With a value close to $69,000, bitcoin celebrated its all-time high back in November 2021. But only some eight months later, the price plunged below $23,000. And it wasn’t just bitcoin – many other cryptocurrencies have followed the same trajectory.
As these developments unravel, many suggest that what awaits is a “crypto winter”, a period in which cryptocurrency prices struggle to find positive momentum. Crypto winters are usually preceded by extreme volatility and a bear market, where the total market cap for all cryptos declines sharply. In terms of market capitalization, it’s also when most altcoins lose a large percentage of their value from their all-time highs.
What will this crypto winter mean for the market’s future, and how can you best prepare?
Even though blockchain technologies have been turning heads in global markets, crypto assets have earned a reputation of high volatility. The price movements of those coins that haven’t seen mass adoption by the public or businesses see even more significant fluctuations. When new investors enter the space and old ones exist at an alarming rate, it’s not surprising that prices plummet just as much as they rebound.
If you’ve invested in a coin or token, it’s important not to panic during such times. Instead, it may be fundamental to acknowledge that low prices tend to be much more sustainable than high prices over time as they create more buying pressure at lower levels instead of encouraging the hoarding of cash at higher levels.
In the early part of this year, crypto prices were already plummeting, with many altcoins losing around 80% of their value from their all-time highs. However, there’s an upside, too. A healthy crypto winter may be necessary for the long-term sustainability of the market, just like with any other financial market cycle.
Why does Crypto Weather cycle?
Even though crypto represents a whole new class of assets, its dynamics may not differ from other markets. Crypto winter is ultimately a very natural process. As long as there is the governing power of supply and demand, this market cycle is bound to occur regularly.
Yet, the key is understanding what exactly drives these cycles and how to use them to your benefit. Investors will be more receptive to investing in cryptocurrencies when the price has fallen below their average buy-in point, so the buying pressure will be stronger than the selling pressure, increasing the value of the asset. This creates buying pressure at lower levels from those who have invested over time, resulting in better prices for those who buy at or just below current levels and sell later on after the price has gone back up again.
How to avoid getting trapped in a Cryptocurrency Winter
Undoubtedly, one of the most complex things about a crypto winter is that it’s impossible to predict when it ends. Sometimes, cryptocurrencies can rebound from the lows with relative ease; other times, they might take months – or even years – before their prices recover. Still, as an investor, there are a few things you can do to avoid getting trapped in crypto winter:
- Diversify your investments: Suppose you only have one or two cryptocurrencies in your portfolio. While there’s a chance that one of them could fare better than all the other coins out there, it exposes you to much higher risk, too.
- Never invest more than you can afford to lose: This is the golden rule of crypto investment. Remember that even if you think prices will eventually rebound, there’s no guarantee they will do so at any point soon, so you shouldn’t bet all your money on it.
- Set up an emergency fund: To weather the storm, you need to be prepared. With an emergency fund, you can ensure that your investment won’t be lost if a bear market hits shortly.
How to prepare for a Cryptocurrency Spring
During a crypto winter, it’s common to see prices fall drastically and rebound as investors realize they need to buy now before the price goes up. Preparing for a possible crypto spring is crucial if you want to invest in a particular coin.
You can take several steps right before the next crypto spring arrives. First, check what is currently being traded on exchanges and determine what projects could be going through big movements in the upcoming months and years. Next, decide how much money you want to spend on coins and buy per tranche in order to average your purchase price. When the cryptocurrency market is going through one of these phases of volatility, it helps to have an investment plan set up in your mind so you know when to add or drop the crypto.
As volatile as cryptocurrency markets can be, there is one certainty: Whether you’re in a bear market or a bull run, the opportunities and risks are always present.
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