Research shows that crypto winters have a huge impact on investor mindsets. If you look at the price history of cryptocurrencies, it is sometimes easy to spot a crypto winter because the drop can be accompanied by a double-digit percentage decline in cryptocurrency values. Let's look at what crypto winter is, why it worries investors so much, and how it differs from a bear market.
What is crypto winter
Crypto winter is a common expression that refers to an underperforming cryptocurrency market. The term is comparable to a bear market in the stock market. A crypto winter means negative sentiment and lower average asset values among a large swath of digital currencies. There have been several crypto winters in the past. For example, from late 2017 to December 2020, cryptocurrency prices fell and remained far from previous high prices. However, in December 2020, prices exploded to all-time highs in a major cryptocurrency bull market. There are no specific, widely accepted guidelines for how much cryptocurrency prices must fall for it to be considered a crypto winter. But market leaders and influencers tend to agree publicly when one has started, as was the case in early 2022. Due to the volatility of cryptocurrency markets, it is impossible to accurately predict future price changes. However, it is prudent for crypto investors to be aware that crypto winters do happen.
Crypto winter periods since the 2017 bull rally. Source: World Economic Forum.
Why is a crypto winter so worrying?
Although the stock market has shown a pattern of ebbs and flows, cryptocurrency has a much shorter history, spanning just over a decade. Any crypto winter is likely to last forever. In the worst-case scenario for investors, a long-term cryptocurrency winter could lead to increasingly lower asset values as they approach zero. Cryptocurrencies and cryptocurrency exchanges operate under minimal financial regulations. Although several cryptocurrency companies have fallen into the crosshairs of regulators, most of them operate with little scrutiny. This sets the stage for fraud and scams that consumers should be aware of, including the risk of loss when holding cryptocurrencies long term.
How crypto winter is different from a bear market
The term bear market usually refers to a period in which stocks lose value, often due to a combination of economic factors. Although a bear market and crypto winter may coincide, they are not necessarily correlated. Stock prices are determined by market forces, and investors rely on fundamental and technical analysis strategies to determine target prices. In the case of cryptocurrencies, valuation models are in their infancy. This can lead to a huge disconnect between stocks and cryptocurrencies. However, as the crypto winter that began in 2021 demonstrates, there is also the possibility that a bear stock market could occur simultaneously with a bear cryptocurrency market.
Correlation between tech stocks and Bitcoin from 2019 to 2023. Source: Bloomberg.