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A crypto winter is a prolonged period of decline in the cryptocurrency market generally characterized by low or falling prices and reduced investor interest. The term was first used in 2018 when Bitcoin crashed and the crypto market experienced a long period of low prices and low trading volume. Some typical markers of a crypto winter include decreased market prices, overall market value decrease and negative investor sentiment.

Here’s how to identify one, some background on the 2022 crypto winter and how investors can prepare for future crypto downturns.

Crypto winter indicators

Here are some of the key factors in a crypto winter:

  • Decreased interest from institutional investors: Institutional investors have played a key role in contributing to the success of major cryptocurrencies such as Bitcoin and Ethereum. However, if they perceive that cryptocurrencies have started to decline or stagnate, they may become hesitant to participate in the market, leading to a decline in asset values.
  • Oversaturation in the market: Cryptocurrencies that do not have a strong business plan or a unique value proposition may not be able to survive in the market. As the coin market becomes more competitive, it’s harder for new coins to stand out.
  • Major security breaches, hacks and fraud: Major cybersecurity issues and fraud can shake investor confidence in crypto networks. For instance, in 2014, Bitcoin lost nearly $60 billion in value after Mt. Gox, a Tokyo-based exchange, filed for bankruptcy. Mt. Gox had a number of cybersecurity issues that prevented Bitcoin withdrawals from being processed.
  • Unclear regulations: Cryptocurrencies and blockchain technology have both faced regulation hurdles since they were first introduced to the market. As government oversight has tightened, lawsuits and regulatory actions have increased and put a damper on crypto hype.

The 2022 crypto winter

The 2022 crypto winter was triggered, in part, by high inflation rates in the U.S., leading to aggressive interest rate increases by the Federal Reserve. Other major contributing factors include the collapse of Luna and TerraUSD cryptocurrencies in May 2022 that plummeted Bitcoin to its lowest price since 2020.  Three Arrows Capital, a crypto hedge fund that managed about $10 billion in assets at its peak, also crashed due to its investments in coins that collapsed. Overall, the industry erased more than $1 trillion from the market in 2022, according to the New York Times. Additionally, in November 2022, the fraudulent cryptocurrency exchange FTX collapsed and filed for bankruptcy.

According to CoinGecko, an annual cryptocurrency report, the combined value of the top 100 cryptocurrencies was around $830 billion on November 14, 2022, a significant decrease from the $2.7 trillion market cap observed on November 7, 2021. The decline in prices was widespread and while the market has gained ground since the start of 2023, it hasn’t reached the previous highs of 2021 and 2022. However, various countries are showing interest in becoming crypto-friendly regions, and traditional financial institutions are looking to enter the crypto industry. These factors may help the cryptocurrency market recover in the long term.

Bear market vs. crypto winter

While the terms bear market and crypto winter are often used interchangeably in the crypto world, they aren’t exactly the same, although a bear market and crypto winter can happen concurrently. A crypto winter refers to a period when stocks and currencies in the crypto world lose popularity and value, becoming stagnant. A bear market occurs when the price of a financial asset declines 20 percent or more off a recent market high.

How to prepare for a crypto winter

Predicting when a crypto winter will start or end is extremely similar to trying to predict how high a cryptocurrency asset will go during a bullish period (when prices rise by 20 percent or more). It’s nearly impossible to know for certain, but if you’re willing to withstand the risk and volatility of crypto, you can still try.

“Because crypto prices are based only on trader sentiment, it’s impossible to predict how high or low they’ll go,” says James Royal, Bankrate’s principal writer on investing. “So it’s especially important to mitigate your overall risk by never trading with money that you can’t afford to lose. For example, keeping your overall stake in crypto to a few percent of your total investment portfolio ensures that even a total wipeout doesn’t affect your overall wealth too much.”

Similar to strategies used in traditional stock markets to survive a bear market, there are ways for investors to navigate through a crypto winter.

  • Stay updated with cryptocurrency news: Keep your finger on the pulse of what’s happening through industry news channels, Discord servers and trusted investing publications.
  • Monitor investor sentiment: Check how crypto is trading by monitoring popular exchanges.
  • Look beyond crypto: Consider diversifying your investments outside of the crypto space and trying strategies such as dollar-cost averaging and risk management.

“Because their price is driven by sentiment, cryptocurrencies that have shown greater resiliency such as Bitcoin and Ethereum may end up performing better than unknown coins,” says Royal.

Bottom line

Crypto winter is a period of prolonged decline in the cryptocurrency industry that can be difficult to predict and navigate. However, investors can still prepare themselves for the future by staying updated with cryptocurrency news and monitoring investor sentiment, as well as diversifying their investments.