The crypto winter is rough. Here are five important survival tips

It’s been a brutal year for crypto investors. After a prolonged market rally saw the global cryptocurrency market cap top $3 trillion by the end of 2021, Bitcoin and other digital assets have been hit by macroeconomic turmoil, suffering a slowdown that has sent many of last year’s new crypto adopters run for the exit. Today, the space is worth just under $1 trillion, with Bitcoin and Ethereum both trading over 70% down from their all-time highs.

But while this year has tested even the most ardent crypto-believers, early adopters have grown accustomed to extreme volatility in both directions. Crypto has historically boomed roughly every four years as new entrants discover the technology and hype, but it has always been plagued by severe crashes after market euphoria peaks. These downturns have become known as “crypto winter” phases, characterized by significant declines in market activity and interest, project washouts, and extreme selling. While few crypto fans welcome bear markets, they can provide an excellent opportunity to recover and take stock ahead of the next market cycle. In this feature, we share our top five tips for surviving the ongoing crypto winter. Those who follow them should be well positioned to thrive as crypto gains momentum.

Stick around through the crypto winter

While crypto winters can be challenging, it’s important to remember that bear markets are actually where many people build real wealth. This is especially true in crypto for two reasons.

One, projects that lack fundamentals, product-market fit, or are outright scams get washed out during bear markets. At the same time, the space turns its focus from price action, marketing and hype to product and business development. Some of the leading crypto projects today, such as Solana, Cosmos and Uniswap, were built and launched during bear markets. Ethereum, the world’s second largest cryptocurrency, launched in the middle of the Bitcoin bear market in 2015 and traded below $10 until the bull cycle of 2017. Ethereum peaked at $1,430 at the end of that cycle in January 2018, delivering staggering returns for early investors.

This leads to the second reason why holding on is key to surviving the crypto winter and thriving in the next cycle. Many legitimate cryptocurrencies are falsely labeled as Ponzi schemes when they are “major fool” assets. In finance, the theory suggests that investors can sometimes make money on “overvalued” assets by selling them to someone (“fool”) for a higher price later. Exacerbated by herd mentality, this psychological phenomenon leads to financial bubbles followed by massive corrections. And while all markets are subject to this, crypto assets are particularly vulnerable, underscoring the importance of being early.

And being early in crypto means staying engaged, learning and analyzing the market when the industry is in a bear cycle. Some of the most successful investors in the 2017 bull run were those who endured the bear market from 2014 to 2016. Likewise, many of those who made a killing in 2021 stayed through the grueling downturn of 2018 to 2019. Above all else, to holding on is the most critical factor for success when the market turns.

Rethink your assignment

Losing money is never fun, but it can be a good teacher. Crypto winter is an excellent opportunity for investors to reassess their investment thesis, reflect on any mistakes they made during the last cycle, and prepare for the next leg.

An asset or an entire asset class plunging 70% from all-time highs can mean different things. For example, a significant decline in an investor’s portfolio may mean that the market has invalidated their investment thesis, meaning they need to rethink their approach and reconstruct their portfolio to better reflect the new reality. If this is the case, selling at a loss and other investments may be warranted.

However, a significant decline does not necessarily mean that an investor’s investment thesis is invalid. Instead, it can be an excellent opportunity to double up. For example, if a token’s fundamentals improve, investors who liked it at $1,000 should like it even more at $200. A fall in an asset price does not necessarily mean that it has become a weaker investment. There are many reasons why an asset may temporarily decline despite strengthening fundamentals, many of which are exogenous or unrelated. An investor’s job is to identify precisely these market inefficiencies, buy temporarily undervalued assets, and then sell them at a higher price when the markets have caught up.

Use second-order thinking

Each crypto bull cycle is triggered by multiple catalysts and wrapped in different narratives. The 2017 bull run was characterized by initial coin offerings on Ethereum and the “blockchain, not Bitcoin” narrative, where startups raised millions and sold largely useless tokens on empty promises of tokenizing and decentralizing everything. The most recent bull run started with Bitcoin’s halving in 2020, which coincided with the unprecedented post-pandemic money printing that spotlighted its value proposition as a peak inflation hedge. The cycle continued with the boom of decentralized math-themed applications on Ethereum in a period known as “DeFi Summer”, before a mainstream boom in NFTs gave rise to “NFT Summer” a year later. The 2021 cycle ended with the rapid rise and fall of alternative layer 1 networks Terra, Solana and Avalanche.

Those who successfully predicted the dominant narratives made a killing, while stragglers who failed to see where the puck was going were less fortunate. Predicting the next cycle’s dominant narratives requires second-order thinking or deep reflection that considers the long-term consequences of many relevant causal events. In this respect, the game of investing is identical to Keynes’s infamous beauty contest, where investors must guess what other investors will think rather than what they themselves think.

Given that cryptocurrencies are subject to the phenomenon of bigger fools, successful investing is not necessarily about trying to find projects or assets that will outperform the market, but rather anticipating the expectations of others. Where first-order thinkers are currently trying to figure out whether the upcoming Layer 1 network Aptos will outperform Solana, second-order thinkers are trying to figure out which blockchain most unsophisticated investors will think is best when the next cycle starts.

Think in terms of expected value

Another useful mental model to use when trying to survive bear markets and crypto investing is to practice making only positive expected value investments. In this context, the expected value (EV) is the sum of all possible values ​​of a random variable, each value multiplied by its probability of occurrence.

Let’s assume an investor is considering buying $1,000 worth of token X. The token in question is a highly volatile small-cap cryptocurrency that has a 95% chance of going to zero and a 5% chance of rising to $25,000. The formula for calculating the expected value of this investment will be:

EV = (-$1,000 x 0.95) + ($25,000 x 0.05) = $300

This means that the expected value of the bet is positive and if the investor continued to invest $1,000 on investments with the same odds indefinitely, they would earn an average of $300 per investment. In simpler terms, if they made 100 investments ($100,000), lost all their money in 95 of them (-$95,000), but made 2,400% on five of them (5 x $25,000 = $125,000), they would end up with $30,000 profit ($125,000 – $95,000).

But while considering expected value makes it easier to judge whether a specific investment is worth it, just a small change in the assumed variables can often turn a positive EV trade into a negative one. This means that correct assessment of the probabilities of certain events occurring is crucial for investment success. Beyond that, considering that there are thousands of cryptocurrencies on the market and investors have a limited amount of money, it is also important to compare the expected values ​​of different investment opportunities and only invest in a diversified set of those with the highest expected value.

For example, suppose an investor is considering whether to invest $1,000 in Bitcoin or Ethereum at current market prices, and they believe they have the same 50% chance of either going to zero or reaching their previous highs. If so, they can calculate the expected value of both investments to see which is more solid. In this case, Ethereum has a slightly higher expected value because it has to appreciate more than Bitcoin to reach its previous high price.

Please be patient

Patience is essential during the crypto winter. The winter season can last longer than expected, which can be mentally challenging even for the staunchest of believers. The current bear market comes under the worst macroeconomic conditions since the Great Financial Crisis. It is entirely possible that cryptocurrencies may continue to plunge or trade sideways for two to three years. For investors on the sidelines, exercising patience can be relatively easy, but for those who have a significant portion of their net worth in crypto, it can be very challenging.

Also, bear markets are much less forgiving than bull markets, which means that not making any investments can sometimes be the best move to make. This is especially true given that most cryptocurrencies on the market are over 99% down from their all-time highs. Bear markets are where many investors build life-changing portfolios, but patience, research and foresight are necessary to make the right moves and pick the cryptocurrencies that will outperform the market in the next leg.

Final thoughts

As this year proves, the crypto market is not for the faint of heart. While upside volatility can help cryptocurrencies to dizzying heights during bull runs, they can plunge just as violently during prolonged downturns. But those who adopt a long-term mindset and learn to embrace downturns have historically been some of the biggest winners in the space to date. Assuming crypto doesn’t die, following the tips in this feature should help investors prepare for the next rally. We’re stuck in crypto winter, but the fundamentals haven’t changed. Anyone who thinks about the big picture will have a much easier time surviving the crypto winter.

Disclosure: At the time of writing, the author of this feature owned ETH and several other cryptocurrencies.