Understanding Crypto Winters and How to Survive Them

The term crypto winter is often used to describe a period of extreme hardship in terms of significant price decline. During these periods, there's usually a lot of fear, uncertainty and Doubt, also known as FUD, characterized by extreme volatility and market manipulation.

Many have gotten frustrated with a bear market at least once, that they just couldn't take it anymore and liquidated crypto positions in one go. Crypto winters are literally bad news for investors and traders alike. These chilly periods will deprive a portfolio of assets that grow. Even worse, crypto winters put profits in the sub-zero regions.

What Is Crypto Winter?

Crypto winters can last between many months to years. In other words, a crypto winter is a prolonged bear cycle spanning over three months. A crypto winter is usually followed by a new bull market when the market recovers and the bulls grow tougher horns.

One of the strongest indicators of crypto winter is the Fear and Greed Index which ranges between 0 and 100, with 1 and 100 indicating extreme fear and extreme greed, respectively.

Crypto Fear and Greed Index at Neutral, denoting a stable market. Source: Alternative

This index provides an overview of the current crypto market sentiment using several indicators, including volatility, market volume, bitcoin dominance and social media. A prolonged score of below 50 might denote signs of an impending bear cycle. And if the score ranges between 0-25 for an extended period, that's a crypto winter.

How to Easily Spot Crypto Winters

Crypto winters are not hard to spot. Just watch the Fear and Greed Index. But of course, there are other subtle elements to keep an eye out.

The most obvious is a significant price decline across the board, triggered by huge market dumps and panic selloffs. This leads to low trading activity and reduced investor confidence, as the overall market sentiment is negative.

Perhaps even worse, a lot of "crypto is dead" news flies around the media during crypto winters. Governments and regulatory agencies are always grappling with adopting frameworks for regulating cryptocurrencies, and crypto winters are worse times for this subject. It's commonplace to see top crypto platforms and exchanges and thought leaders — being targeted by watchdogs.

Bitcoin's price since 2021 shows prolonged winters. Source: CoinDesk

However, crypto winters foster new regulations introduced to crack down on illegal activity in the crypto space. Regulators and investors alike are usually skeptical, resulting in stifled market growth which further prolongs the bear.

A Cold Crypto Winter

To understand crypto winters and the resultant bear cycle, it is important to look at the history of the cryptocurrency market.

Bitcoin, the first decentralized cryptocurrency, was introduced in 2009 after the cryptic Nakamoto paper was published. The digital currency had initially faced skepticism and limited adoption. But bitcoin has gradually gained recognition as a decentralized digital currency, leading to increased investor interest.

In 2017, Bitcoin experienced an unprecedented bull run, reaching a then-record high near $20,000 in December. This uptrend was fueled by the infamous ICO model.

The ICO, or Initial Coin Offering, was a crowdsourced fundraising vehicle modeled after the IPO used in traditional stock markets. It has been one of the key drivers of crypto adoption, during a period which saw thousands of projects launching their tokens on the Ethereum blockchain.

During those days, anyone with an idea, a whitepaper and some guerilla marketing could secure funding from investors. Eventually, events took a turn for the worse, as shady projects and cash grabs became a common sight.

Bitcoin dropped from ~$20,000 to around $6,800 in Feb. 2018. Source: CoinGecko

The once-celebrated ICO became an eyesore for the entire crypto ecosystem, and the remarkable 2017 boom was silenced by an SEC intervention. The market underwent a severe correction in 2018, signaling the onset of a brutal crypto winter. The prices of bitcoin and other cryptocurrencies plummeted hard, dropping by over 200%.

The 2018 crypto winter lasted over two years, causing significant losses for many investors. However, developers kept busy, building innovative projects behind the scenes. In 2021, the crypto market went into another bull cycle which lasted a year. The run was triggered by the adoption of two innovative use cases: Decentralized finance (DeFi) and non-fungible tokens (NFTs).

Winter into Summer

DeFi entered the mainstream in 2020, a testament to the unwavering commitment of ‘gigabrains' building in the crypto space during the previous bear cycle. The DeFi Summer, as it was called, birthed key projects like Compound, Maker, Curve, Balancer and Uniswap during this time.

DeFi TVL stands at ~$37 billion, a shadow of its all-time high. Source: DeFiLlama

At some point in late 2021, the total value locked in DeFi projects was sitting at around $180 billion. After a brief respite, the bears finally dug their claws in, and the markets responded with a huge selloff. This was followed by a market downturn in 2022. Again, this crypto winter arose from market oversaturation and manipulation.

At its inception, DeFi was touted as the all-encompassing answer to the financial services industry. Decentralized banking (i.e., lending and borrowing), liquidity mining, staking, insurance and other financial products supported this.

Top 10 NFT collections across multiple chains. Source: CoinGecko

Similarly, the NFT craze attracted whales, with historic auctions of digital art and collectibles reaching as high as $69 million . However, market manipulation and investor greed (i.e., NFT flipping and ungodly yield farming) dampened an erstwhile bubbling market.

Sadly, the markets haven't stopped bleeding since then, implying a 2022 crypto winter.

How Did Crypto Winter 2022 Happen?

To understand crypto winter in 2022, it is essential to grasp how the cryptocurrency market works. Although cryptocurrencies are decentralized technology, the market itself operates on the basic economic principles of supply and demand.

Crypto winter is a period of bearish sentiment, and the 2022 event is severe. The markets groaned for months before it finally gave way as the media, whales and regulators triggered the this crypto winter. The final nail in the coffin was the Sam Bankman-Fried and FTX saga , a case of market manipulation and criminality, which significantly affected the ecosystem.

Finally, regulatory uncertainty remains a big factor. The SEC has gone after several crypto platforms and blockchains including Binance, Coinbase, Ethereum, and Ripple. This has increased volatility, leading lots of investors and new entrants to lose confidence in the markets.

How to Survive a Crypto Winter

Winter usually gets freezing cold, almost to the point where it feels like some fingers and toes)are falling off. Crypto winter is no different. So here are five tips to help avoid getting ‘frostbite' as you keep those diamond hands steady.

1. Don't bite more than one can chew . Cryptocurrencies remain a nascent concept, and most people agree it's still early days. This means there's high risk and volatility, it's important to refrain from investing lump sums into crypto.
2. Do research . This is one of crypto's earliest mantras, and it couldn't be any truer than in crypto winter. There are thousands of coins and tokens, and the vast majority of them are either scams or ghost towns.
3. Buy the dip . This could help "buy low, sell high" and reap neat profits when the markets go back up. Crypto winters are usually a good time to stack up more coins.
4. Avoid following the ‘herd' . Online investing communities are fun, but they don't in any way replace a financial advisor. Don't follow every single piece of advice out there, as opinions are just that. Stick to a tested strategy and manage risk properly.
5. Don't be too rigid . Don't chase losses. It's perfectly fine to adjust a portfolio when necessary..

Don't Get Too Down

Crypto winters are typically disheartening for investors and builders. But they don't have to be. Investors shouldn't be swayed by the negative sentiment and propaganda of permanent market bears.

It's important to focus on the valuation of a coin or project, and let that be a compass. Winters are a time to build, in silence and in anticipation of the market recovery.

Remember to do research and stay updated on market movements. Also, it's always best to buy the rumors, and sell the news. It's also never a bad idea to consult an investment professional for help. Crypto goes through cycles, and it's important to follow the market trends whether it's a summer or the depths of winter.