What is a Crypto Winter? Definition, Causes, Survival Strategies
What is a Crypto Winter?
A crypto winter is a cryptocurrency market condition that is characterized by prolonged price declines, reduced market capitalization and low trading volumes. In economics, the terms “winter” and “bear market” are used as metaphors to describe financial market conditions that shift investor sentiment from optimism to pessimism.
In nature, winter is a dormant period characterized by harsh conditions. It is a natural part of the seasonal cycle and is always followed by a period of renewed activity and growth.
Financial markets also experience cycles of high and low activity. The difference is that when winter is a season, it only lasts three months. In contrast, the duration of a financial winter is highly unpredictable; it may last only a few weeks, or it may stretch on for years.
Why Crypto Winters Happen
The primary cause of a crypto winter is the same as any other financial winter – there is a fundamental shift that decreases investor confidence.
In the context of cryptocurrency, the shift can be caused by:
Surviving a Crypto Winter
While crypto winters can cause anxiety, they also provide unique opportunities for strategic investors and traders.
Winters can be a good time to buy well-established cryptocurrencies at lower prices. It can also be an excellent time for investors and traders to take a break and learn more about trending cryptocurrencies and explore new investment strategies.
For example, when other cryptocurrencies are experiencing significant price declines, stablecoins can provide investors with a relatively secure option to hold their funds without being subject to the volatility associated with other cryptocurrencies.
Similarly, yield farming and staking in certain proof of stake (PoS) blockchains can generate a passive income and potentially offset losses during a sustained market downturn.
A good investment plan anticipates the probability of a crypto winter, addresses risk tolerance levels, and provides data-driven decision making strategies for determining whether it’s best to hold on to an investment, spread crypto investments across additional cryptocurrencies or buy a fixed dollar amount of a particular cryptocurrency on a regular schedule.
Hodl: Hold on to crypto investments during prolonged market downturns and wait the winter out.
Dollar-Cost Averaging (DCA): Buy a fixed dollar amount of a particular cryptocurrency on a regular schedule (regardless of its price) to reduce the impact of volatility over time.
Portfolio Diversification: Spread crypto investments across various cryptocurrencies to help manage risk.
Crypto Winter vs. Crypto Bear Market
The two terms “winter” and “bear market” are often used as synonyms in economics, finance and fintech. When people use the term “crypto winter” instead of “crypto bear market,” however, they are often trying to make the point that a cryptocurrency’s price drop has exceeded 20% over a three month period — and the dramatic price drop is not just a market correction but an indication of a chilly economic climate overall.
History of Crypto Winters
The first crypto winter occurred in 2014-2015, after the price of Bitcoin peaked at around $1,200 in 2013. The price of Bitcoin fell by over 80%, the price of Ethereum fell from around $10 to around $1 and the total market capitalization of all cryptocurrencies fell from around $100 billion to around $10 billion.
The second crypto winter occurred in 2018-2019 after the price of Bitcoin peaked at around $20,000 in 2017. This crypto winter was more severe than the first one, and Ethereum was one of the hardest hit cryptocurrencies. The price of Ethereum fell from around $1,400 to around $100 and the total market capitalization of all cryptocurrencies fell from around $800 billion to around $100 billion.
The most recent crypto winter began in late 2021, after the price of Bitcoin peaked at around $68,000 in November 2021. The price of Bitcoin has fallen by over 70% since then, and the total market capitalization of all cryptocurrencies has fallen from around $3 trillion to around $900 billion.
Some financial experts and pundits believe that we are still in a crypto winter, but not everyone agrees. Ultimately, whether to call a recent decline in prices a crypto bear market or in a crypto winter is a matter of opinion because there is no right or wrong answer. It is up to the investor or trader to do their own research and understand the risks involved in buying, holding or selling a particular cryptocurrency.