What Is a Crypto Winter?
Crypto winter is a cryptocurrency market condition that is characterized by prolonged price declines, reduced market capitalization, and low trading volumes. In economics, the terms “winter” and “bear market” are used as metaphors to describe financial market conditions that shift investor sentiment from optimism to pessimism.
In nature, winter is a dormant period characterized by harsh conditions. It is a natural part of the seasonal cycle and is always followed by a period of renewed activity and growth.
Financial markets also experience cycles of high and low activity. The difference is that when winter is a season, it only lasts three months. In contrast, the duration of a financial winter is highly unpredictable; it may last only a few weeks, or it may stretch on for years.
Why Crypto Winters Happen
The primary cause of a crypto winter is the same as any other financial winter – there is a fundamental shift that decreases investor confidence.
In the context of cryptocurrency, the shift can be caused by:
- Regulatory changes: The news contains stories about lawsuits or government proposals for stricter regulations, causing crypto investors and traders to be more cautious than usual.
- Market manipulation: Large players in the crypto market – also known as whales – have manipulated the crypto market for their own benefit by initiating massive sell-offs, causing prices to plummet.
- Technology issues: A flaw in a blockchain protocol or a crypto security breach has been made public, resulting in a loss of investor confidence and low trading volumes.
- Macroeconomic and geopolitical turmoil: Upheaval in the larger economic structures and unstable political relations among nations has wide-ranging impacts on global economies and overall financial markets.
- Investor psychology: Investors panic, start selling off their cryptocurrency, and trigger a self-fulfilling prophecy of a crypto winter.
Surviving a Crypto Winter
While crypto winters can cause anxiety, they also provide unique opportunities for strategic investors and traders.
Winters can be a good time to buy cryptocurrencies at lower prices. Or it can be the time for investors and traders to take a break and learn more about trending cryptocurrencies and explore new investment strategies.
For example, when other cryptocurrencies are experiencing significant price declines, stablecoins can provide investors with a relatively secure option to hold their funds without being subject to the volatility associated with other cryptocurrencies.
Similarly, yield farming and staking in certain proof-of-stake (PoS) blockchains can generate a passive income and potentially offset losses during a sustained market downturn.
A good investment plan anticipates the probability of a crypto winter, addresses risk tolerance levels, and provides data-driven decision-making strategies for determining whether it’s best to hold on to an investment, spread crypto investments across additional cryptocurrencies, or buy a fixed U.S. dollar amount of a particular cryptocurrency on a regular schedule.
Hodl: Hold on to crypto investments during prolonged market downturns and wait the winter out.
Dollar-cost averaging (DCA): Buy a fixed dollar amount of a particular cryptocurrency on a regular schedule (regardless of its price) to reduce the impact of volatility over time.
Portfolio diversification: Spread crypto investments across various cryptocurrencies to help manage risk.
Crypto Winter vs. Crypto Bear Market
The two terms “winter” and “bear market” are often used as synonyms in economics, finance, and fintech. While they are similar in some ways, there are subtle differences between the two.
The major difference between a bear market and a crypto winter is that in a bear market, the prices go downwards. In a crypto winter, the prices remain down, but the graph moves sideways. This means that an investor will see negative returns during a bear market but flat returns during a crypto winter.
History of Crypto Winters
The first crypto winter occurred in 2014-2015 after the price of Bitcoin (BTC) peaked at around $1,200 in 2013. The coin’s price fell by over 80%; the price of Ethereum (ETH) fell from around $10 to $1, and the total market capitalization of all cryptocurrencies dropped from around $100 billion to $10 billion.
The second crypto winter occurred in 2018-2019 after the price of BTC peaked at around $20,000 in 2017. This crypto winter was more severe than the first one, and ETH was one of the hardest-hit cryptocurrencies. Its price fell from around $1,400 to $100, and the total market capitalization of all cryptocurrencies dropped from around $800 billion to $100 billion.
The most recent crypto winter started in late 2021 after the price of Bitcoin peaked at around $68,000 in November 2021. Ultimately, whether to call a recent decline in prices a crypto bear market or a crypto winter is a matter of opinion because there is no right or wrong answer.
It is up to the investor or trader to do their own research and understand the risks involved in buying, holding, or selling a particular cryptocurrency.
