“Crypto Winter” is a common phrase making headlines since the first quarter of 2022. Cryptocurrencies have suffered a huge downfall this year, losing almost two trillion dollars since their huge rise in the last quarter of 2021. The first and largest cryptocurrency around the world “Bitcoin” is almost 70% off since its all-time high of $69,000. The poor performance of the cryptocurrency market is known as “crypto winter”. Such a period signifies a lower average asset value and a negative sentiment in a vast range of cryptocurrencies.
The crypto winter of 2022 is not the first time the industry is facing such a huge red candle down, yet this year’s crypto winter has hit every crypto owner differently. Thanks to last year’s inflow of new crypto investors and a mix of crypto market volatility and flawed expectations, the crypto winter was a real eye-opener to several investors. Business professor of Fordham University, Dr. Benjamin Cole stated, “People were not paying attention to the hidden systemic risk built into in crypto market and blindly residing in a media bubble”.
During crypto winter it is hard to decide whether you should sell your assets that are underwater or wait for a long period for the market to recover. A financial advisor of Maranantha Financial in Ventura, Michael Anderson quotes that “cryptocurrencies are a risky asset and the value may even drop down to zero. Although not all cryptocurrencies will fall, some good number might taste the dust”.
While some fear a huge loss during crypto winters, others consider it as the fixture of the crypto industry. The co-founder of Mooning, an Australia-based Web3 marketing agency, Lisa Teh asserts that “this is not the first time the crypto market has crashed, and it surely won’t be the last”.
Usually, experts are on the same page during crypto winters, and the investors predict long-term negative or flat growth. However, the winter of 2022 is different in several aspects. Lisa Teh says, “there are a large number of people investing in crypto this year with more people talking about the situation, and making more noise in the industry”.
Moreover, due to high inflation and rising interests, many investors entered the crypto market to behave differently from the stocks. The sudden turn has left investors “confused and frustrated”. Due to the speculative nature and the limited supply of 21million, investors originally considered it as a “hedge against inflation”. “Investors are confused as they do not understand the nature of cryptocurrencies”, says Teh.
According to Benjamin Cole, “the several hacks on exchange platforms, and the bankruptcy of firms like Celsius, and Three Arrows Capital has rocked the industry to its core”. Another reason why people are attracted to cryptocurrency is its “volatility”. Observing the dynamic rise and fall of cryptocurrencies, a finance professor at Heider College of Business of Creighton University, Dr. Robert Johnson asserts, “investing in a bond or stock has less adrenaline rush and is comparatively stable”. Therefore, to be prepared for this winter, it is important to gain some knowledge, manage the highs and lows and embrace the winter.
Crypto winter is nothing new in the market, yet since this winter is different than others, here’s what top industry leaders have to say about the crypto winter of 2022.
Bitcoin was considered a hedge against inflation because of two things. Firstly, it is a non-sovereign store of value asset, similar to gold but virtual as its production is limited. The asset can be transferred at light speed and stored in the computer. Secondly, it is also an open “monetary network”, so one can transfer a million dollars to another country across the world and bring it back to the same place in an hour.
In a world where it is difficult and time taking to shift things, or ship things, where the supply chain is snarled, bitcoin is a big tech network that can transfer at light speed. Bitcoin offers the best of the real and virtual world and is often considered a “hedge against inflation”, for its limited store value. It is also a worldwide tech-dominant digital network like Apple or Facebook. Although these two have been doing very well for decades, bitcoin is on its way.
To point out the leverage attached to it that has led to an overinflated price for a long period, Saylor pointed out that “bitcoin has been trading on several unregulated exchanges where the leverage ranges between 20x to a 100x, and the fact that it was cross-collateralized with 19,500 other cryptocurrencies, many of these lack securities, and are opaque”. Therefore, when on a Saturday afternoon these coins are sold to buy bitcoins or bitcoin is bought to settle these coins, there is going to be volatility.
However, the industry is maturing every day, the people will get clarity between what is security and what is a commodity, and the exchanges will be regulated, the opacity and the trading leverage will disappear. With bitcoin, the volatility decreases year by year and quarter by quarter as it matures. It is important to be prepared for the winter and hold your ground until the red candle disappears.
In an interview with CNBC, Steven Mcclurg the CEO of Valkyrie Investments an asset management firm says “It is a dangerous environment for assets”. To point out that if it is crypto winter, he says it is winter but not only for the crypto industry but it’s everything winter. It is a difficult environment for many risk assets for months to come, maybe even years.
To point out the forces that bought bitcoin down over the past few months Mcclurg asserts, “it is a combination of several factors, the main factor being macro-economic situation. For the past few months, the FED along with other Central Banks is forcing all values to come down such as S&P by 20%, NASDAQ by 30%, and Bitcoin by almost 50% (a the time of interview). It is not much of a surprise that all the risk assets are selling off and as long as FED raises interest rates to balance the global recession, the industry will stay under winter”.
He concludes that bitcoin will lose more of its value in the coming months until the banks lower their interest rates. It will be a long winter, and only the brave investors can make it through.
Similar to a downturn in the stock market, preparing to survive the crypto winter is a similar situation. Here are the top four things that experts recommend that investors should do while waiting for the market to recover.
Dr. Benjamin Cole suggests that investors should diversify their assets while investing. He suggests that “the first principle of investment is diversification. Never put all eggs in one basket, and all tokens in one platform, diversification is the key”. Generally, experts recommend investing in diversified index funds, as they have low expense fees and are best for all investors. Since cryptocurrencies are highly volatile, experts suggest allocating only 5% of your entire investment portfolio to them. Cole shares his views on not only diversifying your investments but also diversifying where you are storing your assets. Use multiple exchanges, platforms, and crypto wallets to store and invest in cryptocurrencies.
Experts suggest that crypto winters attract investors to explore anything new in the market. However, as Warren Buffet once said, “Never invest in something you don’t understand”, it is best to do some research and homework to ensure you understand the technology and the market dynamics that run the crypto industry.
Piers Ridyard suggests that investors should “go back and think about the basic principles, and spend some time reading and learning, this will help you to be prepared for the next bull market that is coming”.
Crypto winter can be a great advantage for investors to pick up some additional assets at a discount. Like Baron Rothschild once said, “Invest when there’s blood in the streets”. However, Lisa Teh suggests that “it is important to do your research before investing and check for utility and long-term market value”. The majority of the crypto investors stick to Ethereum, and Bitcoin to ensure security.
She also quoted, “the markets are down, and if you are planning to get into the crypto space, now is the time, however, do conduct a thorough research before investing any asset”, also do not follow what Elon Musk tweets about”.
Dr. Rober Johnson says, “it is important to remember that the crypto industry is a massive gamble for every investor”. Since the crypto industry is unpredictable, you can earn double your money, or lose it all. It is wise only to invest what you are comfortable losing. Dr. Johnson shares that he has a hard time referring to cryptocurrencies as an asset class. Since these are conjectural, the investors must understand the basic difference between investing and speculating. Overall, the crypto industry is undergoing the massive wrath of crypto winter, and there is nothing to be done rather than being optimistic about a better future.