What is a Crypto Winter?
Crypto winter is a period when the cryptocurrency market is performing poorly. This is similar to a bear market in the stock market. A crypto winter exhibits negative market sentiment, where panic and fear replace optimism. The value of virtually all cryptocurrencies drops below previous all-time highs.
Crypto winters of the past
The crypto market is witnessing a winter season in 2022, but this isn’t the first time. The previous crypto winter lasted from January 2018 to mid-December 2020. This was probably the most remembered crypto winter in history. It came shortly after the 2017 bull run, which was widely covered in the media as a bubble with a high likelihood of bursting.
After hitting $20,000 for the first time on December 17, 2017, Bitcoin’s price experienced a sharp decline and stayed below this price until December 16, 2020, when it rose beyond $21,000, according to CoinMarketCap data. From December 17, 2017, to January 1, 2018, Bitcoin underwent a steep decline of 30%. At the close of 2018, BTC had crashed by 80% since the December 17 all-time high (ATH). On the other hand, Ether surpassed $500 on December 11, 2017, climbing beyond $1,000 in January 2018. It then started steadily dropping the next month and did not recover the $1,000 mark until January 3, 2021. Many other cryptocurrencies plunged as well during the 2018–2020 crypto winter. This was crypto’s second winter.
Some people consider the first crypto winter to have taken place in 2014 onwards. One BTC was trading for slightly more than $1,000 on January 6, 2014. The next day, prices dropped and remained below $1,000, never recovering until February 2, 2017. The suspension of trading and cessation of withdrawals at the now defunct Mt. Gox crypto exchange contributed to the price decline in early 2014. Before this, Mt. Gox announced on June 13, 2013, that it had suffered a hack, losing thousands of BTC. As a result, Bitcoin’s price plummeted from the $32 high it had reached several days earlier, on June 8. The price did not bounce back until 2013 when it rose beyond $32.
In 2022, BTC has dropped by about 66% since it reached its ATH of almost $69,000 on November 10, 2021. Ether’s price has also fallen, recording a drop of approximately 68% since its ATH on November 16, 2021. Overall, the market cap of the entire crypto market has lost $2 trillion in about eight months entering its third crypto winter. Some analysts have predicted that altcoins will drop even further in this crypto winter. Ultimately, experts believe thousands of cryptocurrencies will collapse in the future, and only strong and useful projects will remain.
Previous crypto winters lasted a few years, and the same could happen with the 2022 bear market. Industry experts expect the current and third crypto winter to extend beyond 2022. What’s more, they foresee a fourth crypto winter happening at a later date in the future. Every crypto winter has been followed by a crypto spring, when growth returns, giving investors renewed hope that a bull run is around the corner.
Are all crypto winters created equal?
Crypto winters are not necessarily the same because they rely on prevailing macroeconomic conditions. Hence, the current 2022 crypto winter could be different because the cryptocurrency market is beginning to show a close relationship with the traditional markets. For instance, for most of its history, BTC has shown little correlation to S&P 500 and other assets like gold. In the last quarter of 2021, however, a correlation between Bitcoin and S&P 500 index began to emerge. The two assets remained correlated in Q1 and Q2/2022. As of July 2022, BTC and the S&P 500 had a correlation above 0.6. Bitcoin has also correlated closely with stock indexes like the Nasdaq. So, as the stock market suffers from the U.S. Federal Reserve’s efforts to curb inflation by increasing interest rates, Bitcoin is likely to bear the impact as well.
This crypto winter could also be unique because cryptocurrencies capture a greater mindshare than ever before. Also, cryptocurrencies have grown into a global phenomenon as big Wall Street players like J.P. Morgan and Goldman Sachs go crypto. This mainstream popularity has helped more people to learn about digital currencies. Therefore, cryptocurrencies are more well-known now than during the past crypto winters. This could mean that more people are buying the dip, and this crypto winter could be shorter than expected.
How to tell we are in crypto winter
According to some observers, crypto bear markets, or crypto winters, have three stages. They include.
Stage 1: The unwind
This stage doesn’t feel like a bear market because the excitement of the bull market is still there. Narratives develop weekly, and although crypto prices are unwinding, it appears as if they have only “pulled back to realistic valuations.” Therefore, companies continue building products, investors carry on with allocating funds, and everything else keeps running as usual. Nevertheless, weak hands may sell.
Stage 2: Forced capitulation
Luna’s crash brought the 2022 crypto winter to stage 2. Here is where cynics appear with the “I told you so” statements. At the front row of this cynical crowd is the mainstream media that seems to be writing about nothing else but how badly things are going in the crypto realm. Suddenly, regulators start warning investors that cryptocurrencies aren’t good investments because they’re volatile. The investors that were once excited in stage 1 become angry and frustrated.
Narratives die, and diamond hands may be forced to sell because they don’t have a choice. People start to take advantage of dead cat bounces to sell their coins. As the downtrend persists, skeptics become louder and crypto prices plunge lower. The vicious cycle goes on and on.
Stage 3: Bottomless exhaustion
After a painful period in stage 2, the exhaustion begins. Crypto prices steadily drop or consolidate sideways. Prices are no longer bouncing. At the bottom, silence replaces anger. Web2 investors stop allocating funds, product building stops, and companies shut down. It’s a boring time when nothing seems to be happening, except for regulators, who may use this as a chance to pass regulations that will negatively affect the crypto market.
How can you know that crypto has bottomed?
Now that you know the three stages of a bear market, here are the potential bottom signals you can watch out for.
The existing macroeconomic conditions are affecting Bitcoin’s price action. BTC is now more correlated to tech-heavy indexes like the Nasdaq than ever before. It might, therefore, make sense to analyze the macro conditions and watch out for a macro bottom. For example, investors should be cautious until data indicates inflation is coming down. Moreover, investors may expect a macro bottom when the Federal Reserve relaxes hikes on interest rates or the rates market indicates that tightening is over.
Technical analysis indicators
Examine technical analysis indicators like a double bottom, monthly RSI, and weekly 200 WMA. A low monthly relative strength index (RSI) shows that price movements are very negative compared to the previous 12 months. Bitcoin’s RSI is presently the lowest it has ever been.
As of June 12, 2022, Bitcoin’s price was below the 200 weekly moving average (WMA) and has remained close to the 200 WMA throughout the year. Historically, BTC bottoms out around the 200 WMA. Additionally, look out for a double-bottom pattern that occurs at the bottom of a downward trend. It signals that sellers who controlled the price action of a digital asset are losing momentum.
A surge in crypto volumes
Spikes in crypto volumes after a market collapse may also signal a bottom. Institutional investors that are looking to acquire crypto at a discount cause a rise in volumes. High crypto volumes after a disappointing occurrence like the Luna crash indicate the market is repricing the impact of the event on other crypto assets. Volume surges generally coincide with short- to mid-term bottoms.
Traders and investors can study on-chain data like whale behavior, miner holdings, long-term holder sentiment, exchange holdings, and blockchain addresses to detect a bottom. To illustrate, large whales buying crypto could indicate the market has reached a bottom.
Market sentiment indicators
Another bottom signal is when crypto activity on social media quiets down. For example, popular accounts on crypto Twitter may stop tweeting often. Moreover, a drop in exchange volumes indicate a loss of retail interest, signaling that crypto has bottomed. Other indicators are fear and despair in the crypto community, few crypto conferences being organized, a drop in the listeners of crypto podcasts, and crypto YouTube channels experiencing a decline in viewership.
How to survive a crypto winter
Crypto winters are harsh, but that doesn’t mean investors cannot withstand them. Below are the various ways investors can survive a crypto winter.
Keep assets in crypto blue chips like Bitcoin or Ether
BTC and ETH haven’t dropped as low as other coins because they are more established. Therefore, they have gained more trust from the crypto community. By way of illustration, Litecoin, Stellar, Fantom, and Zilliqa have dropped by 86%, 87%, 90%, and 84% (as of this writing), respectively since their all-time highs. This is higher than Bitcoin’s ~66% and Ether’s ~68%.
Switch to stablecoins for stable yield
Dollar-cost average coins backed by strong crypto projects
Dollar-cost averaging (DCA) coins that are backed by crypto projects with good fundamentals is another way to benefit from a crypto winter. A project with a community of developers that are continuously working on the protocol is an example of a strong project. Applying DCA in your investment strategy eliminates the need to time a volatile market.
Hedge with Bitcoin derivatives
Purchase Bitcoin futures and sell Bitcoin put options to bet on a crypto bear market. However, using derivatives is only for advanced traders.
Avoid panic selling
Bear markets lead to panic, and investors may exit the market based on this emotion. However, you should depend on hard facts backed by data to sell your holdings. Making selling decisions based on emotions and advice on social media is risky.
Avoid revenge trading to recover losses, especially if you’re using leverage to boost your trading position. If the trade backfires, you’ll be liquidated, and your losses will increase.
How long will a crypto winter last?
Going by the length of previous crypto winters, the 2022 winter season could stretch for a few years. However, the past is never a perfect indicator of the future. The micro and macro market conditions have changed significantly since 2018. So, it’s hard to tell what the future holds.
That being said, crypto is here to stay. This innovation gives users complete control over their money, a freedom that is non-existent in traditional markets. It also gives investors a new asset class that they can potentially use to diversify their portfolios. As a result, cryptocurrencies cannot be ignored.
Crypto winters are typically followed by crypto springs, where new growth and narratives arise. So, crypto winters aren’t the end. If anything, it provides the perfect environment to flush out weak crypto projects and strengthen projects that are already fundamentally strong and is the perfect buying opportunity for convinced buyers.