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Crypto winter explained: Everything you need to know

The current decline of the cryptocurrency market can be defined as a 'crypto winter.' While it's unknown how long one can last, there are steps investors can take to weather it.

Crypto winter is the literal season of discontent for the cryptocurrency market. It's a term that is loosely based on the concept of 'Winter is Coming' from the HBO series Game of Thrones, whereby winter is a time of challenge and conflict.

The period of negative gains in the value of cryptocurrency is commonly referred to as crypto winter. In 2022, the value of popular cryptocurrencies declined precipitously with a series of dramatic events. This included the failure of multiple stablecoins, such as TerraUSD and Luna in May, and the collapse of FTX in November. In addition to ongoing security concerns, the potential risk of future cryptocurrency regulations played a role in investor uncertainty. Broader issues with inflation and recession in the macroeconomy didn't help either.

What is crypto winter?

A crypto winter in a traditional financial market sense can be thought of as being similar in concept to a bear market. Not coincidentally, bears hibernate in the winter. A bear market is the opposite of a bull market, where the bull is a period where the market charges ahead and the bear market lumbers along at a slower pace. Within the traditional capital markets, a bear market is commonly defined as a market where stock values have declined by 20% from peak values.

Unlike in the traditional capital markets, in the cryptocurrency market, there is no specific metric by which a crypto winter occurs. A crypto winter is not declared by any one regulatory authority or entity. Rather it is a general situation where exchanges and investors alike see continued declines over a period. The declines in a crypto winter are typically over multiple cryptocurrencies and for a period of at least three months.

Crypto winter isn't just about lower values for cryptocurrency assets; it's also about lower overall trading volume over a period. An associated aspect of crypto winter, due to the decline in volume, is a reduction in staffing at major exchanges, such as Coinbase. In June 2022, Gemini -- a popular cryptocurrency exchange created by the Winklevoss twins -- was among many firms in the space announcing layoffs.

"This is where we are now, in the contraction phase that is settling into a period of stasis -- what our industry refers to as 'crypto winter'," according to a Winklevoss blog post. "This has all been further compounded by the current macroeconomic and geopolitical turmoil."

Crypto winter of 2022 declines by the numbers

Looking at the numbers behind the crypto winter of 2022 gives an indication of the financials loses that have been incurred.

As of Dec. 21, 2022, global cryptocurrency tracking site CoinGecko reported that the global market capitalization for a basket of nearly 13,000 cryptocurrencies tracked across 618 different exchanges was valued at $845 billion, which marked a 65% year-over-year decline.

Bitcoin (BTC), which is arguably the most popular and widely traded cryptocurrency token, hit a record high of $69,000 in November 2021. In contrast, for much of December 2022, Bitcoin's price was hovering around $17,000. Ethereum (ETH), which is also widely traded, also hit its all-time high of $4,800 in November 2021 and was trading at $1,200 in December 2022.

What causes a crypto winter?

A crypto winter is caused by a decline in the value of cryptocurrency assets and trading volume over a period. There are many different causes for why the value of cryptocurrencies decline leading to a crypto winter.

Much like the triggers for a bear market in the traditional markets, investor confidence in the overall outlook and prospects for a sector play a strong role in pricing and the potential for a decline. The decline in confidence can be triggered by negative sentiment about value as well as concerns about liquidity and security. Financial loses, such as an organization ceasing operations or declaring bankruptcy, can also contribute to a crypto winter event.

In the crypto winter of 2022, a series of unfortunate events triggered a domino effect of financial losses that led to a disintegration of investor confidence in cryptocurrency. In May 2022, the TerraUSD and Luna stablecoins crashed, taking billions of dollars of investor equity with it. That crash led to a crisis of confidence in the overall stability of the cryptocurrency markets, dragging down the values of the market overall.

The market was further impacted by the bankruptcy of crypto exchange FTX in November 2022, which also wiped out billions of investor equity. With FTX, allegations of financial wrongdoing and mismanagement have been levelled against the firms leadership, including the company's founder Sam Bankman-Fried.

The FTX bankruptcy has had widespread impact on the cryptocurrency industry, also leading to the bankruptcy of the BlockFI exchange due to its exposure to FTX assets. The BlockFi collapse led to further investor losses.

Ongoing fears about potential new regulations to place more controls on cryptocurrency in the wake of the FTX bankruptcy have also led to a decline in confidence about future prospects, further chilling the market and helping to extend the crypto winter.

For the crypto winter of 2022, the overall macroeconomic was faced with a series of headwinds, including inflation and fears of a potential recession slowing overall activity. The impact of the macro economy on sentiment and confidence in cryptocurrency cannot be understated as well.

How long do crypto winters last?

As a season, winter in North America and Europe usually lasts three months and is determined by the Earth's orbit around the Sun. In the traditional equity markets, bear markets have lasted on average 289 days, or just under 10 months.

When it comes to crypto winter, there is no such astronomical measure to gauge the precise length for how long it will last. There is also no precise metric for determining when winter begins or when it ends, other than a generalized market consensus that cryptocurrency values are on the way up or down.

The first crypto winter is generally considered to have started in January 2018 and may have lasted as long as December 2020 for a period of 23 months. The timing of the crypto winter of 2022 is somewhat unknown, starting in earnest in the May timeframe alongside the collapse of TerraUSD and Luna and continuing into 2023.

How to survive a crypto winter

Crypto winters can be a harrowing time for investors, with negative sentiment, declining values and equity losses.

Much like there are strategies for surviving a bear market with traditional equities, there are similar ways that investors can make it through crypto winter to hopefully emerge back into a future crypto spring with rising confidence and values. Examples of possible strategies include the following:

  • Short selling. For those who take the long view, buying low and selling high, crypto winter is a loss situation. The same is not true for short sellers, where the goal is having the price of an equity decline in value.
  • Dollar cost averaging (DCA). A common strategy for volatile equity markets is to continue buying a security (in this case, a cryptocurrency) even in a period of decline to lower the average purchase cost. In that approach, there is a faster potential for investors to benefit from a future recovery.
  • Manage risk. A good rule of thumb for cryptocurrency investors in general is to not risk more than they can afford to lose. Certain volatile assets, including cryptocurrencies with smaller trading volumes, should likely be avoided in favor of more stable cryptocurrencies options, such as Bitcoin and Ethereum.
  • Don't panic. It's not clear how long any given crypto winter will last. What is clear is that the first crypto winter was followed by a period of growth and all-time highs for the market. Bear markets are common in the traditional equity markets and those markets always eventually recover.

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