An overview of crypto winters, market cycles and lessons for every crypto investor.
With every crypto winter comes crypto spring; you just have to hibernate and stay safe until then…
If you’ve invested in crypto for the first time over the past two years, it’s likely that your investment is currently down from where you first bought in. Wondering why the price is stagnating? It’s called a crypto winter.
Crypto winters are similar to bear markets. In contrast to the bull markets, where many investors seem to be investing wizards with incredible foresight, bear markets can feel difficult to storm, especially with values staying depressed for long periods of time. But learning what they are, what to look for, and how to manage them can be incredibly powerful and help you ride out the storm.
In this post, we’ll take you through what crypto winter is, signs and common events to happen, learn lessons from winter’s past, and look to times when spring arrives.
So what is a crypto winter?
Crypto winters are similar to bear markets which you see in traditional asset classes. It’s when prices drop and remain significantly lower than recent highs for long periods of time. While there are technical elements to identifying a bear market, crypto winters are quite easy to feel, even without a thermometer.
Bitcoin is down more than 70% since its all-time high in November of 2021, and prices have started to move relatively sideways for more than five weeks. But there are lessons to be learned from winter’s past, including what to look for, what to expect, and when spring may arrive.
Signs of a crypto winter
Bear markets have technical indicators such as the 20% peak-to-trough price retreat to signify the market, while crypto winters don’t. Still, there are a few telltale signs we are in a crypto winter.
Prolonged price depression
The crypto market cap was US$2.9 trillion just a short 12 months ago and in that time, it has shed near 70% to just US$872 billion at the time of writing. Crypto markets are known for their volatility, so sharp movements up or down are hardly ever signs of the market slipping into a winter slumber. However the prices have remained depressed for months now, leading most investors to agree we have indeed arrived at crypto winter.
With every new technology comes new businesses. We only need to look at the .com boom to see examples of how businesses started and stopped in the throes of a bubble market. Alta Vista, Ask Jeeves, and MySpace are just a few of the brands who launched during that time and are barely in existence today, at least not in the same form. Businesses and projects are born from the hype and injection of money, only to fall short when markets turn.
When will the crypto winter end?
One would need a crystal ball in order to properly predict when a crypto winter will end, however, there are four typical phases the market moves through that can serve as some indication of when this might be.
Accumulation phase: This is when institutions and experienced investors start buying digital assets below their intrinsic value. They do this because they believe that the prices will eventually rise and they want to get in on the ground floor. During this phase, there is usually very little news or hype surrounding the market.
Markup phase: This is when prices start to increase as more people buy into the market. This phase is often fueled by FOMO (fear of missing out) as new investors see the prices going up and feel like they need to get in on the action. This can also be a dangerous time because it’s easy to get caught up in the hype and invest more money than you can afford to lose.
Distribution phase: This is when the whales start selling off their holdings. They do this because they think that the prices have peaked and they want to cash out before the inevitable crash. This selling can sometimes trigger a panic among other investors who then start selling off their own holdings, which can cause prices to crash even further.
Markdown phase: This is when prices crash as everyone tries to sell at once. This usually happens after a period of hype or excitement surrounding the market followed by a sudden drop in prices. Investors who bought during the markup phase often lose a lot of money during this phase.
As the above outlines, there are some telltale signs of the market phases. It’s an investor’s job to understand their risk profile, assess the market and determine when is the best time to enter and exit.
The good news is, this isn’t our first crypto winter. So there are lessons that can be learnt from the past.
Lessons from winters’ past
Cointree has been in crypto since the first crypto market cycle, and over that time learnt a few lessons about crypto winters and things to keep in mind – though not financial advice.
Crypto winters are a normal part of the market cycle. It’s a time when digital assets are expected to show low amounts of return as the market lacks the hype of phases before.
Know the risks
Crypto winters present various challenges for investors, no matter your experience level. It’s important to know this, but also to be aware of the risks involved, this includes the security of assets. So it’s important to consider how your assets are stored, where, and by who.
Build your knowledge
When winter arrives, it’s time to pick up a book and read. Or explore more about the technology and projects of interest. It’s an ideal time to understand the market so that when it comes time to invest, the right decisions are made.
While it’s difficult to know when spring will arrive, there are signs to look out for. Until then investors can look on winter’s past to lessons learnt, and things to come.
- It’s a little something known as a crypto bull cycle and typically has four phases, these include the accumulation phase, the markup phase, the distribution phase, and the markdown phase – before renewing the market cycle.
- While it may seem for those of us who have been in the space since it began, we know that with every crypto winter comes a crypto spring.
Cointree is a digital currency exchange, founded in Melbourne in 2013, helping Australian investors access the world of crypto. And over the years we’ve guided thousands of investors through the process of setting up their accounts, helping them make their first crypto purchase and answering all their questions along the way. Cointree provides all the advanced tools to buy, sell, trade, and grow investment portfolios with Bitcoin, Ethereum and 280 other cryptocurrencies.
Cointree is a part of the BGL Ecosystem, SMSF Association Australia sponsor and Finder’s 2022 Winner of the Best Crypto Exchange in Australia for SMSFs.
Cointree is a registered digital currency exchange with AUSTRAC (the Australian Government regulatory and monitoring body for AML/CTF) and a partner of Blockchain Australia.
Disclaimer: Information provided is for educational purposes and does not constitute financial product or SMSF advice. You should obtain independent advice from an Australian financial services licensee before making any financial decisions.