Crypto Winter: Implications & What You Need to Know

Crypto winter refers to periods of sharp decline in Bitcoin prices and other crypto assets. It is worth noting that, because cryptocurrencies are relatively recent assets, there is no consensus on the parameters that must be met to state that the market is in a crypto winter. However, it is possible to distinguish these periods by sharp falls that can reach two digits in percentage terms.

crypto winter

If we make a comparison with the stock market, the crypto winter is essentially a bear market – a period of consistent price declines.

Another point to bear in mind is that a crypto winter usually affects all cryptocurrencies, so a decline in one cryptocurrency's price doesn't mean that it's a crypto winter – there should be a decline in the crypto market overall.

Causes of crypto winters

It is important to bear in mind that cryptocurrencies are risk-on assets with little to no regulatory oversight. Remember that they are not backed by any central bank and are not universally accepted as a means of exchange. In this sense, volatility will always affect this market. The only exception is stablecoins whose value is linked to an external asset such as a country's currency or another asset.

Having said that, let's look at some causes of crypto winters:

  • Speculation: Overenthusiasm may lead to overvaluation in the crypto market, just like in any other market. This could then lead to corrections if fundamentals do not align with expectations.
  • Regulation: Governments can threaten with restrictions on cryptocurrencies, which generates uncertainty among investors and reduces demand for these assets.
  • Cyberattacks: Technical and security failures can reduce investor confidence in these types of assets, leading to price decreases.
  • Technological developments: This aspect is somewhat complex. Some blockchain-based projects may arouse interest among investors. However, others may cause concern or uncertainty. In addition, if there are more developments and more competition, market saturation can lead to price decreases (greater supply, lower price).
  • Economic cycles: In times of greater uncertainty, investors will look for less volatile assets (risk-off assets, such as bonds or other traditional assets). However, this may depend on as Bitcoin is starting to be accepted as “digital gold” and may be seen as safe haven by some investors.

Each crypto winter has a trigger. For example, let's have a closer look at the 2022 crypto winter.

When did crypto winter start 2022?

High inflation in 2022 changed the course of central banks, which in a few months not only had to raise interest rates but also stopped buying debt.

This had a direct impact on the valuations of tech companies. Companies that were raising capital at stratospheric multiples saw spectacular falls in the markets.

The venture capital funds that happily financed these projects, investing millions and millions in companies without profits, but with high growth rates, closed the financing tap and recommended all their companies to go into survival mode for the next two years.

Automatically, this generated a chain reaction that affected the crypto sector. The first to fall were cryptocurrency lending projects like Three Arrows Capital which dragged the Voyager Digital platform with it.

Then followed massive layoffs in Latin American exchanges like Bitso and BuenBit. Not even the giants were spared and Coinbase laid off a good part of the staff. Likewise, Bitstamp increased its commissions to survive.

Is crypto winter over?

As we can see in the second half of 2023, cryptocurrency prices, led by Bitcoin, rose due to significant events including the legal repercussions for major crypto figures and successful legal challenges. The anticipation of Bitcoin's next “halving” event, which historically leads to price increases, further fuelled investor interest.

The broader crypto ecosystem also displayed strong growth indicators, such as Ethereum‘s rapid revenue growth, surging crypto adoption rates surpassing early internet adoption, a record number of active crypto addresses, and a significant increase in developer participation. These factors suggest a positive outlook for cryptocurrencies into 2024, indicating an end to the “crypto winter” as some experts would say.

How many crypto winters have occurred so far?

For some of the early adopters of Bitcoin, crypto winters are nothing new. So far, there have been more than 10 crypto winters with losses higher than 30%.

The most remembered Bitcoin drop periods are those of 2013, 2016, 2017-2018 and the drop since the end of 2021.

The average period is about a year, but there have been stages with durations longer than 24 months, according to visualcapitalist.com.

What strategies can be used to survive a crypto winter?

The following strategies can be applied to survive a crypto winter:

  • Diversify: In investment and trading, it is common knowledge not to put all your eggs in one basket. In that sense, you should not invest all your capital in a single cryptocurrency, much less, invest everything in cryptocurrencies. For instance, you may want to diversify your portfolio by investing in commodities, purchasing some of the best ETFs, or adding some of the best dividend stocks to generate passive income.
  • Research: It is important to know what type of cryptocurrency you are investing in. As we already mentioned, each crypto asset is unique. For example, you may want to start by learning the differences between Bitcoin and Ethereum by checking our Bitcoin guide and Ethereum guide.
  • Consider the long term: While some high-risk investors may seek quick profits, a longer-term view should be preferred, as this will help you ride out short-term volatility.
  • Be patient: You should not exit your position in cryptocurrencies at the first drop. Make sure you define your exit strategy beforehand and always make data-driven decisions rather than those based on fear, greed, or instinct.
  • Risk management: It is important to craft a clear risk management strategy. If you're not sure what this entails, have a look at money management strategies.
  • Seek professional advice: Instead of making an impulsive decision, you should seek the advice of a cryptocurrency expert and analyse all the information available. This means staying up to date with all information in the markets and monitor all developments that could affect your holdings.

Learn more about cryptocurrencies

Summary

Overall, crypto winters are what bear markets describe for traditional assets. If you have decided to invest in crypto, make sure you choose one of the best crypto brokers in the UK. Also, it's important to be familiar with the basics of cryptocurrency trading before investing your hard-earned cash.

FAQs

How long does a typical crypto winter last?

The duration of a crypto winter varies, but it can last anywhere from several months to a couple of years.

Is a crypto winter the same as a market correction?

No, a market correction is typically a short-term decline of 10-20%, while a crypto winter denotes a more prolonged and deeper downturn.

Can crypto winters be predicted?

Predicting a crypto winter is challenging due to the cryptocurrency market's volatility and sensitivity to various external factors.

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