This Crypto Winter Is Unlike Any Other. Here's Why That's a Good Thing.

The cryptocurrency asset class is no stranger to bear markets. Although the burgeoning investment category has had its fair share of corrections in its short history, the crypto winter currently gripping the market is unlike any other. 

Cryptocurrency got its start when Bitcoin (BTC 0.26%) was created in 2009. Since then, the market has evolved from just one cryptocurrency to a smorgasbord of tokens, stablecoins, smart contract platforms, and much more. From their humble beginnings, cryptocurrencies have often shed more than two-thirds of their value during each downturn.

What the past tells us

In 2014, the asset class went through one of its first corrections. Its collective market cap reached a new high just shy of $16 billion in December 2013.

It took until May 2015 to bottom out, when it plummeted to as low as $3.2 billion -- a brutal descent that erased 80% of the market's recent peak value.

From that bottom, it took a tedious 18 months for the market to recover all of its losses, when it reached $16 billion again in December 2016.

By January 2018, crypto hit a new all-time high when the collective market cap reached more than $821 billion. Those highs were short-lived, and the market fell throughout the entirety of 2018. It bottomed in December 2018, but not before shedding more than 87% of its value. It would take nearly two more years before the market reclaimed its previous all-time high in January 2021.

And now we find ourselves in a similar situation. The collective market cap of cryptocurrencies fell from a new record of $2.9 trillion in November 2021 but has since tumbled by nearly 70%. This crash is clearly nothing new, but still excruciating.

Looking at the time it took to reach previous bottoms, we are historically getting close to being within the typical timeline of when the upturns have started in the past. 

Additional pressures are forming

However, to the dismay of investors, this time around might be a little different. In the past, crypto winters occurred when the economy was in overall better shape. Since Bitcoin's creation, the stock market enjoyed one of the greatest and most prolonged bull markets in history. But not anymore. 

This year, the stock market entered bear market territory for the first time since 2009 (we won't count the March 2020 crash since it was the shortest one in history). And talk of a recession continues to loom as macroeconomic factors like inflation and rising interest rates stymie hopes for economic growth.

Although crypto advocates contend that the greater economy and stock market are uncorrelated with crypto, there is plenty of evidence showing that the two actually become positively correlated in times of economic uncertainty. As costs for everyday goods rise, mortgage rates and home prices increase, and layoffs ensue, investors have less priority to spend money on things like cryptocurrencies.

While the stock market and economy continue to struggle, it will be difficult for crypto to regain its previous highs. As a result of the factors the economy is currently dealing with, investors should expect this crypto winter to be a little colder and last a little longer than past ones. 

Forming a game plan

On average, it takes the crypto market about three years before it's able to reclaim its previous high. But now the economy is in a bear market and the possibility of a recession is growing.

The average recession lasts around 11 months, and it's been only a year since crypto hit a new all-time high. If this winter follows a similar path to past ones and we take into account the potential for a simultaneous recession, it would be safe to assume that it might take another two to three years before any particular cryptocurrency recovers all of its losses.

Although this won't leave investors with much confidence for the foreseeable future, there is a silver lining.

Despite having a relatively short history compared to the stock market, crypto has shown that it is capable of recouping the losses it goes through. Looking at the past, the investors who continued to build up their portfolios regardless of prices ended up reaping the greatest returns.

If it takes two to three years before prices rise again, investors have a long-lasting opportunity to buy crypto at historically low prices. Should the day come that crypto is able to gain momentum, those who remain steadfast in their allocation will then be positioned to benefit the most.

Most importantly, remember to keep a long time horizon. Investing is a marathon, not a sprint.