Much like the stock market, the crypto market goes through a few different seasons. Crypto winter is a particularly painful type of bear market when prices drop for months on end and confidence in the entire asset class seems to evaporate.
The good news is that winters end. The bad news is that they always come back eventually. So, should investors expect hard times in crypto to be right around the corner?
Image source: Getty Images.
Winter is (probably) coming
A crypto winter is best thought of as a long stretch of falling flat prices in major coins, alongside persistently pessimistic market sentiment that, on average, appears to be fully justified.
These periods tend to also be characterized by a large reduction in the amount of chatter related to cryptocurrency on social media, and much less news coverage from investment publications. Crypto winters can happen alongside any given set of macroeconomic conditions, but they have often coincided with economic turbulence or rising interest rates.
The most recent winter ran from early 2022 through roughly the third quarter of 2023. Although the Federal Reserve's rate-hiking regimen to fight inflation was responsible for causing much of the bearish conditions at the time, the market's difficulties were substantially exacerbated by the collapse of the FTX crypto exchange in late 2022.
Historically, Bitcoin's (BTC 1.06%) halving, which occurs roughly every four years, has been followed by a surge to new highs, and then a deep winter. Bitcoin's peaks that followed halvings came in late 2013, December 2017, and November 2021, about 12 to 18 months after each halving.
The reason for Bitcoin playing such a large role in crypto winters is quite simple: The coin is on its own responsible for more than 50% of the entire sector's market cap. So when it stumbles, the fall is almost never contained and tends to spread to other coins.
And when prices plummet, it has a way of delivering investors with some harsh clarity regarding what projects are actually delivering value, and which were more style than substance. Hence the tendency of crypto winters to extinguish entire market segments, chains, coins, and the portfolios of many aggressive investors.
The last winter's damage was enough to shake the conviction of cryptocurrency evangelists and tourists alike.
Bitcoin fell more than 70% from its 2021 high. Other major coins, like Ethereum (ETH 2.76%), had it just as bad or even worse. From the peak in mid-November 2021 to the end of 2022, it declined by 74%, and Solana (SOL 7.69%) lost about 96% of its value in the same period, partly as a result of the FTX implosion.
The most recent halving was in April 2024, about 16 months ago. If halvings continue to predict future winters, we're due for one pretty soon. That means you need to prepare.
How to prepare
Assume there will be another winter. Assume you will feel uncomfortable while your positions are underwater, and build a plan around that.
For instance, buying Bitcoin, Ethereum, and Solana in the last crypto winter paid off very nicely for those who could stomach it. In contrast, selling your coins will lock in your losses, so don't do that unless their investment theses have become invalidated somehow.
At the same time, when the winter actually arrives, be sure to curb your risk appetite. Many coins will be on sale in the sense that they have lost most of their value, but only the cream of the crop will recover.
Invest more conservatively than you might feel inclined to. Keep in mind that you will probably need to hold whatever investments you make for at least a year or so before the market conditions will be right for it to flourish.
Ideally, the play is to automate small dollar-cost averaging purchases of your chosen assets and commit yourself to a minimum holding period measured in years. Even if you don't need to run the crypto winter plan anytime soon (fingers crossed), it's a lot better to be in a position where you're feeling greedy than to be distraught when all the coins look like they're dying.
