market in the crypto space, according to Piers Ridyard, the Switzerland-based CEO of RDX Works. But he says there is a key difference between a bear market and a crypto winter. “A bear market is when the market is going down, and a crypto winter is when it goes sideways, and doesn’t really do anything.”
By Ridyard’s definition, an investor would see flat returns during a crypto winter, and negative returns during a bear market. As the market has recovered some of its losses over the past several months, many investors may have experienced flat or at least substandard returns in their portfolios.
Ridyard says that these “winters” are often marked by people losing interest in the crypto market as returns are stunted. It essentially becomes a waiting game for many investors who aren’t confident about the state of the market. The current crypto winter could last “a year or two,” he says.
Another important thing to keep in mind is that crypto winters are basically fixtures of the crypto space, similar to bear markets in the stock market.
“This isn’t the first time the crypto market has crashed, and it won’t be the last time,” says Lisa Teh, the co-founder of Mooning, an Australia-based Web3 marketing agency, referring to the last crypto winter, which stretched from late 2017 into late 2020.
Why This Crypto Winter Is Different, According to Experts
Experts generally agree the market is in a crypto winter, and that investors should get accustomed to periodic stretches of flat or negative growth.
The reason the 2022 crypto winter feels so much more severe, Teh says, is that “there are significantly more people in the market now than last time — so, more people were affected, there’s more noise in the market, and more people are talking about it.”
Further, Teh says a lot of investors got into crypto expecting the market to behave differently from stocks or other assets in the face of rising interest rates and high inflation. That hasn’t happened, and it’s left many crypto investors frustrated and confused. Historically, cryptocurrency experts and investors touted bitcoin as an inflation hedge because of its limited supply of 21 million and speculative nature.
“People are getting upset because they don’t understand it,” Teh says.
In many ways, the crypto downturn and subsequent winter is similar to the housing crisis in 2008 and 2009, according to Cole.
There were unrealistic expectations that home values were going to continue to increase during the mid-2000s before the crash, Cole says, and that’s similar to the expectations that many crypto investors have had over the past couple of years. Cole also says the numerous hacks on exchanges and the failure or collapse of firms, like Three Arrows Capital and Celsius, rocked the market to its core.
Another expert says part of the reason that crypto has an attraction to people is its volatility.
“If you invest in a stock or bond that is relatively stable, there’s not the adrenaline rush,” says Dr. Robert Johnson, a professor of finance at Creighton University’s Heider College of Business, pointing to the meteoric rise and fall in value for some cryptocurrencies like bitcoin.
“For some, the high volatility makes them more attractive,” and there’s an opportunity to make a huge return (or loss) in a short period of time, he says. So, crypto investors may be best off learning to expect and embrace crypto winters and taking some measures to manage the ups and downs.
Tips for Surviving Crypto Winter
The steps to prepare for, or survive a crypto winter are more or less the same as with a downturn in the stock market. Here are four things experts say crypto investors should do while waiting for the market to recover — or to make sure their portfolios are in good shape the next time crypto winter rolls around:
Diversify Your Holdings
Cole says crypto investors should keep diversification top of mind when investing. “Remember the first principle of finance: diversify,” he says. “Don’t put all of your eggs in one basket, and don’t put all of your tokens on one platform — diversification is key,” he says. Experts generally recommend investing in low-cost, diversified index funds as these funds have low expense ratios, or fees, that are great for all investors. Because crypto is a high-risk investment, experts say you should allocate only 5% of your total investment portfolio to it.
Cole recommends not only diversifying in terms of holdings but also in terms of where investors are keeping them. Use multiple platforms or exchanges, crypto wallets, and more, he says. And it’s critical, too, that investors be able or willing to move their assets off of certain platforms to a hot or cold wallet to ensure you actually have and own them.
Use the Downturn to Go Back to the Basics
Ridyard says that crypto winter offers investors a good chance to take a breath and get caught up with everything that’s new in the crypto market. In other words, now is a good time to do some homework and research to make sure you actually understand the technologies and principles powering the crypto industry.
“Go back and think about all the things that you didn’t understand and spend some time reading, learning, and going back to basic principles — getting a real handle on what these apps are and how they work,” Ridyard says. “Be methodical during this time that is available, because you’ll thank yourself when the next bull market comes along.”
Do Your Own Research
Investors could also use the down market to pick up additional assets at a relative discount, Teh says. But, she warns, that it’s important to do your research to make sure you’re investing in crypto projects that have long-term value or utility. Most experts recommend sticking with bitcoin and ethereum, the two largest and most established cryptocurrencies.
“Yes, the market’s down, but it’s a natural cycle, so if you’re thinking about getting into the space, now is the time to pick up distressed assets,” Teh says. “But do your research properly and don’t look at what Elon [Musk] is tweeting about.”
Remember: It’s All Speculative
Investors should always keep in mind that crypto still is a massive gamble for most investors, says Dr. Johnson. That’s why it’s important only to invest money in the crypto market that you’re comfortable losing.
“I have a problem referring to crypto as assets, and certainly referring to cryptocurrencies as an asset class,” he says. “They’re speculative vehicles. Know when you’re speculating and know when you’re investing. If you’re buying crypto, then you’re speculating.”