During the COVID-19 pandemic, cryptocurrency prices rose to all-time highs, eventually peaking in November 2021. Bitcoin surged above $69,000; Ethereum soared to over $4,800.
Then 2022 hit: inflation and interest rates skyrocketed, and the dreaded “crypto winter” set in. By mid-2022, crypto markets had shrunk by 60%.
In total, the crypto markets have lost more than half of their value in about a year. As an emerging asset class, cryptocurrency is known for both outsized returns and extreme volatility. For short-term investors, crypto winter may mean locking in losses; for long-term investors, known online as “holders,” this can represent a tremendous opportunity.
What is Crypto Winter?
Think of a crypto winter as the bear market for digital currencies. This occurs when the broader crypto market experiences a substantial and prolonged price decline. For stocks, a 20% decline can generally be considered a bear market. In crypto, due to its unprecedented price action, cooldowns are also much more dramatic; generally, Bitcoin fell more than 75%, with altcoins retreating deeper.
The last crypto winter was between January 2018 and December 2020, when Bitcoin prices fell nearly 80%. Throughout 2021, prices rose again amid bouts of volatility, eventually peaking in November before falling back.
Given the current downtrend since November 2021, it seems clear that another winter has arrived.
What causes Crypto Winter?
The 2022 crypto low can be attributed to several factors, but the underlying theme is reducing risk for investors.
As the pandemic ended, consumers began to spend more, while supply chains remained tangled and inflation gnawed at wallets. In the United States, and then globally, rising interest rates drove up the cost of borrowing, such as mortgages and business credit.
To escape the turmoil wrought on financial markets, investors fled riskier assets like cryptocurrencies for safer securities like bonds and gold. That didn’t help when the Terra Luna ecosystem, including its stablecoin UST, collapsed, scattering holdings, while yield and borrowing platforms Celsius and Voyager also sank.
At that time, the foundations for the current crypto winter had already been laid.
Does Crypto Winter impact all cryptocurrencies?
There is no formal definition of what exactly a crypto winter looks like. However, most experts agree that it usually affects a wide range of cryptocurrencies for long periods of time. Historically, crypto winters started with bigger coins like Bitcoin and Ethereum, morphing into smaller coins from there. From top to bottom, these periods tend to last anywhere from around a year to over 400 days.
How is Crypto Winter different from a bear market?
Crypto winters and bear markets are similar – and can happen at the same time – but they are not exactly the same.
Using the stock market as an example, a bear market typically occurs when an individual stock or a broader index, such as the S&P 500 or Nasdaq, is down at least 20% from recent or year-to-date highs in the year.
In contrast, a crypto winter is appearing in the cryptocurrency markets. As there is no official definition of what constitutes a crypto winter, there is no set metric for how many cryptocurrencies need to crash (or how far) to declare a market decline; however, this period is typically characterized by major crypto assets and the vast majority of altcoins experience significant downtrends for periods of up to a year or more.
Another substantial difference is that stock prices are determined by a combination of business fundamentals, investor sentiment, and market forces. In contrast, crypto prices are primarily determined by investor and user sentiment and coin popularity.
Either way, a broader decline can lead to widespread losses for investors large and small.
5 Tips for Navigating Crypto Winter with an IRA
Depending on who you ask, using a crypto strategy in your IRA can improve your saving efforts for the future or hamper your retirement prospects. If you’re buying crypto during the dip, here’s what to know.
Diversify your portfolio
The key to buying crypto into your IRA is to diversify your portfolio between cryptocurrencies and more traditional investments. If you invest too much in a single asset or asset class, you risk concentrated losses in a crash.
Commit to the long term
It is in the name of your IRA that it is designed for retirement, which is a long-term investment. If you’re not close to retirement, don’t waste too much time wondering where the market is today.
By focusing on your long-term crypto strategies, investments that experience corrections have time to recover and thrive.
Don’t invest more than you can afford to lose
Crypto is a relatively new investment; Bitcoin was created in 2009, and many other coins and tokens followed thereafter. The asset class has since become known for outsized returns and considerable volatility. As such, you shouldn’t invest more than you can reasonably afford to lose in crypto, even in your IRA.
Don’t believe everything you read
Online communities and forums are exciting places to talk about crypto strategies with like-minded people. However, they are also made up of mostly amateurs, who range from well-informed to simply well-informed.
Beyond the accuracy of everyone’s knowledge, crypto enthusiasts on public forums don’t know your personal financial situation. Investors should seek advice from a qualified financial advisor or CPA to discuss their personal financial goals and investment strategies.
Consider the impact of buying the dip
While no one can predict how long the crypto winter will last, this market – just like the stock market – has frozen before. If you think the downside is just that, buying crypto now could mean higher gains down the road.
However, understand that there are no guarantees; if crypto markets recover, buying the dip means more coins for your dollar than at higher prices, and lowers your average cost per coin (or token), a potentially powerful strategy.
Will Crypto Winter hurt my IRA?
Crypto is an unusually divisive financial asset. Some people think this is the future of money and investing; others claim it was a bubble that seduced otherwise reasonable investors. Fortunately, history suggests that bull and bear cycles in crypto are normal, as icy lows eventually give way to recovery and potential new highs.
What Happens During a Crypto Winter?
During a crypto winter, the prices of various cryptos drop dramatically and stay there for an extended period of time. The move may result in losses for investors, but has historically also presented significant opportunities.
When will the crypto winter end?
It is impossible to accurately predict when the crypto winter will end. The last crypto winter took about a year (December 2017 to December 2018) to find a bottom, and until fall 2020 before the next major surge took place.
What time is it best to buy cryptos?
As with other assets, it is best to buy crypto to make a profit on a pullback or decline. However, it is impossible to accurately determine the bottom of a cipher dip until it has already passed. Averaging has been considered by many to be a generally reliable strategy.