What is a crypto winter?
Crypto winter is a period of time, usually months or years, when asset valuations drop and then stagnate. This is combined with a drop in sentiment, activity and number of participants as people leave the ‘boring’ market. Crypto companies also typically cut back on their workforce in order to cope with less demand for their services, or close altogether. In many ways it is like a summer holiday resort out of season – no one wants to visit.
The crypto winter is a very hard time for everyone in the space, from investors to builders, with mainstream media outlets and critics proclaiming it to be dead (again), and people who are nursing losses wondering if they should sell for a loss or not.
When did the crypto winter start?
The crypto winter officially started in June this year when Bitcoin’s price crashed through the $29,000 barrier following the collapse of lending platform Celsius. However, for many this action merely confirmed the thesis that the crypto winter had actually been in play since the November 2021 high of $69,000.
Retrospectively, we can say that the November 2021 top was the end of the bull market, but the crypto winter wasn’t confirmed until the drop in June this year when it was clear that the market wouldn’t be rebounding.
Advantages and disadvantages of crypto winter
The biggest losers in a crypto winter are those who started investing in crypto at the top of the last cycle, for they will have to hold their assets at a figurative loss throughout the crypto winter or sell at an actual loss. They may also have to put up with taunts from friends, family and co-workers who they tried to convince to buy in.
Then there are the crypto companies who rely on user activity, such as exchanges, for their revenue. They see a huge reduction in traffic, and therefore income, and sometimes have to make tough choices in order to survive.
There are, however, advantages to a crypto winter. It separates out the serious projects and people from those just in it for the money, as uncommitted developers leave. It also helps project leaders learn how to survive and build on a smaller budget.
For some it gives the chance to build their products and refocus their targets without having to field questions on the project’s cryptocurrency price, with those supporters only interested in profits making way for those with a vested interest in the product.
What should crypto investors do during this period?
A crypto winter breeds two types of people – those who ask ‘why is crypto down’ and go about learning why, and those who decide it’s not for them and leave. The crypto winter is a great time to just ignore the cryptocurrency price metrics and instead learn more about the fundamentals of investing in crypto: are you a trader or a hodler? Do you need to change your risk management style? Are you better with one or two large plays or several smaller ones?
A crypto winter teaches many people that they aren’t financial geniuses – they just got lucky, and they can’t replicate their success when the tide is against them. For these people, the best bet is to stay in cash/stablecoins while the crypto winter sets in and not try to outsmart anyone left in the market.
The crypto winter is also a great time to research potentially promising projects and buy them up cheap in the crypto winter when nobody wants them – just be prepared to hold for a long time!
When is the next crypto winter?
We have been in a crypto winter for two months (or nine months, depending on who you ask), and if history has taught us anything it is that the next crypto winter will take years to play out. Historically, the crypto market has crashed at the halfway point between two Bitcoin halvings, with the market bottoming out and beginning a slow recovery over the course of the following 6-12 months, with the halving itself typically preceding a bull run.
This has played out again so far, with the crypto market having crashed 50% since the halving halfway point in May. The next Bitcoin halving is in May 2024, giving the crypto winter plenty of time to play out.
“Crypto winter” and “bear market” differences
There is a difference between a bear market and a crypto winter, albeit a more technical one. We can say that an asset is experiencing a bear market when it endures a decline of 20% or more over a period of time, usually two months or more. However, with crypto often experiencing 20% drops in a single day, this clearly doesn’t apply. In fact, the crypto market typically contracts by some 80% during its bear market.
An asset can go through a bear market and not have its fundamentals questioned, but when the crypto bubble pops, the knives come out from all angles. This is typical crypto winter stuff – mainstream media outlets and other critics savage the crypto space and mock those who experimented with investing in crypto, saying the space will never recover.
This is what makes a crypto winter different – its very fundamentals are brought into question again and all the old arguments are rehashed. The sentiment is so bad and cryptocurrency price action so unremarkable that people leave the crypto space in droves, leaving just the hardcore behind.
In many ways, we can judge a crypto winter from the time of the first slew of negative articles to the time when crypto barely gets a look in. Only then, when no one is talking about it, can we say that the crypto winter might finally be over.
Related Posts
