How to survive a crypto winter

Crypto winter is a longer period of depressed cryptocurrency values ​​compared to previous peaks. Similar to a bear market in the stock market, a crypto winter can lead to extensive losses for investors. Here are several key insights on how to survive a crypto winter as an investor.

What is a crypto winter?

A cryptocurrency winter is an industry term for a long downturn in cryptocurrency prices. Crypto winters typically range from well-known currencies like Bitcoin and Ethereum to NFTs and lesser-known cryptocurrencies and tokens.

Crypto winters can coincide with other economic downturns or a bear market in the stock market, but that is 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 difficult to decide whether to sell before further losses or wait for a hopeful rebound,” said Michael Anderson, a financial advisor at Maranatha Financial in Ventura, California. “Cryptocurrencies are a risky asset that can eventually fall to zero value. While I don’t think all cryptocurrencies will fail, a good number could eventually bite the dust.”

Since its peak in November 2021, Bitcoin has lost more than half of its value. Widespread price drops severely affected several cryptocurrency and blockchain projects. Notably, Terra Luna’s algorithmic stablecoin lost its link to the US 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. “Loss of Voyager, Celsius and the demise of the LUNA stablecoin are prime examples of why investors should be extremely cautious,” he said.

How to know you’re in a crypto winter

As a newer resource, crypto winters are not as clearly defined as downturns elsewhere. If treated as a bear market on the exchange, a crypto winter will occur when prices fall 20% or more from recent peaks.

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 its recent peak, clearly indicating a crypto winter. However, long-term owners are still up above the three- and five-year horizons.

Should you sell all of your crypto in a crypto winter?

In the stock market, many investors believe that the market will eventually recover from a possible downturn. History shows this to be true, but there is no guarantee that markets will always go up. In reality, only time will tell.

“Cryptocurrency prices have seen big declines and long periods of stagnant prices before seeing big recoveries, so you can never completely count crypto out,” Anderson said. “Although there is a high risk of loss, we have seen people earn 10x, 100x, or more in a short period of time when a successful crypto project takes off.”

While investors are very confident about 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 the markets will survive the ups and downs of economic cycles.

Bitcoin started in 2009. Although it has a solid decade under its belt, it is still very new compared to traditional investments. That leaves several questions about the future of crypto and its ability to recover from a long period of falling prices. It is best to keep the risk of any investment in mind when deciding how much to hold and what you can afford to lose.

5 tips for surviving a crypto winter

If you get a sick feeling in your stomach like a roller coaster ride when crypto prices fall, consider these tips for surviving a crypto winter.

1. Don’t invest more than you can afford to lose: Crypto is still fairly new. It is very risky and volatile. Smart investors avoid investing more than they can afford to lose. It is not a good idea to invest your savings in any cryptocurrency.
2. Carefully evaluate each crypto project: Each coin and token is associated with a different governing entity or volunteer group. Some have turned out to be scams. When it feels like the Wild West, it’s important to carefully evaluate each crypto project before deciding how much to invest.
3. Beware of herd mentality: WallStreetBets and other online communities are fun places to learn about and discuss investments, but that doesn’t mean you should take everyone’s advice. Online discussion forums are filled with hobbyists who are not your friends in real life and will not be affected if you lose your shirt in the crypto markets. Stay focused on your personal goals and risk tolerance when investing.
4. It is okay to make portfolio adjustments: In poker, there is a sunk cost theory where it is difficult to fold a hand even when you think you will lose if you have already made a big bet. It may seem logical to bet even more to avoid losing what was deposited, but if the money is already lost, depositing more to chase your sunk costs will lead to more losses. You don’t need to HODL on crypto that is down if you don’t think it will come back. It’s okay to sell and make portfolio adjustments when you find it necessary.
5. Consider buying dip: Conversely, if you believe that a cryptocurrency downturn is temporary, you may want to buy in at lower prices, hoping to buy low and watch the value of your portfolio grow as the markets recover.

According to Anderson, ”Don’t let past losses influence future investment decisions too much. Focus on what you believe is the intrinsic value of the currency or project and let that guide your decisions.” “If you’re not sure what something is worth, it might be worth skipping. It’s best to keep your investments in assets you understand.”

If in doubt, it may be best to consult an investment professional who acts as a fiduciary, meaning they must put your interests first.