Businesses are preparing for a crypto winter – here’s what it means
Companies are showing concern about a recession, and many in the crypto area are preparing for a crypto winter.
Coinbase is laying off 18% of the workforce, or about 1,100 people, according to an email sent to employees Tuesday morning. CEO Brian Armstrong said the company was growing “too fast” during a beef market and expressed concern about a looming recession.
“We seem to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for a longer period,” Armstrong said in the email. “Even though it is difficult to predict the economy or the markets, we always plan the worst so that we can run the business through all environments.”
Here’s why companies are preparing for a crypto winter, and what it means for investors.
What is a crypto winter?
Bitcoin has fallen around 55% so far this year and stands at around $ 21,000 per coin. It is down about 70% from a record high of $ 69,000 per coin in November. The total market value of cryptocurrencies fell to less than $ 1 trillion from the peak of $ 3 trillion in November.
The last crypto winter happened in late 2017 and early 2018, when bitcoin crashed as much as 80% from all-time highs and took about 18 months to recover. Meanwhile, equities officially entered the bear market this week, with the S&P 500 index down around 23% since the beginning of the year from Friday afternoon. Experts predict a recession may be around the corner.
It’s hard to say how the current fluctuation will shake, says William Luther, an economics professor at Florida Atlantic University and director of the American Institute for Economic Research’s Sound Money Project.
He says it’s important to maintain the long term: If you think these are valuable assets, then you think their use will be more widespread in the future, and “you see this as more of a seasonal fluctuation. That’s why people call it a crypto winter. , because it suggests that there is a spring on the horizon. “
“In the past, there has been a tendency for these to be floods in the crypto market,” he told CNBC Make It.
Why leaders are concerned
Companies are concerned that when cryptocurrencies fall in price, investors will reduce their trading activity, which is how companies make money.
This means that companies must find ways to reduce costs, for example by reducing the workforce. Coinbase joins one growing list of crypto companies, including BlockFi and Crypto.comwho recently announced layoffs and then staff cuts to reduce costs.
For most companies, current fluctuations in the market are still relatively small, “so you do not see that most companies in the economy lay off 20% of their employees when there is a market downturn,” says Luther.
With cryptocurrencies “there is the potential for their value to fluctuate much more than other assets, and so you see companies next to these coins expanding and contracting much more.”
What this means for investors
Luther says the good news is that current cryptocurrency should not change your broader portfolio strategy. “You should have a strategy in place where you have a diversified portfolio of stocks and bonds and potentially cryptocurrencies as well, where you have thought carefully about that asset allocation.”
Aside from rebalancing your portfolio if the value of your assets has changed, “I do not see anything that has happened in the last six months that would make me change my portfolio strategy,” Luther says.
Experts usually recommend that crypto remain a small part of your total portfolio, between 1% and 5%, and that you only invest as much money as you are comfortable losing.
But for those interested in getting into crypto, it’s not the best time now, Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management, recently told CNBC. He made one exception for people with a very long time horizon and who have a dollar cost average in the asset.
Those who buy in now should have “long-term convictions,” Tyrone Ross, CEO and co-founder of Turnqey Labs, Inc., told CNBC earlier. He said that buying into crypto now has a similar risk and potential reward of risk-backed investment.
If anything, Luther sees the current crypto fluctuations as a reminder of what he is saying to his students: Be careful not to own too many shares in their employer, especially if they work in a volatile industry.
He knows that it is a tough sale for people who build the technology: “They are very excited about it, and they naturally want to own some of the assets they create.
“But they should at least realize that it’s a very risky proposition, when they can diversify away some of that risk by keeping a more traditional portfolio.”
Check out:
Stocks have officially entered the bear market – here’s what it means and what you should do
You should not look at your investment accounts every day – here is the reason
Technical experts are urging Congress to bring a “skeptical approach” to the crypto industry
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