What is a crypto winter, how does it differ from a bear market, and how to survive it? As part of our initiative to tackle popular crypto fears, we will consistently deal with what is feared, yet what is not to be feared.

The cryptocurrency market, like Westeros, experiences not only periods of growth but also deep corrections, often called crypto winters. During this period, cryptocurrency prices experienced a significant drop, often accompanied by general pessimism among the community. Cryptocurrency winters are a natural part of the market cycle, and by understanding their main signs and consequences, investors can better prepare for the challenges ahead.

The term ‘crypto winter’ refers to a prolonged period of decline in the value of cryptocurrencies, often accompanied by stagnant market activity, pessimism among investors and significant capital outflows. Similar to a bearish stock market, a crypto winter often results in many new projects failing, existing platforms being forced to either adapt or close, venture capital investment declining, and overall industry activity falling. In Westeros, this is reminiscent of the fall of the Stark dynasty after the death of Ned Stark — many new and promising projects fail, and old platforms are forced to adapt or close.

The main signs of crypto winter:

• Decreased institutional interest: During crypto winters, there is a significant decline in interest from institutional investors. They may suspend or reduce their cryptocurrency investments, considering the market too volatile or risky for further investment. Something similar to how the Lannisters withdraw from alliances when the situation becomes tense.

• Market oversaturation: During periods of growth, a lot of new projects and coins appear on the market, many of which have no real value or long-term potential (e.g. Shitcoins), which leads to market saturation. The more coins that appear on the market, the harder it is for new entrants to gain a foothold, leading to market crashes during the cryptocurrency winter.

• Security breaches and fraud: Frequent instances of exchange hacking, cryptocurrency theft, or fraud can seriously undermine investor confidence. The bankruptcy of Mt.Gox in 2014, which resulted in significant financial losses, is an example of how cybersecurity issues can accelerate a cryptocurrency winter, shake investor confidence and lead to a sharp drop in market value.

• Regulatory challenges: Increasing regulatory pressure on the cryptocurrency industry could also point to a possible cryptocurrency winter. When countries introduce new rules or bans, it can lead to a decrease in market activity.

While the terms ‘crypto winter’ and ‘bear market’ are often used interchangeably, they have their differences, just like the Starks and Targaryens. Understanding these differences is key for investors who find themselves in one of these situations, as strategies that may be effective in one case may not be effective in the other. Determining whether the market is in a downturn or a crypto winter will help adjust investment approaches to better manage potential risks and opportunities.

Duration and price movement: A bear market is characterized by a drop of 20% or more from recent highs, a steady decline in prices and a negative outlook, which can often lead to further downward trends. At the same time, during crypto winters, prices also decline, but usually move sideways after the initial drop. As a result, profits remain unchanged over a long period of time, unlike the sharp drops seen in bear markets.

Investor sentiment and market dynamics: During a bear market, there is typically a lack of optimism and confidence, and prices gradually decline. Market sentiment becomes extremely negative and even fearful. Although investor confidence is also low during a crypto winter, the market can stabilize at lower price levels, creating a holding pattern rather than a continuous decline.

Signals and market recoveries: Bear markets are caused by various factors, such as economic downturns, political crises, or significant changes in market regulation, and recovery from them is slow and unpredictable, as it depends on external factors such as economic growth and investor psychology. Crypto winters, like White Walker attacks, are usually triggered by certain events in the cryptocurrency market, such as major hacker attacks, regulatory changes, or significant outages on crypto platforms. Recovery can also be slow, but this is more dependent on the development of the crypto industry.

The 2018 Crypto Winter

In 2017, the crypto market experienced a real boom thanks to initial coin offerings. In December 2017, Bitcoin reached a record high of around $19,783, after which the market experienced a sharp decline.

As early as February 2018, the price of Bitcoin fell to below $7,000, which was mainly due to the speculative nature of the market during its bullish growth, combined with the lack of real utility of many blockchain projects at the time. In 2018, the cryptocurrency market fell by more than 80%. The value of Bitcoin dropped to $3,200 in December 2018, and most ICO tokens lost almost all of their value.

The reason for the fall was that many ICO projects turned out to be fraudulent or unable to fulfill their agreements. When investors realized that many of these projects had no real value, a massive sell-off of assets began. After that, regulatory actions played a crucial role. In particular, the governments of many countries, including China and the US, began to introduce stricter measures against ICO and crypto trading, which led to increased pressure on companies and investors.

In addition, the market has suffered significant financial losses due to hacker attacks and fraud — $1.7 billion was lost in 2018 alone, further undermining investor confidence and market stability.

The 2022 Crypto Winter

After Bitcoin reached a new all-time high of $69,000 in November 2021, the crypto market faced another cryptocurrency winter. In particular, it was caused by a combination of internal vulnerabilities in the crypto industry and external economic factors.

The collapse of major companies such as TerraUSD/Luna, and the FTX cryptocurrency exchange were the central events that triggered another cycle of crypto winter. In just one year, these events wiped out the market value of cryptocurrencies by more than $1 trillion. As for economic factors, macroeconomic factors have made the situation much worse. Rising inflation and interest rates in many countries, particularly in the United States, have led to a decline in interest in high-risk assets, including cryptocurrencies.

These factors made the crypto market more sensitive to the broader economic environment than in previous years. The correlation with traditional financial markets has increased, as institutional investors have become more active in the crypto market.

As a result, the cryptocurrency market again lost more than 60% of its capitalisation, with Bitcoin falling below $16,000. Many companies went bankrupt or experienced significant financial difficulties. In addition, as a result, regulators have become even more active in checking the activities of cryptocurrency companies.

Preparing for crypto winter requires strategic thinking and market analysis. Therefore, the following tips may come in handy to survive the next ‘hibernation’.

• Don’t invest more than you can afford to lose. This is the most important rule for any investor. Wise investors avoid investing more than they can afford to lose. Be like Davos Seaworth, a wise investor who avoids investing more than he can afford to lose.

• Diversify your portfolio. When the market is falling, it is important to have a variety of assets in your portfolio to reduce the risk of loss. You should consider spreading your investments between different cryptocurrencies and traditional assets such as stocks, bonds, and real estate. Portfolio diversification helps to reduce risks and stabilize potential returns by spreading investments across multiple asset categories.

• Choosing a reliable crypto exchange. Choosing a reliable platform is an important step in protecting your assets. The exchange should have a high level of security, a good reputation, and do not forget about the possibility of storing assets on cold wallets. Examples of such exchanges are Kraken, Coinbase, WhiteBIT, which have a high percentage of assets stored on cold wallets to ensure the protection of users’ assets (WhiteBIT — 96%, Kraken — 95%, Coinbase — 98%). Along with security methods, WhiteBIT has launched a Halloween campaign where users can interactively fight the cryptocurrency winter.

• HODL. A popular cryptographic term that means ‘Hold On for Dear Life’. The idea behind HODLing is that you invest for the long term and believe in the project. Thus, even if the price falls in the short term, you expect your portfolio to grow when the markets recover.

The cryptocurrency market is constantly undergoing changes, from epic growth to long periods of decline known as crypto winters. Such cycles are inevitable and important for the development of the ecosystem. Understanding the main signs and differences of crypto winters allows investors not only to survive the hard times but also to use them to strengthen their positions in the market.

By following strategies such as diversification, cautious investing, and awareness, you can minimize risks and be prepared for the next cycle of market activity. Ultimately, the crypto winter is not the end, but just another stage on the road to future growth.

Originally published at https://www.gncrypto.news/ on October 30, 2024