Grab your coat, Crypto winter may be coming
Anyone who’s been involved in the crypto space long enough knows that crypto winter eventually arrives. Crypto is very volatile and has regularly "crashed" anywhere from 20% to 50%. But for the purposes of this article, a ‘winter’ is defined as a decline of 70% or more over a period of at least 10 months.
Since Bitcoin launched in 2009, there have been four winters. The most recent was in 2018 when bitcoin peaked at $20K, and over two months the price fell 70% to $5,900, traded sideways for most of the year and hit a new low of $3,100 in December. This represented a drawdown from peak to trough of over 83%, before a significant rally in 2019. Bitcoin did not reach $20K again until December 2020, making that winter three years long.
The most recent bitcoin pullback from the November high of $69K down to $38K at the time of writing is a drawdown of ‘only’ 45%, but considering where bitcoin is in the halving cycle and the lack of strength to start the year, grumblings about crypto winter have started to arise.
Vitalik Buterin, the founder of Ethereum, commented last week that “many crypto developers wouldn't be unhappy to see a continued slide in the price of digital currencies, as the slump could clear out less-viable projects”, and that crypto winter could be a positive. (1)
However, as an investor, what can one do to seek to benefit from a crypto winter and come out of it nice and warm?
Dollar-cost average – At current price levels, bitcoin may be mid-cycle, it may simply bottom here and go on to make new highs, or it may continue to fall another 40%. No one knows, and it’s impossible to time the market. Crypto is extremely volatile and has spent over 80% of its history in a drawdown greater than 20%. (2) One way to seek to take advantage of this volatility is by using a dollar-cost average strategy (DCA).
DCA is the process of buying an asset in small portions over time to reduce the impact of volatility and average out the overall entry price paid. Rather than hoping you are buying at the bottom and purchasing your total allocation all at once, multiple buys across a period can reduce your average cost and increase the exposure that you otherwise would have bought at a higher price.
DCA works against you in a rising market, so you want to ensure you are implementing this approach throughout the complete cycle, catching large drawdowns. Considering how quickly crypto markets can turn around, the shorter the time between purchases the better, as periods of a month or longer could mean you completely miss out on a dip.
Staking – If you are invested in a token that you have deemed worthy of a long-term hold, then you can consider putting it to work through staking. Staking involves locking up or committing your coins for a period of time to help support that blockchain’s consensus method for processing transactions and creating new blocks. In return, you are rewarded with additional tokens. In the legacy financial system, it is akin to lending money to a company by purchasing a bond and receiving interest payments as compensation. Not all tokens offer "staking," but many layer-1 (the term that's used to describe the underlying main blockchain architecture) protocols do, whether through an exchange or through the network.
Do your own research – When markets are rising strongly, it is not uncommon to purchase crypto simply because the price is going up and before any real research is done. But if prices are headed south, FOMO (fear of missing out) is not a factor. You have the time to do the research required to determine if a project is worth investing in, and you will have the benefit of buying at lower prices.
According to Coinmarketcap, there are over 17,000 cryptocurrencies available (3), most of which are unlikely to be around in five years’ time. What will determine survival is if users believe in it, the utility it brings to the table and the value you get from it. Ask yourself, what problem does the protocol try to solve, how big is the community pushing it forward, and does it have staying power?
Just HODL (Hold On for Dear Life) – It’s easy to make money in a crypto bull market. It’s even easier to lose most of it in a crypto winter. But for the projects that have longevity - Bitcoin and Ethereum being the best examples to date – another potential strategy could be to sit on your hands and do nothing. In fact, in the case of bitcoin, you could have purchased at the highest price of any year and if you had held for a minimum of four years, your position would have been well ahead. If you have patience and are willing to wait, if history is a guide, doing absolutely nothing might serve you well.
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Justin is the Head of Digital Assets, leading sales efforts on cryptoassets, educating and informing clients as they consider investments into this emerging and exciting asset class. He also contributes to the formation of digital asset strategy...