Weathering the crypto winter

The financial markets are going through a period of turbulence. Equity markets have recently dropped into what’s known as bear market territory, but the cryptocurrency space has been there for several months already. 

Now, many market participants are freely calling the current downturn a “crypto winter”. Let’s break down the difference between bear markets and a crypto winter and learn what both of these mean for the markets and investing.

What is a bear market?

A bear market is a sustained, long-term decline in the price of a financial asset, such as stocks, bonds, and cryptocurrency. Bear markets can last from several months to several years and are usually characterized by stock prices falling 20% or more from their most recent highs. 

The word bear, concerning markets, is thought to have come from the London Stock Exchange in the 17th century when offers to buy and sell were physically posted on a bulletin board. If there were no offers, the board was "bare" - later turned into a "bear market".

Are we in a crypto winter?

Crypto winter is a term that describes a rapid and prolonged decrease in cryptocurrency value. It is more than just a bear market. Prices can fall as much as 50-90% and remain depressed for many months. That type of drop is almost unheard of in traditional financial markets, leading to a new descriptive term. In December 2018 the news platform Bloomberg coined that new term, when they said that Bitcoin had entered "crypto winter." Today, this phrase is used quite often when there are large price losses in the crypto market and a recovery is not expected soon.

With Bitcoin 70% off its November 2021 all-time high we can easily say that we are in the midst of a crypto winter now. With that said, you’re probably wondering, like many others, how long this uncomfortable phase can last and what you can do to survive the frosty crypto markets. In this article we take a closer look at the topic.

It’s not the first winter

This is not the first time crypto markets have descended into a crypto winter. We’ve seen this type of behavior several times in the past. Are there any common trends in past periods that might translate to today’s crypto winter? Let’s look at past periods to see.

2012 – This is the first time Bitcoin has suffered from persistently declining prices. Within six months, the price fell by about 40 %. But considering the lack of other competing blockchains, we can’t call it a crypto winter. Rather, it was a bear market.

2013 – This was the very first crypto winter, and it lasted from November 2013 until January 2015. Over those 14 months Bitcoin declined 83%.

2018 – Bitcoin falls from $19,000 to below $7,000 in under three weeks. After a bounce Bitcoin will grind lower to under $3,500 in the following 12 months for a loss of just over 80% from the high. The term crypto winter appeared and was soon heard around the world.

2020 – After tripling over a three-month span Bitcoin began an eight-month slide that would see a 60% loss from high to low.

2021 – Not really a crypto winter as the drop in price and recovery was very rapid. This is more along the lines of the traditional bear market and what’s known as a “V” shaped recovery.

2022 – In a similar fashion to 2018 crypto winter Bitcoin’s price was cut in half in just two months, followed by a brief bounce. After this hopeful recovery, the price of Bitcoin has capitulated and is now roughly 70% below the all-time high.

The interesting thing is that these crypto winter markets also have some similarities with traditional financial markets. If we look at the three previous times that qualify as a winter event (2013, 2018 and 2020) we can see that the average duration is 11.3 months. Bear markets in equity markets historically last 9.6 months – not so different. Of course the the price drop in cryptocurrencies is far greater than the 35.6% average decline in stock markets, but that can be attributed to the increased volatility seen in the emerging crypto markets.
 

The current winter period in cryptocurrencies is nothing new. What may be new is the reasons why we’re seeing a winter period. In the past these downdrafts were primarily created by events within the cryptocurrency space itself. Hacks, lawsuits, threats of government bans and the like were the catalysts for previous crypto winter periods.

Why markets fall

Prior to the 2013 crypto winter the market suffered bear markets, but nothing as deep and extended as the freeze investors would experience in winter. For example, the first half of 2012 saw a 40% decline in the price of Bitcoin. The primary reason was the regulatory shutdown of TradeHill, then the second largest Bitcoin exchange. Also contributing was the Bitcoinica hack, where 18,000 BTC was lost, and the Linode hack, where 46,000 BTC was taken.

What sparked the 2013 winter?

The 2013 crypto winter was far worse. It lasted for 15 months, and the largest drop was 83% from top to bottom. A number of events factored into this period of time, but it’s widely agreed that the catalyst for the 2013 crypto winter was the shutdown of Silk Road by the FBI. Silk Road was an online black market, often referred to as the very first darknet market.

Once the slide began Bitcoin and crypto were dealt a massive blow in February 2014 in the form of the infamous Mt. Gox hack. This was the largest hack of its kind, with 744,000 BTC, valued at roughly $400 million at the time. The price of Bitcoin declined 36% over two months in response to this event.

The market did see a bounce after this massive decline in a short period, but it was a trap. From 10 April 2014 to 28 May 2014 Bitcoin gained 64%, though there was no significant event to spark such a rise. And after reaching a high of $683 price turned sideways and by August 2014 was back in a downtrend that would eventually see a low of $152.40 in January 2015.

The 2018 decline

The crypto winter in 2018 doesn’t have a single catalyst, unless that catalyst was over exuberance. Late 2017 saw crypto markets booming, as the ICO became increasingly popular as a means to raise funds, and hundreds (if not thousands) of new projects came online to take advantage of cryptocurrency as a funding mechanism.

At the same time optimism over the entire space was growing, and equity markets also contributed as tech and digital stocks became some of the most highly valued. Much of the gains seen in 2017, when Bitcoin went from roughly $800 at the start of the year to $19,666 at its December 2017 high, came from unleveraged retail traders.

Of course it was unsustainable. By December 2017 the industry was beginning to crack, seeing multiple scams and failed startups. The breaking point came with the launch of Bitcoin futures on the CME, roughly at the high for Bitcoin. The launch of futures allowed for leverage, and also allowed institutional investors access to Bitcoin derivatives. They promptly began to short Bitcoin, putting unprecedented selling pressure on the market. At the same time rumors of a potential crypto ban by China and other Asian nations created FUD (fear, uncertainty, doubt) that added to the downside pressure.

As a result Bitcoin saw a massive 70% drop from its December 2017 high to early February 2018. As we often see following such a sharp decline there was a dead cat bounce, followed by the prolonged downtrend that marks a crypto winter. There was little interest in the space by investors who were burned, muted activity from developers as potential new regulations caused uncertainty, and a lack of liquidity.

Is 2022 different?

The causes of the current drawdown are not the same as in past cycles. Yes hacks do continue to occur, but they are typically smaller in scope. Yes institutions are still investing in crypto markets, but they are interested in buying rather than shorting. Investors have somewhat acclimatized to potential regulations and crypto bans by various nations. This time the causes were more comprehensive. Macroeconomic concerns, inflation, the threat of a global recession, geopolitical turmoil – these are the catalysts for the current bear market. Indeed they are the same factors that are causing stock markets to implode. That’s key because with the addition of so much institutional money to crypto markets we’ve also seen an increased correlation with the traditional equity markets, as well as a drop in volatility.

Financial markets across the board are seeing immense pressures caused by the war in Ukraine, the massive spike in global inflation, and the prospect of central banks raising interest rates for months to come. On top of it all is the fear of a coming global recession.

On a more positive note, the crypto industry as a whole has become increasingly accepted by the mainstream. The growth seen from interest in the metaverse and increased demand for crypto products and services should help the market when a recovery comes, possibly leading to an even stronger crypto ecosystem once the winter recedes.

Lessons from crypto winters

We’ve seen the effects of previous crypto winters and can already take some lessons away from those events. As mentioned above, these events in cryptocurrency markets aren’t too dissimilar from bear markets in traditional equity markets. And they also provide some of the same benefits.

One of these benefits is that weaker companies or projects get weeded out of the ecosystem, leaving strong companies the chance to mature and improve their products. Once things thaw, a period of tremendous growth is often the next stage.

This means that focusing on these stronger companies with a proven track record could be a positive strategy, just as it often is when stock markets head into bear market territory. Of course the turnaround isn’t likely to be immediate. The macroeconomic environment will take months if not years to turn positive. But in the meantime these strong projects should continue to improve and increase their own market share.

We can also look back to know that, on average, the crypto winter period will last a bit over 11 months. We’re likely about 7 months into the current winter based on the November 2021 all-time high. That should mean we can start to look for signs of thawing in the final quarter of this year. Not only does that mesh with the historical length of the crypto winter, it’s also in-line with the timeline put forward for recovery in the global economy – driven by current monetary policies. However, there are also experts who believe that it may take more time before things pick up again. 

Investing for the long term

A key lesson from the past is that Bitcoin has so far emerged from every crisis stronger than ever. And other cryptocurrencies and the market as a whole have also benefited from this. Perhaps the greatest lesson from the recent past is that crypto markets aren’t so dissimilar from traditional markets any longer. That’s probably the result of so many traditional players in the finance industry now participating in the cryptocurrency space. And that means a crypto spring is almost surely coming. We just need to be patient. 

Investing means thinking long-term. Crypto investments are about digital transformation, the possibilities of blockchain technology and future development steps. If you are convinced of the potential of cryptos, you can calmly get through bear markets and crypto winters.

A good way to deal with frosty markets is to review your portfolio and consider where you might be able to make small investments to take advantage of the current low prices. Register now with SMART VALOR – your trusted gateway to digital assets.