What is a crypto winter?
A crypto winter is a prolonged bear market for digital assets such as Bitcoin and Ethereum (ETH), and the prices of cryptocurrencies are significantly lower than their recent highs. There's also reduced crypto trading volume and minimal media coverage.
Crypto winters start after a major market sell-off. In traditional markets such as the New York Stock Exchange (NYSE), investors often declare a bear market after prices drop 20% from recent highs. However, since cryptocurrencies are incredibly volatile assets, they often fall more than 20% during a crypto winter season.
Although it’s unknown who coined the term "crypto winter," most people believe it was influenced by the popular HBO show “Game of Thrones.” Whenever bear markets strike, crypto enthusiasts frequently share memes with the “Game of Thrones” character Eddard "Ned" Stark bracing himself for a blizzard.
What happens during a crypto winter?
Crypto winters send a chill across the Web3 industry. Here are some of the most common outcomes:
- Low prices for prolonged time frames: Unlike a market correction, crypto winters take years to recover, with prices plunging at least 20% below their highs.
- Limited trading volume: Many retail and institutional investors shy away from crypto assets in a bear market. Although prices are more affordable, there's less confidence in the crypto industry’s future. Low volume on exchanges such as Binance and Coinbase typically translates to subdued price volatility.
- Less mainstream news coverage: Since the number of crypto traders reduces during this phase, news outlets focus less on the industry. But if they do, they most likely publish negative news pieces.
- Sour market sentiment: Users aren't as willing to embrace coins such as Bitcoin, Litecoin, and Ethereum during a crypto winter. Even new crypto projects struggle to generate positive social media engagement. Also, metrics such as the "Crypto Fear and Greed Index" stay closer to the "fear" category when a crypto winter is in full swing.
- Stunted Web3 start-up culture: As more money leaves the crypto space, it's increasingly challenging for tech start-ups to find willing investors. Instead of investing in high-risk start-ups, many firms stick to established coins, provided they exist in the space.
- More layoffs, failures, and bankruptcies: As cryptocurrencies fall in value, Web3 companies face serious financial challenges. It's common for crypto-related businesses to announce layoffs or freeze hiring during a sustained winter. Crypto companies with shady practices or poor risk management may file for bankruptcy (e.g., Voyager, FTX, and Three Arrows Capital).
- Shift to stablecoins, cash, or Bitcoin: In past crypto winters, Bitcoin's percentage of the global crypto market cap grew as more investors sold riskier altcoins (or non-Bitcoin cryptos). Although Bitcoin is volatile, it tends to be "less risky" due to its size and reputation. However, with the rise of stablecoins and convenient fiat off-ramps, it's easy to trade altcoins for less volatile assets. In any case, people are more likely to put their money into less volatile projects.
How long does a crypto winter last?
There's no average time frame for a crypto winter, but they're always long-term downward price trends. Unlike market corrections, a true crypto winter lasts at least one year. Crypto’s history suggests most winter phases persist for 2–3 years before crypto can recover, although the length of specific crypto winters is exceptionally difficult to predict.
Examples of past crypto winters
Prior crypto winters followed a similar pattern known as the "four-year cycle." Every four years, the daily issuance of Bitcoin drops by half during the "BTC halving," a recurring event where BTC circulation gets cut in half. In the months following this event, the prices of digital assets significantly rise before falling into a multiyear bear market.
The 2016 halving event is a classic example––Bitcoin's price rose from $650 on its halving day to a high of almost $20,000 at the end of 2017. Following this local peak, BTC and the entire crypto industry fell into a crypto winter that lasted until the 2021 bull market.
Although previous crypto winters fit the four-year cycle model, there’s no guarantee Bitcoin will follow this pattern in the future. Dozens of macroeconomic or crypto-specific events could invalidate the four-year cycle.
How to prepare for a crypto winter
Since crypto winters are brutal, investors rely on a few strategies to protect their portfolios and navigate a volatile crypto bear market, preserving their peace of mind. Here are some techniques:
- Define your investment strategy: Before entering the crypto market, ensure you know why you're getting involved with digital assets. Remember that a short-term crypto trader has a different risk profile than a long-term investor. So take more time to develop your strategy to make clear-headed decisions.
- Consider portfolio diversification: Since cryptocurrencies are such a volatile asset class, consider diversifying investments to reduce the impact of bear markets. Research how assets such as precious metals, stocks, or ETFs (exchange-traded funds) adjust your risk profile.
- Take Profits: If investors already have profitable positions in the crypto market, they should consider selling some of their top-performing coins. Taking some cash out of digital assets minimizes the downside risk if a crypto winter strikes.
- Know a crypto winter’s warning signs: Closely follow crypto news and price data to spot a bearish trend ahead of time. Better position yourself by tracking your investments and capital for an upcoming winter when you see red flags such as negative headlines or weaker price performance.
- Look into dollar-cost averaging (DCA): DCA is a long-term investment strategy that may be advantageous during market downturns. Investors who use DCA buy small amounts of their favorite cryptocurrencies regularly. Since crypto prices are low in a bear market, investing during this phase easily lowers the average price for your long-term crypto position.
- Review crypto’s price history for perspective: During steep market downturns, hundreds of crypto fans say, "When in doubt, zoom out." And when you "zoom out" on the global crypto market cap’s price chart, you’ll observe the trend rising since Bitcoin's inception. Although this isn't a guarantee that prices will increase, reviewing historical data puts recent price dips into perspective.
What are the benefits of crypto winters?
At face value, crypto winters are negative times for digital assets. However, that doesn't mean crypto winters are all bad news. There are a few positive traits associated with prolonged crypto bear markets.
- Tests the resilience of cryptocurrencies: Crypto projects and companies easily generate hype when markets are riding high. It's only when the market starts to fall that high-quality cryptos shine. Projects that survive multiple winters gain more stability and credibility.
- Involves fewer scams and less hype: As retail interest in crypto wanes, there’s potentially less scam activity in Web3. Projects or companies that weren't designed to last likely fall during a winter. Also, it's easier to conduct clear-headed crypto research with less froth in the market.
- Entails lower prices for crypto assets: Investors with a long time horizon can take advantage of reduced prices of crypto assets. And, if they plan to "hodl" (Hold on to Dear life––a misspelling of the word “hold”) their crypto for years, they consider adding to a pre-existing portfolio.
Although crypto winters can be frustrating, they are unavoidable. Bear markets are a fact of life for every asset class. New investors must recognize that downward price trends are always possible, especially when dealing with volatile assets such as Bitcoin and Ethereum. While the global crypto market cap has grown since its inception, prices can remain stagnant for years as the industry finds its footing.
In the long term, Worldcoin believes digital assets will positively impact the global economy. To ensure everyone has equal access to this emerging technology, we're putting a share of our crypto in their hands for free. We’re also giving away free DAI stablecoins to millions of crypto wallets. Subscribe to our YouTube channel to learn more.