At the time of writing, i.e. 11th Oct 2022, the value of bitcoin has declined by 72% from its highest peak in Nov 2021, i.e. $69000. The crypto market has shrunk within the cold clutches of crypto winter. After hitting $3 trillion in Nov 2021, the cryptocurrency market capitalization reduced to less than $1 trillion in Sep 2022. The crypto winter of 2022 started to be visible approximately from the month of March, and within the next few weeks, it made the market bleed into the red. Even though the market has been through the “winter phase” in the past, this crypto winter doesn’t look the same. For a deeper understanding of crypto winter 2022, let’s explore & analyze its fundamentals, impacts & reasons in detail.
What is crypto winter?
Crypto winter refers to the period when the prolonged downfall of cryptocurrency prices is observed. In this phase, the crypto prices remain contracted for a longer period. It affects most of the coins/ tokens and NFTs, irrespective of their popularity. The duration of crypto winter is variable as it depends on several factors.
The last crypto winter: 2018
In 2017, the macroeconomic conditions were favorable for the tech & digital economy. The crypto industry witnessed exponential growth fueled by the ICO era in late 2017. The concept of ICO gained immense popularity, and numerous startups leveraged ICO to raise funds. The euphoria for the crypto industry gained traction among investors and resulted in an inflow of huge capital in the crypto space. By the end of 2017, an estimated $4.9 billion was raised through the ICO. However, the lack of regulations & excessive investments in underachieving projects resulted in the failure of the ICO era.
As per the analysis, approximately 90% of the projects which raised funding via ICO didn’t even make it to 6 months after their launch. In addition to the failure of projects, the rise of scams created FUD (fear, uncertainty & doubt) and resulted in the loss of investor confidence in the industry. Therefore after reaching an all-time new high market cap, the industry slipped into the debilitating phase of crypto winter in 2018.
Crypto winter 2022: What’s different?
Earlier the industry was in a nascent stage, and the macroeconomic situation had a negligible impact on the industry’s performance. Most investors looked at crypto investments exclusively as an opportunity to get wildly high returns on their investments. In the ICO era, people invested their money blindly into crypto projects without understanding their potential or authenticity. However, moving on to 2022, the industry has come a long way and is constantly moving toward maturity. Unlike earlier, when the ignorance of investors & burst of the ICO bubble led to the collapse, this year’s crypto winter has more factors to contribute to it.
This year macroeconomic factors have profoundly impacted the crypto market. The Russia-Ukraine war and the U.S. federal’s move to hike the interest rate impacted the crypto market negatively. It is also observed that Bitcoin’s worst quarter in the past decade coincided with the timeline when the Nasdaq fell by more than 22%. The crypto market has shown a correlation with other risk assets, which was unlikely in the earlier winter.
Apart from macroeconomic factors, one of the few events that contributed to creating fear & uncertainty in the crypto market includes the Terra-Luna debacle. The failure of this stablecoin raised questions about the stability of so-called stablecoins. However, it highlighted the shortcomings of algorithmic stablecoins and helped in weeding out the bad actors from the market, but it is undoubtedly one of the reasons for dipping the crypto market into red.
Apart from the Terra-Luna fiasco, suddenly frozen customer accounts and the bankruptcy of Defi platform Celsius, Three arrows capital, and Voyager digital, along with other regulatory challenges in various countries, also contributed to the current market crash.
How do investors navigate through the crypto winter?
Due to its uncertainties, the crypto winter is considered the most difficult phase of the market. Everyone seeks the rewarding nature of crypto but staying invested and calm while watching the market shatter down is the toughest task for investors. People generally become clueless and indecisive in this phase which often leads to panic selling or other irrational decisions. To help you in navigating the crypto winter, we have summarized a few points to keep in mind before taking any investment decision during this phase:
- Apply Dollar Cost Averaging Strategy
Instead of investing large amounts of money into volatile crypto, divide the amount into smaller chunks and invest them over a uniform period of intervals. It will help you to bring down the average risk over the investment.
- Diversifying is the Key
Don’t invest all your money into one crypto asset. To minimize the risk, diversify your investments into different crypto assets. Always remember never to put all your eggs into one basket.
- Consider Switching to Stablecoins
Depending on your risk appetite, you can consider redistributing your assets to switch to stablecoins investments. Stablecoins may remain more stable as compared to the other coins. You can also consider staking or investing in crypto fixed deposits.
- Say No to Revenge Trading
Always avoid impulsive, emotion-led investment decisions. It is often observed that many investors cannot accept their losses which in turn promotes them to invest more in the hope of recovering the previous loss. This results into a vicious cycle, and investors generally end up losing a large amount of money.
- Avoid Panic Selling
Understand the cyclic nature of the crypto market. After every crypto winter, the market will certainly rebound; it’s just the uncertainty of the time. Stay away from panic or discount selling and focus on investing in fundamentally strong projects.
We hope this article will help you in analyzing the various dimensions of crypto winter and how you should make your investment decisions during this phase. If you find this article insightful, please share it with your crypto-enthusiast friends and follow us for more interesting pieces. Got an opinion on this topic? Do let us know in the comments. We will be happy to hear from you.