Crypto winter is an extended period of depressed cryptocurrency asset prices compared to prior peaks. Similar to a bear market in the stock market, a crypto winter can lead to widespread losses for investors. Here are several key insights on how to survive a crypto winter as an investor.
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 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.
"When cryptocurrency prices are down, it's hard to decide if you should sell before additional losses or hold on waiting for a hopeful rebound,” said Michael Anderson a financial advisor at Maranatha Financial in Ventura, California. "Cryptocurrencies are a risky asset that could eventually fall to zero value. While I don't think all cryptocurrencies will fail, a good number may ultimately bite the dust."
Since its peak in November 2021, Bitcoin has lost more than half 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.
The bankruptcy of crypto lending and exchange platforms worries Anderson. ''Losses at Voyager, Celsius, and the demise of the LUNA stablecoin are good examples of why investors should be extremely cautious," he said.
As a newer asset, crypto winter isn’t as clearly defined as downturns in other places. If treated like a stock market 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.
In the stock market, many investors believe that the market will eventually 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.
"Cryptocurrency prices have seen major declines and long periods of stagnant prices before seeing huge recoveries, so you can never count crypto out completely,” said Anderson. “While there's a big risk of losses, we've seen people make 10x, 100x, or more in a short period when a successful crypto project takes off."
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 to 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.
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.
According to Anderson, ''Don't let past losses influence future investment decisions too much. Focus on what you believe to be the intrinsic value of the currency or project and let that guide your decisions.” “If you're not sure what something is worth, it could be worth skipping. It's best to keep your investments in assets you understand."
If you have any doubts, it may be best to consult with an investment professional who acts as a fiduciary, meaning they have to put your best interests first.
Open trading marketplaces determine cryptocurrency prices. The latest trade price sets the currency on each exchange. There’s no guarantee of future prices or a future recovery.
Cryptocurrencies are digital assets managed using blockchain technology. Unlike government-backed fiat currencies, cryptocurrencies are run by volunteers and for profit-companies who develop and upgrade the underlying software.
Cryptocurrencies sell on both centralized and decentralized exchanges. Each has pros and cons with varying risks and costs. It’s wise to research several exchanges to pick the best one for your needs.
S&P Dow Jones Indices. "S&P Cryptocurrency Broad Digital Market Index."
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