Why this crypto winter is different and what investors need to know about it

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The crypto market has attracted a group of new investors in 2021 – and they are now experiencing their first-ever “crypto winter”.

Bitcoin, the biggest cryptocurrency on the market, started the year near $48,000 but saw its value erode rapidly in the spring and plummet to below $18,000. It is currently trading near $22,000, a year-to-date loss of around 55%. Similarly, Ethereum, the second largest crypto, was trading near $3,800 at the start of the year and is now close to $1,700.

This isn’t the first time the market has experienced a crypto winter, but investors are finding things are different this time around. Experts say that’s largely thanks to the influx of new investors over the past year and a convoluted mix of misguided expectations and classic crypto market volatility.

“Obviously there has been an irrational exuberance about the price action of crypto,” he says. “People were living in a media bubble without paying attention to the hidden systemic risk inherent in all of these things,” says Dr Benjamin ColeProfessor of Commerce at Fordham University and Fellow of the British Blockchain Association.

Experts say the current crypto winter could last for quite some time. Here’s what that means for investors.

What is a crypto winter?

Crypto winter is what they call the bear market in the crypto space, according to Piers Ridyard, the Swiss-based CEO of RDX works. But he says there is a key difference between a bear market and a crypto winter. “A bear market is when the market goes down, and a crypto winter is when it goes sideways and doesn’t really do anything.”

According to Ridyard’s definition, an investor would see flat returns during a crypto winter and negative returns during a bear market. While the market has recouped some of its losses in recent months, many investors may have seen flat or at least below-standard returns in their portfolios.

Ridyard says these “winters” are often marked by people losing interest in the crypto market as returns are stunted. It essentially becomes a waiting game for many investors who are not confident about the state of the market. The current crypto winter could last “a year or two,” he says.

Another important thing to keep in mind is that crypto winters are basically inescapable parts of the crypto space, similar to bear markets in the stock market.

“This isn’t the first time the crypto market has crashed, and it won’t be the last time,” says Lisa Teh, co-founder of mooningan Australia-based Web3 marketing agency, referring to the last crypto winter, which spanned from late 2017 to late 2020.

Why This Crypto Winter Is Different, Experts Say

Experts generally agree that the market is in a crypto winter and that investors should get used to periodic periods of flat or negative growth.

The reason why the crypto winter of 2022 looks so much harsher, Teh says, is that “there are a lot more people in the market now than last time – so more people have been affected, there are more noise in the market and more people talking about it.”

Additionally, Teh says that many investors got into crypto expecting the market to behave differently than stocks or other assets in the face of rising interest rates and high inflation. That didn’t happen and it left many crypto investors frustrated and confused. Historically, cryptocurrency pundits and investors have touted bitcoin as an inflation hedge due to its limited supply of 21 million and speculative nature.

“People get upset because they don’t understand,” Teh says.

In many ways, the crypto downturn and ensuing winter are similar to the housing crisis in 2008 and 2009, according to Cole.

There were unrealistic expectations that home values ​​would continue to rise in the mid-2000s before the crash, Cole says, and this is similar to the expectations that many crypto investors have had over the past two years. Cole also says the many hacks on the stock exchanges and the failure or collapse of companies, like Three Arrows Capital and Celsius, have shaken the market deeply.

Another expert claims that part of the reason crypto attracts people is its volatility.

“If you invest in a relatively stable stock or bond, there’s no adrenaline rush,” says Dr. Robert Johnsonprofessor of finance at Creighton University’s Heider College of Business, pointing to the meteoric rise and fall in value of some cryptocurrencies like bitcoin.

“For some, the high volatility makes them more attractive,” and there’s an opportunity to make a huge return (or loss) in a short period of time, he says. So, crypto investors might be better off learning to expect crypto winters and adopting some measures to manage the ups and downs.

Tips for Surviving Crypto Winter

The steps to prepare for or survive a crypto winter are more or less the same as in a stock market downturn. Here are four things experts say crypto investors should do while waiting for the market to rally – or to make sure their portfolios are in good shape the next time crypto winter hits:

Diversify your holdings

Cole says crypto investors should keep diversification in mind when investing. “Remember the first principle of finance: diversify,” he says. “Don’t put all your eggs in one basket and put all your chips on one platform – diversification is key,” he says. Experts generally recommend investing in low-cost, diversified index funds because these funds have low expense ratios, or fees, that are suitable for all investors. Because crypto is a high-risk investment, experts say you should only allocate 5% of your total investment portfolio to it.

Cole recommends not only diversifying holdings, but also knowing where investors keep them. Use multiple platforms or exchanges, crypto wallets, etc., he says. And it is also essential that investors can or want to move their assets from certain platforms to a hot or cold wallet to ensure that you own and own them.

Use slowdown to get back to basics

Ridyard says the crypto winter provides investors with a good opportunity to breathe and catch up on everything new in the crypto market. In other words, now is a good time to do some homework and research to make sure you really understand the technologies and principles behind the crypto industry.

“Go back and think about all the things you didn’t understand and spend time reading, learning, and going back to the basics – to really understand what these apps are and how they work,” says Ridyard. . “Be methodical during this available time, because you’ll thank yourself when the next bull market rolls around.”

Do your own research

Investors could also use the bear market to buy additional assets at a relatively low price, Teh says. But, she cautions, it’s important to do your research to make sure you’re investing in crypto projects that have long-term value or utility. Most experts recommend sticking with bitcoin and ethereum, the two largest and most established cryptocurrencies.

“Yes, the market is down, but it’s a natural cycle, so if you’re thinking of entering the space, now is the time to recover distressed assets,” Teh says. “But do your research properly and don’t look at what Elon [Musk] is tweeting.

Remember: it’s all speculative

Investors should always keep in mind that crypto is still a massive bet for most investors, says Dr. Johnson. This is why it is important to only invest money in the crypto market that you are comfortable losing.

“I struggle to refer to crypto as assets, and certainly to refer to cryptocurrencies as an asset class,” he says. “These are speculative vehicles. Know when you are speculating and know when you are investing. If you are buying crypto then you are speculating.

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