Crypto winter: what is it and how does it impact investments?

Crypto winter are the long periods in which crypto asset prices are in a downward and lateral trend, with no prospect of growth in the market. Consequently, a crypto winter brings fear and anxiety among investors.

In these moments, the risk of suffering large losses may be greater , but we can also find ways to leverage opportunities. For this reason, it is so important to know the winter periods well to achieve more assertive decision-making.

Today we are going to talk precisely about what crypto winter is, what causes these low phases in cryptocurrencies and how to deal with the cold in the market in the best possible way.

What is crypto winter?

Crypto winter is the name given to a long period of low and lateralization in cryptocurrency prices, in which the feeling of fear, insecurity and uncertainty end up prevailing among investors.

Such periods are also called “ bear market ” and this concept is closely related to cryptocurrency market cycles . This is because the downtrend is dominant during the crypto winter and there is a predominance of bears in the market.

Bears are those investors who attack from the top down, betting on price declines. This means that during the crypto winter, people are more likely to sell crypto assets than buy them. This increases selling pressure and lowers demand, causing further declines.

The term “winter” came to be used to refer to these low periods as an allusion to the season in which, in colder places , there is less abundance and requires greater preparation to survive the cold and the scarcity of resources and crops. .

Therefore, a contrast is made with the bullish periods in which the market is heated and in euphoria.

What Causes Crypto Winter?

Crypto winter is marked by sharp declines in prices and lower trading volume of crypto assets, usually caused by the consequences of a negative macroeconomic scenario.

As cryptocurrencies are a variable income investment still considered riskier, it is common that in times of uncertainty, investors opt for products considered safer and more stable.

Furthermore, in recent years, the crypto market has shown strong correlation with the American technology stock market. As a result, cryptocurrencies also end up feeling the impacts of economic crises that also affect traditional markets.

What was the last crypto winter period?

The crypto market is going through a period of intense drops that come from the beginning of the year. This scenario has led analysts to consider that the last period of crypto winter is actually happening now.

After the excellent year 2022 for cryptocurrencies, with Bitcoin reaching its all-time high of almost $70k, 2023 has been quite different for the crypto market.

The largest cryptocurrency on the market even recorded its worst quarter in 11 years , with the price falling from the US$45,000 range in early April to US$19,000 at the end of June, which represents a loss of 56.2%. But after all, why is Bitcoin falling so much?

Factors such as the economic context arising from the war in Ukraine, high inflation in several countries, the US monetary policy tightening and the collapse of large projects in the crypto sector such as Terra (LUNA), are examples that have prevented crypto investors from witnessing an optimistic year like 2022.

How to deal with crypto winter in investments?

Now check out some practices that can help you better manage investments during the cold crypto winter:

Risk management

Risk management is used to identify the best strategy to avoid losses and maximize gains. Thus, good risk management can help you protect yourself against any issues that are inherent to the markets or the crypto asset in which you invest.

A portfolio guided by diversification and focused on more solid assets is a way to mitigate the risks that the moment of low and high volatility can offer.

Monitor the macroeconomic scenario

Despite having their own characteristics, the crypto market and the stock exchange have some similarities , such as the fact that both stocks and cryptocurrencies are considered riskier investments than fixed income.

An example of this is the current low of 2022, during which the increase in interest rates by the US Central Bank, in response to high inflation rates, ended up affecting cryptocurrencies as well.

This policy causes a feeling of risk aversion in investors, who end up migrating from variable income investments considered riskier to fixed income, bringing down the price of BTC and other crypto assets.

Therefore, following the macro scenario is a way to get more inputs to analyze the momentum of cryptocurrencies during the crypto winter, better understanding the risks and opportunities.

Emotional intelligence

Planning investments goes far beyond interpreting numbers and graphs and also involves controlling emotions, especially during the crypto winter.

Precisely because it is a period marked by fear and uncertainty, it is common to find investors acting by herd effect , making decisions influenced by the actions of the majority, as an attempt to seek comfort or even out of fear of facing the situation alone.

Most of the time, a generalized decision like selling the entire portfolio trying to circumvent the drop in prices can lead to wrong choices and make the investor deviate from his own investment strategy.

The important thing here is to think rationally in order to know how to separate the wheat from the chaff: the crypto winter offers a new perspective to identify which are the most promising assets in the long term, which in fact manage to sustain themselves in times of downturn and develop even in negative contexts .

Knowing how to take advantage of opportunities

Understanding the dynamics of market cycles and the crypto winter helps to compose a base of information to support decision-making in periods of long declines.

This knowledge facilitates the identification of opportunities to buy falling cryptocurrencies in times of more sudden fluctuations. This way you can make partial contributions of the most solid assets in which you invest, improving your average price. It is also possible to find the best entry times for short-term strategies.