How to Survive the Crypto Winter

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This newsletter is sponsored by Luno. 

Luno is a cryptocurrency platform available to both iOS and Android users. It checks off most of the important boxes for a crypto exchange. It is highly secure, easy to use, beginner-friendly, pays interest on crypto savings, has secure storage and provides educational resources.

A cryptocurrency winter is a term which represents a long downturn in cryptocurrency prices. Crypto winters typically extend from well-known currencies like Bitcoin and Ethereum. It may also coincide with other economic declines or a bear market in the stock market.

The last crypto winter lasted from January 2018 to December 2020, when Bitcoin plunged 83%, from $19,423 to $3,217. During the same period, Ethereum fell from $1,448 to $85. However, both Bitcoin and Ethereum jumped to a whopping $67,567 and $4,850 respectively in November, 2021. Since this peak, Bitcoin has shed about 70% of its value, and the overall market capitalisation of crypto assets has dropped to less than $1 trillion from its November 2021 peak of $3 trillion. Widespread price declines severely impacted several cryptocurrency and blockchain projects. 

Some of the causes of the widespread price declines include but not limited to the Terra Luna algorithmic stablecoin that lost its peg to the United States dollar; the Celsius and Voyager platforms that went under after filing for bankruptcies, which cost depositors a large portion of their holdings. Macro factors have also contributed to the bearishness both in the crypto markets and the stock markets, with rampant inflation continuing and the U.S. Federal Reserve expected to hike interest rates again next week to control rising prices. 

4 Tips to Survive a Crypto Winter

One strategy for surviving a period of prolonged market declines is to understand that dips, even if they are prolonged, are a natural aspect of investing. This can help investors maintain perspective as prices decline, avoiding panic selling. However, it is much more crucial to mitigate as many additional dangers as possible.

1. Plan for the unexpected, as many cryptocurrencies and platforms could fail.

A number of cryptocurrency projects failed to survive the previous crypto winter in 2018. Smaller cryptocurrencies with little or no utility face the greatest risks, whereas more established cryptos have a much better chance of surviving and eventually prospering in the long run. 

Crypto platforms themselves could collapse. We know that several top crypto exchanges are already struggling and have laid off staff in recent times. Find out what protection you have if you keep your digital assets in a custodial wallet on a crypto exchange or loan site.

2. Don’t invest more than you can afford to lose.

When investing in high-risk assets, the golden rule is to only invest money you're willing to lose. If you buy cryptocurrency with money that you need for other financial purposes, a complete cryptocurrency collapse could jeopardise your long-term plans. You may be compelled to sell your assets at a loss if you cannot afford to wait for prices to rise again.

Ensure crypto only represents a small portion of your overall portfolio. That way, if crypto fails, you'll still have other safer assets to fall back on. Once the crypto market recovers, prices may eventually soar again. However, since it's possible they may not recover, don't bet a house on it.

3. Carefully evaluate each crypto project. 

Each coin and token is associated with a distinct managing entity or volunteer group. Some have turned out to be scams. It's critical to properly evaluate each crypto project before determining how much to invest.

4. Invest in other asset classes such as stocks, bonds and mutual funds

Alternatively, you could decide to invest in other asset classes that offer good return and are less risky compared to cryptocurrency. Some of these assets are stocks (growth or dividend stock), index funds or ETFs, REITs, bonds or alternative investments. An index fund is used to track the performance of a large group of stocks picked to represent the broader stock market. Owning funds that track broad-based indexes can add diversification to a portfolio. Examples of broad-based indices range from the S&P 500 and NASDAQ Composite to the Russell 3000.

In Conclusion

Winters may be depressing, and there are many times when it appears as though the sun won't rise again. But just as spring and summer follow winter, so do seasons and markets—bear markets follow bull markets. History demonstrates that prices have always eventually recovered in the stock market. 

The problem with cryptocurrencies is that they are riskier investments than, say, stocks. Since the market is still somewhat new and uncontrolled, there is a slim chance that it could completely collapse. Bitcoin has so far managed to overcome even sizable drops and rise to fresh highs. As a long-term investor, there are numerous grounds to believe it could do so once more. To survive a protracted winter, you must plan for the worst while holding out for the best.

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