The Crypto Winter: What is it and what can you do about it?
*SPOILER ALERT* Although this may surprise you, I’m in fact not a fortune teller nor do I have a DeLorean that can travel through time. As much as I wish I could, I can’t accurately predict exactly what will happen in the market, crypto or otherwise. What I can do is tell you what is going on right now and what are some options that may help moving forward. Before we get too ahead of ourselves, I want to remind you that everyone’s personal financial path is different. Some routes are best left not taken, while some can be extremely beneficial. Before you embark on a plan, be sure to do your own due diligence and make sure you’re happy with the possibilities, whether they be positive or negative. Cryptocurrencies especially are very speculative, so you should never invest more than you’re prepared to lose. So, what is going on with crypto right now?
What is “The Crypto Winter”?
Crypto Winter is essentially a prolonged period of time where we see significant decline in the value of relatively all Crypto. You can think of it kind of like a Bear Stock Market but for cryptocurrencies. Except unlike the stock market where we consider a Bear Market to occur only after there has been a 20% decline from the most recent high, the Crypto Winter is generally much more severe. For example, the most recent Crypto Winter occurred towards the beginning of 2018, where we saw roughly an 87% decline in Bitcoin from it's all time high and 88% loss in market value across all crypto and didn’t recover for 716 days. Now, the previous Crypto Winter only lasted 335 days, but with the relative “new-ness” of cryptocurrencies, we don’t have a lot of data to really predict how long a winter would last. One thing though is certain; Cryptocurrencies are extremely volatile with huge swings.
Right now, it is safe to say we are in a Crypto Winter. As of writing this, we’ve seen a 43% drop in Bitcoin since it’s all time high on November 10th and about a $1.6 Trillion loss in Total Market Cap across all cryptocurrencies over the same time. That’s more than the total Market Cap of Alphabet, Google’s parent company, today! Of course, we should also note that all markets are currently down with the Nasdaq, S&P, and DowJones down 24%, 14%, and 10% for their year to date respectively. Also, with significant inflation and rising interest rates, there is a lot to consider why the markets may be down.
So, What can I do about the Crypto Winter?
There are realistically just three options we can consider. Now, these can be used in combination with each other and to what amount is purely dependent on your personal risk tolerance and financial standing. To be repetitive, you have to do what’s right for you and your financial goals. So, let’s break them down:
Option 1) Sellout and Run
Now, this drastic measure is likely not your first choice nor your best. If you’re already heavily invested in cryptocurrencies, you likely believe in them and definitely don’t want to sell out of all your coins. With most market downturns, we usually see corrections across the total market landscape. What does that mean? If you’ve invested in the more trustworthy, tried and tested cryptocurrencies like Bitcoin and Ethereum, there is a better chance these will recover based on our limited historical data. Of course, that isn’t a guarantee.
“Luna couldn’t keep up with the burned Terra”
So, why would we do this? One reason is if you find yourself over extended, meaning you’ve invested too much money into cryptocurrencies and you now need that money to pay bills. In that case, it’s better to divest at least what you need now and pay those bills than risk watching yourself going broke watching the value of your wallet fall day after day. Another reason may be if you’re heavily invested in highly speculative or newer coins. These coins are generally more volatile and risky and we don’t know how they’ll react to this extreme market. It may be worth divesting to protect the funds you have left rather than risking it all and being left holding the bag. For example, if you’ve been paying attention to Crypto News recently, you’ve likely heard about the Terra (UST) Crash. To try and make a long story short, Terra was what is called a stable coin, meaning a cryptocurrency that’s value is tied to another asset and protected. In this case, that asset was the US Dollar or in simple terms;
1 Terra (UST) = $1
Now, Terra was different because it was an algorithmic stable coin, meaning it used a computer running formulas to try and keep its value pegged through regulating supply with another coin, Luna, instead of having a reserve of physical cash to back it. The way it essentially worked was when the value of Terra dropped below $1, users could “burn” the Terra coin and receive an equivalent value in Luna, which had a fluctuating value. However, when Luna started to crash, Luna couldn’t keep up with the burned Terra and Terra ended up falling to $0.31 on May 11th. Now, if you had all your life savings tied up in just that one coin, it would be smart to sell out before you lose it all. Now, if you’ll only invest what you’re ready to lose and you still believe in Terra, then maybe hold on, but there is no guarantee it will.
Option 2) Buy the Dip
“What you are basically doing is buying at a discount”
Now maybe you only have a very small crypto investment and can afford to increase it or you haven’t even started with crypto but want to, now may be a time to buy. If you’ve done your research and you expect the value of certain cryptocurrencies to recover, you could Buy the Dip, meaning purchasing into an asset at its lowest value before a rise. What you are basically doing is buying at a discount because you expect the asset will be worth much more in the future. It’s like if you could buy a Lebron James Rookie Card for $1 knowing you can sell it for $100 next week. You just have to predict where the value will go. If you haven’t bought in and decided now is your time to buy, you can use these links for Coinbase or BlockFi and earn some bonuses! (→Coinbase← & →BlockFi←)
A warning though, this can also be risky. Trying to speculate when the best time to buy an asset is very difficult. Without a crystal ball to see into the future, we really don’t know what will happen with an asset or in this case crypto. You could buy today expecting this is the bottom, but the value could just keep dropping. You might see a short surge so you think it’s recovering, buy in and watch the price keep going up expecting it to never stop, only for the price to fall back down again and you could panic and choose to sell. Honestly, you just can’t be certain what will happen when and it’s historically more likely than not that the average investor is wrong in their timing. You can try and make an educated guess based on news for that crypto, possible advances in that system, or it’s future utility but that doesn’t guarantee it will increase in value from when you purchase.
Option 3) Just Dollar Cost Average
Dollar Cost Averaging is a method of investing where you make frequent, continuous, smaller contributions into an asset over time regardless of the asset’s price. This can help reduce the impact of volatility for your investment and is often considered one of the safest strategies by experts. To demonstrate how this works, let’s say you plan to invest $1,200 total;
Initial Investment = $1,200
Investment Time Frame = 12 months
Dollar Cost Average = $1,200 / 12 months = $100 per month
Now, we use this investment strategy to buy an imaginary crypto, Awesome Money Coin (AMC) starting at $20 per coin. However, the next month, the value drops to $10 when you buy, then back up to $20 the month after, then back down to $10, and so on for all 12 months ending back at $20 per coin when we review our investment. Again, you invest $100 a month no matter the change. After a year, this looks like;
AMC = $20, 5 AMC x $20 = $100
AMC = $10, 10 AMC x $10 = $100
(5 AMC x 6 months) + (10 AMC x 6 months) = 90 AMC
Initial Investment / No. of Coins = Average Cost
$1,200 / 90 AMC = $13.33 per AMC
So, you’re Investment Gain and Return on Investment (ROI) at the end of the year would be;
Investment Gain = (No. of Coins x Present Value) - Initial Investment
(90 AMC x $20) - $1,200 = $1,800 - $1,200 = $600
ROI = Investment Gain / Initial Investment x 100%
$600 / $1,200 x 100% = 50%
So we can see we made $600 over the year or a 50% return on our investment. Now, let’s compare that to if we just invested all our money right away as a lump sum;
AMC = $20, 60 AMC x $20 = $1,200
After 12 months AMC = $20
Investment Gain = (60 AMC x $20) - $1,200 = $1,200 - $1,200 = $0
ROI = $0 / $1,200 x 100% = 0%
As you can see, after all the volatility and change in price, if you invested everything at the beginning of the year, you would just break even but when you used Dollar Cost Averaging, you actually made a substantial return. Of course the argument could be made that if you bought at $10 per coin each time and sold at $20 per coin, you would make a much more significant return. Unfortunately, that would only work if you knew exactly what the coin’s value would do and when it would do that and, as said previously, your average investor statistically can’t manage to do that. With Dollar Cost Averaging, you help protect yourself against the rough volatility while continuing to invest. As the saying goes, time in the market beats timing the market.
The Wrap-Up
A Crypto Winter is a lot like a Bear Market for the Stock Market. It’s a sustained period of losses which we can’t accurately predict how long it will last. What we can do is consider what we learned from our options;
It may be time to get out of the market if you’re overly invested and need the funds now.
If you invested into an untrustworthy Crypto, it’s better to lose a little than it all.
In a downturn, it may be the time to purchase more of better proven assets, like Bitcoin or Ethereum. It’s similar to getting a discount.
The likely safest method is to Dollar Cost Average, if you continue to invest.
More than anything;
Do Your Research!
Returns are NOT Guaranteed!
Never Invest More than you are Prepared to Lose!
Generally speaking, most experts recommend investing no more than 2% of your total net worth in Crypto Currencies but everyone’s financial goals and risk tolerances are different. The plan that is right for you may not be the same for someone else. If you need help making a plan, find a Certified Financial Planner who can help you make those decisions and can provide more information on how to invest. As always, Financial Literacy is the Number 1 key to Financial Success! Keep learning!
Links
Ready to jump into Crypto? You can start investing on Coinbase with this link (→Coinbase←)! With this link, you’ll get $10 worth of Free Bitcoin after signing up and funding your account.
Looking for a different exchange to buy Crypto? Use this link to invest with BlockFi (→BlockFi←) and receive a bonus when you sign up!
*Disclosure* This is NOT financial advice and I am NOT a Certified Financial Planner. All information is provided for educational purposes only and is not to be construed as advice. Everyone’s financial situation is different and requires individualized planning. Seek out a Certified Financial Planner for assistance with your own financial situation.
*Affiliate Disclosure* This post contains an affiliate link. By clicking on the link and utilizing the service, LiveItAwesome LLC and/or the posts author may receive some form of compensation from the linked Affiliate.
