Crypto winter is quite a scary topic for a crypto investor, but it is inevitable in the crypto market cycle. Bitcoin (BTC) is now worth less than half of its all-time high, and the prices of many other cryptocurrencies have dropped even more. When you think about the effects of the ongoing economic tightening measures and the possibility of a recession, it’s time to face the fact that winter is here.
How to survive a Crypto Winter
One way to get through a long period of falling prices is to keep in mind that dips, especially longer ones, are a normal part of investing. This can help investors keep things in perspective when prices go down, which may help them avoid selling out of fear. But reducing as many extra risks as possible is even more important. Investing in cryptocurrencies is already a risky business, and the risks are even more obvious during a bear market. Here are some tips you can appear to stay safe during bear season;
Plan for the winter, since it is traditional that most cryptocurrencies will fail.
During the last crypto winter in 2018, several projects didn’t make it. Although the industry has grown, a lot of cryptocurrencies could still fail next year. Smaller altcoins with little or no use have a higher risk of fading away, while cryptos that have been around longer, have a better chance of hanging around and making it in the long run. For now, you should focus on bigger crypto projects.
Another risk to think about is that the crypto platforms themselves could fail. We know that some of the best cryptocurrency exchanges are already having trouble and have had to let people go. In a blog post about cutting jobs, Gemini spoke about a “crypto winter,” which immediately followed the biggest cryptocurrency lender, Celsius, quitting withdrawals on its platform.
If you keep your digital assets in a custodial wallet on a crypto exchange or lending platform, find out what protections you have if the platform goes out of business. For example, Coinbase told its customers that their assets could be at risk if the company went out of business. The same risks could happen to funds on other exchanges.
Even if none of the big players stop trading for obvious reasons, you still have to protect your cryptocurrencies. One way to protect yourself from platform failure is to move your digital assets to a crypto wallet you control. Remember that this path requires extra caution. For example, there is no “forgot password” button on your wallet if you forget the password. Some investors are worried about this storage method because billions of dollars worth of Bitcoin are stuck in wallets that people can’t assess.
Don’t invest money you can’t afford to lose.
When buying high-risk assets, the golden rule is to only use the money you are willing to lose. If you buy crypto with money that you need for other long-term financial goals, a complete collapse of crypto could ruin your plans. You may also have to sell your assets at a loss because you can’t wait for prices to go up again as you’re urgently in need of your funds.
Instead of investing in crypto, you should focus on other goals, such as building an emergency fund or paying down debt. It’s also smart to make sure that crypto is only a small part of your portfolio as a whole. So, if crypto fails, you can still fall back on other, safer assets. Once the crypto market gets back on its feet, prices may rise again. But it’s also possible that the price won’t, so you don’t have to bank on it.
Be ready for more price drops
When crypto prices drop, the popular advice is to “buy the dip.” This can make sense sometimes, but there are a lot of things to keep in mind. Most importantly is the fact that prices may go down even more. If you had bought Bitcoin when it was down about a third from its high in November to January, you would still be looking at a big loss today.
Some investors use dollar-cost averaging, which is when they buy smaller amounts of investment at regular intervals to manage risks. Instead of spending $1,000 all at once on Bitcoin, for example, dollar-cost averaging might mean spending $100 at specific intervals. So, you’re stuck in finding a perfect entry, and if the price keeps going down, you’ll be able to buy at least some of your BTC at a lower price.
Reduce exposure to volatile altcoins in a crypto winter.
Once a widespread market downturn starts, the first step is to reevaluate current positions and reduce exposure to the most volatile assets.
Many token holders are new to the community and not long-term investors like the user bases of more established projects.
One good way to start evaluating a project is to look at its GitHub account to see how active it is and how many developers are working on the protocol.
Even if there are flashy marketing tricks and big promises, and the project hardly progresses, an investor may want to cut it when the market starts to slow down. Traders could put these funds into stablecoins, which can be staked to earn interest or to buy dips in the market in the future.
Staking is probably the easiest way to increase the value of a portfolio over time, and it takes away the need to worry about daily price changes because the staked asset keeps gaining tokens.
Most layer-1 protocols, like Solana (SOL), Cardano (ADA), Polygon (MATIC), and Avalanche, allow you to stake your token on the network to earn a return (AVAX).
Ether holders can also stake their tokens on the beacon chain for Eth2. Staking rewards can’t be claimed until Eth2 is fully launched, though.
There are many other ways to stake, including gaming protocols like Axie Infinity and Illuvium and NFT marketplaces like LooksRare. Once a deep dive has been done and fundamentally sound projects have been chosen, staking becomes a matter of setting it and forgetting it.
The Winter season can be disheartening, and sometimes it seems like the sun will rise again. But both seasons and markets go through cycles. Just like spring and summer come after winter, bear markets come after bull markets. History shows that stock prices have always gone back up in the long run.
The problem with cryptocurrencies is that they are riskier than stocks. It’s still a new market that is yet to be regulated, and there is a small chance that it could fold up. So far, Bitcoin has been able to recover from even big drops and reach new highs. As a long-term investor, there are many reasons to think it will do so again. But to make it through a long winter, you need to plan for the worst and hope for the best.