Why this crypto winter is different, and what investors should know about it

The crypto market brought 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 nearly $48,000, but saw its value quickly erode over the spring, falling as low as $18,000. It is currently trading at nearly $22,000, a year-to-date date loss of around 55%. Similarly, ethereum, the second largest crypto, traded at nearly $3,800 at the start of the year and is now close to $1,700.

This is not the first time the market has experienced a crypto winter, but investors are finding that this time just hits differently. Experts say that’s largely thanks to last year’s influx of new investors, and a complicated mix of flawed expectations and classic crypto market volatility.

“Obviously there’s 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 embedded in all 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 it 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’s a key difference between a bear market and a crypto winter. “A bear market is when the market goes down, and a crypto winter is when it goes sideways and doesn’t really do anything.”

By Ridyard’s definition, an investor will see flat returns during a crypto winter, and negative returns during a bear market. As the market has recovered some of its losses in recent months, many investors may have experienced flat or at least substandard returns in their portfolios.

Ridyard says these “winters” are often characterized by people losing interest in the crypto market as returns deteriorate. It will essentially be a waiting game for many investors who are not sure of the state of the market. The current crypto winter could last “a year or two,” he says.

Another important thing to remember is that crypto winters are basically fixtures in the crypto space, similar to bear markets in the stock market.

“This is not the first time the crypto market has crashed, and it won’t be the last,” says Lisa Teh, co-founder of Mooning, an Australia-based Web3 marketing agency, referring to the recent crypto winter. , which spanned from late 2017 to late 2020.

Why this crypto winter is different, according to experts

Experts generally agree that the market is in a crypto winter, and that investors should get used to periodic stretches of flat or negative growth.

The reason the crypto winter of 2022 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. ”

Furthermore, Teh says that many investors entered crypto expecting the market to behave differently than stocks or other assets in the face of rising interest rates and high inflation. That hasn’t happened, leaving many crypto investors frustrated and confused. Historically, cryptocurrency experts and investors have designated bitcoin as an inflation hedge due to its limited supply of 21 million and speculative nature.

“People get upset because they don’t understand,” says Teh.

In many ways, the crypto downturn and subsequent winter resemble the housing crisis of 2008 and 2009, according to Cole.

There were unrealistic expectations that home values ​​would continue to rise in 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, such as Three Arrows Capital and Celsius, shook the market to its core.

Another expert says that part of the reason crypto has an appeal to people is its volatility.

“If you’re investing in a stock or bond that’s relatively stable, it’s not the adrenaline rush,” says Dr. Robert Johnson, professor of finance at Creighton University’s Heider College of Business, pointing to the meteoric rise and fall in value of 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 might be best off learning to expect and embrace crypto winters and take some measures to deal with 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 for a stock market downturn. Here are four things experts say crypto investors should do while they wait for the market to recover — or to ensure their portfolios are in good shape 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 economics: diversify,” he says. “Don’t put all your eggs in one basket, and don’t put all 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 good for all investors. Because crypto is a high-risk investment, experts say you should only allocate 5% of your total investment portfolio to it.

Cole recommends diversifying not only in terms of holdings, but also in terms of where investors hold them. Use multiple platforms or exchanges, crypto wallets and more, he says. And it is also crucial that investors can or will move their assets from certain platforms to a hot or cold wallet to ensure that you actually have and own them.

Use the downturn to get back to basics

Ridyard says crypto winter gives investors a good chance to catch their breath and get caught up on everything 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 that drive the crypto industry.

“Go back and think about all the things you didn’t understand, and spend some time reading, learning, and going back to basics — getting a real sense of what these apps are and how they work,” says Ridyard. “Be methodical during this time available, because you will thank yourself when the next bull market arrives.”

Do your own research

Investors can also use the down market to pick up additional assets at a relative discount, says Teh. But, she warns, it’s important to do your research to ensure you’re investing in crypto projects that have long-term value or utility. Most experts recommend sticking to bitcoin and ethereum, the two largest and most established cryptocurrencies.

“Yes, the market is down, but it’s a natural cycle, so if you’re thinking of getting into the area, now is the time to pick up distressed assets,” Teh says. “But do your research properly and don’t look at what Elon [Musk] tweeting about.”

Remember: Everything is speculative

Investors should always keep in mind that crypto is still a huge play for most investors, says Dr. Johnson. Therefore, it is important to only invest money in the crypto market that you are comfortable with losing.

“I have a problem with referring to cryptos as assets, and certainly referring to cryptocurrencies as an asset class,” he says. “They are speculative vehicles. Know when to speculate and know when to invest. If you buy crypto, you are speculating.”