After attracting a lot of new investors in 2021, the crypto market is now experiencing its first crypto winter in 2022.
At the start of the year, Bitcoin was trading at almost $48,000, but its value quickly declined to under $18,000 by the springtime.
At the time of writing, it is trading at almost $22,000, which represents a loss of around 55% year-to-date. At the start of the year, Ethereum was trading at almost $3,800 but is now about $1,700.
Crypto winters have been experienced before, but this time the market is feeling them in a different way. It’s due to a combination of flawed expectations and classic crypto market volatility, which experts attribute to last year’s influx of new investors.
According to him, crypto prices have been irrationally exuberant recently.
Benjamin Cole, a business professor at Fordham University and a fellow at the British Blockchain Association, says people were living in a media bubble without paying attention to hidden systemic risks.
There is a possibility that the current crypto winter will last for some time. Investors should take note of these implications.
What Is a Crypto Winter?
According to Piers Ridyard, the CEO of RDX Works in Switzerland, crypto winter is the worst bear market in crypto history. Despite this, he says that crypto winters and bear markets are fundamentally different.
The difference between a bear market and a crypto winter is that a bear market is down, and a crypto winter is when the market goes sideways.
Ridyard’s definition of a crypto winter suggests investors will be seeing flat returns, while bear markets are likely to bring negative returns.
Many investors have seen flat or at least substandard portfolio returns over the past several months as the market recovered some of its losses.
As crypto returns drop, Ridyard says people lose interest in the market during these “winters”.
Investing in the market becomes a waiting game for many investors who are uncertain about the future.
Currently, there is a crypto winter that could last for a year or two, according to him.
As with bear markets in the stock market, crypto winters are a fixture of the crypto space.
In reference to the last crypto winter, which ran from late 2017 to late 2020, Lisa Teh, co-founder of Mooning, an Australian marketing agency, says that this isn’t the first time the crypto market has crashed.
Why Crypto Winter 2022 Is Different, According to Experts
There is general consensus that the crypto market is experiencing a crypto winter in 2022, and that investors should expect periodic periods of flat or negative growth.
There’s more noise in the market, more people are talking about it, and it feels worse than last time, Teh says, is that People are much more active in the market now than they were last time, so more people were affected, the market is noisier, and more people are talking about it.”
As a result of increasing interest rates and high inflation, many investors entered the crypto market anticipating a unique market behavior compared to stocks, bonds, or other assets.
Crypto investors are frustrated and confused because that hasn’t happened.
Due to its limited supply of 21 million and speculative nature, cryptocurrency experts and investors have traditionally viewed bitcoin as an inflation hedge.
There is a lot of frustration from people because they do not understand what is going on, says Teh.
Crypto downturns and the consequent winter resemble the housing crises of 2008 and 2009 in many ways, says Cole.
Prior to the crash in the mid-2000s, many home buyers had unrealistic expectations about home values continuing to rise, says Cole, and similar expectations have been held by a lot of crypto investors lately.
In addition, Cole noted that hacks on exchanges and the failure or collapse of companies, such as Three Arrows Capital and Celsius, rocked the market to its core.
Cryptocurrencies are popular because of their volatility, according to another expert.
As a result of the meteoric rise and fall in value for some cryptocurrencies such as bitcoin, Dr. Robert Johnson, a professor of finance at Creighton University’s Heider College of Business, says, you don’t get the adrenaline rush if you invest in a relatively stable stock or bond.
Despite the volatility, some find it appealing because it’s risky and there’s the potential for a big return (or loss) quickly.
It may be best for crypto investors to learn to accept and embrace crypto winters and take measures to manage them.
Tips for Surviving Crypto Winter 2022
Crypto winters can be prepared for or survived in much the same way as stock market downturns.
When crypto winter comes around, investors should make sure their portfolios are well prepared with these four things experts recommend:
1. Diversify Your Holdings
Diversification should be the top priority when investing in crypto, according to Cole. According to him, diversification is the first principle of finance. Invest in a number of different platforms – don’t put all of your chips in one basket. Diversification is important.
There is a consensus among experts that investing in low-cost, diversified index funds is best because these funds have low expense ratios, or fees, which are beneficial to investors of all types. According to experts, crypto investors should allocate only 5% of their portfolios to it because of its high risk.
Diversifying holdings and keeping them in different locations is also recommended by Cole. A crypto wallet, multiple platforms, and more are recommended, he says.
Investing in hot or cold wallets is also crucial to ensuring you own your assets, and they are not just held on certain platforms.
2. Use the Downturn to Go Back to the Basics
According to Ridyard, crypto winter gives investors a chance to catch up on all of the new developments in the crypto market. So if you would like to understand how the crypto industry works, you need to do some homework and research now.
“Get a real handle on what these apps are and how they work,” Ridyard urges readers to think about all the things that they did not understand and take some time to read, learn, and review the basics. “As the next bull market approaches, you’ll appreciate your methodical approach.”
3. Do Your Own Research
The down market could also allow investors to pick up additional assets at a relative discount, says Teh. To make sure you invest in crypto projects that are worth your time or money in the long run, she warns investors to do their research. There is no doubt that bitcoin and Ethereum are the most established and largest cryptocurrencies. Therefore, most experts recommend sticking with these two.
“The market may be down, but it’s a natural cycle, so if you’re considering investing, now is the time to buy distressed assets,” Teh says. You shouldn’t look at what Elon [Musk] tweets about. Do your research properly.”
4. Remember: It’s All Speculative
The majority of investors should always keep in mind that cryptocurrency is still a massive gamble, says Dr. Johnson. The crypto market is therefore only suitable for those who are comfortable losing money.
In his opinion, crypto assets are not assets, and certainly, cryptocurrencies are not asset classes.
“These are speculative vehicles. Investing is a different thing from speculating. Cryptos are investments, so speculating on them is an investment.”
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