Keeping warm during the “Crypto Winter”
Economies have boom and bust cycles. Stocks have bull and bear markets. And cryptocurrencies have crypto winters, indicating a prolonged period in which tokens decline in value and trade well below previous highs.
(Notably, there’s no similar concept for a crypto summer. Are we all just that pessimistic or should we officially coin the term crypto summer here on the Bridges Blog?)
Where do crypto winters come from?
Here, again, we can draw parallels to stock markets. You see, more than profits, p/e ratios, and other factors, the stock market is driven by investor confidence — in other words, how investors perceive the likelihood of earning positive returns relative to the risks they assume.
An identical concept — investor confidence — operates in the worlds of cryptocurrencies and decentralized finance. Typically, crypto winters are precipitated by some sort of event that shakes investor confidence.
Such an event can come from within the world of crypto, such as the crash of Terra earlier this year, or it can be driven by events outside of crypto, such as a large-scale economic contraction — reminding us of the fact that no asset, no matter the type, is entirely recession proof.
We’re not in the first, or the last, crypto winter.
With a market cap of almost $400 billion and a history dating back more than 10 years, the trading price of Bitcoin (BTC or ₿) is considered a bellwether of the broader crypto market. And Bitcoin, too, has experienced at least four (4) crypto winters in the past decade:
So how do you keep warm during a crypto winter? For starters, it’s less about getting out of the cold and more about making the right moves as things start thawing out.
As we stated earlier, the defining characteristic of crypto winters is that tokens trade well below their previous highs. And although we don’t offer investment advice on this blog, the math is what our point is: it’s easier to realize higher-percentage gains when an asset’s price is low compared to when it’s high.
Let’s talk about that crypto summer.
The inherent cynicism of the term “crypto winter” paints a picture of DeFi as a risky space where fortunes are lost but not made. But reality couldn’t be further from the truth. The market cap of all cryptocurrencies totals nearly $1 trillion and, even in today’s environment, many still trade well above where they launched — meaning investors are still holding onto significant gains.
To attract new participants into DeFi, crypto influencers and thought leaders ought to emphasize three important truths:
- That summers follow winters, even if the turnaround takes an extended period of time
- The biggest gains are made when buying tokens during a downward turn in the market
- Long-term holders are substantially more likely to enjoy persistent gains
In the current crypto winter, it’s still a good time to buy, even though many tokens appear to have already hit their lowest point and are finally on the rebound. Like the real seasons, crypto winters don’t last forever–and perhaps that’s the real point of it all. Crypto winters are temporary phenomena and often go as quickly as they came in.
And now that we’re in one, we can be more confident that summer is just around the corner.