“You know nothing, Jon Snow, winter is coming!” — Many have predicted it, few believed it, yet here we are in the middle of another crypto winter.
But what exactly is a crypto winter, what created it, and what can we do about it?
Let’s take a brief foray into the history of crypto, touch on some basic economics, draft some plans, and review a few tips and tricks on managing the situation.
What is a Crypto Winter?
A “crypto winter” generally refers to a broad cryptocurrency market sell-off followed by muted activity and slow price recovery. In traditional finance terms, think of a bursting bubble, creating a bear market leading to an economic recession.
The Great Crypto Winter of 2018
Previous crypto crashes were predominantly a sector-specific phenomenon caused by increasing mainstream adoption of crypto trading. Ever-increasing reports of exuberant gains from early token investors tended to spread like wildfire and created a market frenzy, largely uncorrelated to broader, more traditional markets.
While the crypto winter of 2018 was the most prominent yet, it was not the first. According to Wikipedia, since Bitcoin launched in 2009, crypto markets have seen no less than four major market crashes.
And while the first three received little attention from the public, the 2018 crypto-crisis is still very much on the minds of investors and companies.
Since 2008, loose monetary policy, cheap fiat lending rates, and a booming global economy allowed many new participants loaded with cash to enter crypto markets, fueling token price appreciation, often regardless of the actual value of the underlying project. Blockchain projects sprouted in every area, de facto letting anyone create their own money, creating a booming but vulnerable niche market where no one wanted to miss the boat.
Following a massive bull market in 2017, the start of the 2018 Crypto Winter can be traced back to a few significant crypto-related issues, such as the BitConnect incident and the restriction of cryptocurrency investments in certain countries.
What’s Different With the 2022 Crypto Winter?
Since 2018, crypto markets have gotten used to regulations and restrictions, and utility token projects have moved to the forefront of investor and company interest.
Over two years, Bitcoin and most other tokens reclaimed their pre-crisis levels, and a new bull run began in 2020. After all, the global economy was booming, and people had ample time during Covid-19-induced lockdowns to familiarize themselves with blockchain and cryptos. And if crypto was not mainstream before 2018, it certainly was by the end of 2021. New applications such as DeFi and NFT projects flourished, and everyone was suddenly a crypto expert.
This sentiment shifted harshly in early 2022. Token prices started to move sharply lower, sell-side volumes spiked, and many leveraged investors got into increased difficulties with their positions, further fueling a downward price spiral.
So again, simply a winter caused by cryptos’ natural too-high-too-quick cycle? Maybe partially, but this time seems different.
What is different today is that the global economy faces a new enemy — an enemy that does not make a difference in what industry or sector you are invested in.
Since the financial crisis in 2008, leading economies have engaged in considerable efforts to kickstart economic growth, predominantly through lowering benchmark interest rates and increasing monetary supply. But even so, global inflation numbers remained subdued for almost a decade, encouraging central banks to loosen their policies continuously. And it worked well.
Global GDP growth was strongly positive for over a decade, international trade flourished, and investors profited from booming markets. The trending investor mentality was that you could buy anything, and it would make you money. Even the 2019–2021 Covid-19 crisis seemed temporary, with governments further opening the floodgates to support consumers and businesses.
But this is a delicate experiment. Traditional economics teaches us that there has to be a balance between money and goods to stabilize prices. An oversupply of money vs. goods leads to price increases, widely known as inflation.
Historically many central banks would target a roughly 2% annual inflation rate as a sign of successful economic expansion.
Although many voiced concerns, no one really paid attention when inflation numbers started overshooting these targets. The US Federal Reserve Bank in 2021 widely considered the high inflation rates transitory.
In early 2022, the voices warning that loose monetary policies have gone too far have finally gained increased attention. These concerns were further fueled by global supply chain disruptions caused by the recent war conflicts, hawkish foreign policies, and the aftermath of Covid-19.
All of this led to rising prices for consumers, aka inflation. Now, inflation per sé is not a fearsome enemy as long as you have the right weapons to fight it.
Enter Rising Interest Rates
Traditionally, central banks would simply hike interest rates and withdraw money from circulation through debt issuance. But this is where the problem comes in.
Raising rates means businesses will have higher refinancing costs, company valuations change, and the cost of borrowing increases. And after ten years of virtually free lending, many corporations and individuals will face a decision de-leverage or pay higher prices for borrowed money.
Rising interest rates also make investing in debt increasingly attractive again while at the same time reducing the attractiveness of equities and other risk assets.
So how does that relate to the crypto winter, you might ask?
Crypto is a High-Risk Asset. Guess What Gets Dumped First in a Recession?
From a traditional investor perspective, cryptocurrencies are high-risk assets.
Any type of high-risk investment typically gets liquidated first when the global economy faces the risk of a slowdown. Selling assets leads to a price decline which then triggers more selling. Voilà, a bear market is born. Rawr 🐻
While in traditional markets, spillover effects and multi-year-long bull/bear market cycles are common, they are somewhat new for many enthusiast crypto investors. As a result, and for the first time in the history of crypto, the winter is not an industry-made problem but the result of influence by global economic forces.
Cryptocurrencies have reached mainstream adoption. While this is excellent news for the technology, it also means that the space becomes more closely correlated to traditional asset classes. Higher correlation means lower diversification and thus increased risk for market participants.
How to Survive Crypto Winter as an Investor or a Web3 Company?
“What good is the warmth of summer, without the cold of winter to give it sweetness.” — John Steinbeck.
Understanding how the 2022 crypto winter came about, we can conclude that crypto investors and businesses are subject to greater economic forces beyond their control.
But like the rest of the traditional world economy, Web3 will weather this winter and the next. While this sounds promising in the grand scheme of things, there is no denying that hard times are upon us. Hard times sometimes require drastic measures. Many will fade, few will remain, but the few will emerge stronger than ever before.
So let’s look at a few measures that you as an investor or a Web3 company can take to shift the odds to survive the crypto winter in your favor.
- Have an emergency fund
- Be transparent & communicate
- Set up multiple streams of income
- Diversify your investments
- Manage your risks
- Choose value & utility over the return
- Plan for the long term
- Reduce cost & repay debt
- Ask challenging questions and DYOR
- Buy the dip
- Overexpose yourself
- Leverage to reclaim losses
- Rush into decisions
- Follow self-proclaimed leaders
- Be driven by FOMO
In short: Focus on continuation, value, risk management, and planning.
Organically injecting these traits into your investment and Web3 company strategy only can be good for your future, the future of your company, the crypto industry, and everyone involved.
Crypto Winter Survival Plan for Investors and Web3 Companies
Have an Emergency Fund
Investors: Make sure you have ample liquid assets. It will help cover eventual losses in your portfolio and allow you to gradually re-build positions at cheaper valuations. An emergency fund enables you to continue maintaining your lifestyle without liquidating your positions.
As a rule of thumb, your emergency fund should allow you to cover at least one year of living expenses.
Companies: Any reliable company has a war chest, allowing it to continue operating in a market downturn. The emergency fund should be the company’s last resort and must not be used for any other purpose. If possible, keep building your reserve even if you don’t think the current crisis will affect your business. Remember, the next black-swan event is always just around the corner.
As a rule of thumb, allocating 5–10% of your balance sheet towards an emergency fund is a good starting point for a company.
Be Transparent and Communicate
Investors: Make sure you are fully aware of your risk exposure across all markets and asset classes. If you are leveraged, ensure you know how much of a drawback you can stomach and seek dialogue with your debt providers to pin down worst-case scenarios.
Companies: Communicate openly about the situation with your staff, clients, and investors. Give them regular updates on your business and how the crisis affects it. It provides stakeholders confidence that you are in control of the situation. Investors are less likely to jump ship, and clients will build trust and continue to support your business.
Diversify Investments and Income Streams
Investors: Diversification is vital as an investor. Restructure your portfolio to lower the correlation between your investments. Don’t forget — in a time of crisis, cash is king. It will allow you to be more flexible in your decisions and provide a good night’s sleep.
If possible, diversify your stream of income too. Being solely reliant on one single source of income can be a dangerous game, especially if your stream is heavily exposed to a volatile asset such as crypto.
Set size limits in % for your total holdings, for example, no more than 5–10% of portfolio value in any given token.
Companies: Make sure your company portfolio reflects your business, whether it’s assets, liabilities, or revenue. Halt or cut risky investments and low-margin products. Analyze your revenue model and see if you can expand or diversify it. It is possible to launch a new product in times of crisis. Don’t go into hedgehog mode — it will discourage investors and depicts your company as a one-trick pony.
Manage Your Risks
Investors: I should not have to mention this, but investing is 100% about successful risk management. Make sure you have a risk management setup in place and follow it religiously. If a trade goes against you, bag the loss and walk away from it while you can still walk. The same is valid for gains — have a clear target return and cash in while you can. Forget about doubling down on losses, and don’t ride your winners till they break.
When working with stop-loss, limit, and take-profit orders, apply a principle such as the 3:1 ratio, meaning that for every $300 of profit, your maximum loss is capped at $100.
Another principle would be to define a max risk threshold. For example, aim at not having more than 1% of your portfolio volume at risk at any given time.
These numbers may sound hyper-conservative, especially in crypto, but you will thank me later.
Companies: Make sure you are aware of the risks in your company and, more importantly, have a plan on how to tackle them. Depending on the size of your company, having a holistic risk approach is a significant undertaking and grows more difficult the more extensive the company gets.
Putting a rigorous and scalable risk management framework in place should be the first thing you do. If possible, task the risk management to a dedicated team or team member with the shortest possible reporting line to the executive board.
Choose Value and Utility Over Returns
Investors: Make sure you understand your investment and why it is valuable. Choose projects that are based on their useability, scalability, and stability. Don’t be afraid to ask uncomfortable questions when confronted with an investment opportunity. Once you deploy your money, you’re in it for the ride. Identify your target and aim before you shoot.
Watch for red flags such as the promise of huge returns as the primary investment thesis. Instead, focus on the underlying product of the company and understand the competition. Carefully analyze the company structure, operating procedures, and management track record.
Companies: Understand and be clear about how your company produces value for shareholders and clients. Focus on delivering quality over quantity. Cheap, low-quality products may have higher profit margins and revenue rates but are also short-lived and trend-bound. Products that create actual value for customers ensure a more loyal customer base and require less active marketing.
Take Rolls-Royce customer, for example. If you can afford one — the build quality, customer service, and experience make it unlikely you ever want to buy another car. If you buy a cheapie, you may be able to get a new car every so often, but you are much more likely to experiment with different brands.
Cheap mainstream products are more transitory, so don’t act surprised when customers choose another brand.
Reduce Cost & Debt
Investors: Before you start selling your investments to cover your lifestyle in a crisis, reduce your cost. It allows your money to continue working for you. Start by listing your expenses over a few weeks or months, down to the last cent. Then ask yourself honestly where you can cut back, at least for the time being.
Reducing debt for the investors is critical in a recession because rising interest rates will increase the cost of borrowing or refinancing. It does not mean that you should be debt-free, but make sure you have a healthy ratio of debt vs. equity. There is nothing worse than having to force-liquidate positions to repay debt.
Companies: Cost reduction does not necessarily mean immediate cost- and staff-cutting and varies in the long-term impacts on your company. Start with improving the efficiency of your company before making cuts, even if this means you have to invest in the short term. It might sound counterproductive, but it will be cheaper and less painful in the long run than cutting off staff, processes, or entire business units to re-introduce them later.
Think about unnecessary costs first. Does your company really need that fancy downtown office, or could people work from home? Does my staff have to travel for business? Does management require bonus payments, no matter the situation of the company?
What’s different here for the companies, is that reducing debt may reduce your cash flow burden, but it is actually not always efficient from a taxation point of view. Get expert financial advice on how to restructure or improve your balance sheet. The cost will be well worth the benefits.
Ask Challenging Questions & Do Your Own Research (DYOR)
Investors: Be hard on yourself, ask many questions, and conduct proper research before investing. Approach any source of information critically. Thread cautiously around crypto-assets sold through the hype, FOMO, and herd mentality. Using these factors for investment decisions makes you a speculator and gambler.
An expert investor digs deep, takes his time to analyze, and leaves his emotions aside.
Companies: The same rules apply to companies. Ensure you understand every last bit of your business, industry, competition, and external forces.
Ensure you stay at the forefront of the latest developments and be critical about any information you receive, internally or externally.
What NOT TO DO In the Crypto Winter
Don’t Buy the Dip
Investors: Very few investors succeed in timing markets correctly, and even fewer can pull it off regularly. Yes, falling prices provide opportunity, and Warren Buffet allegedly said, “Buy when there is blood on the streets.” But have you also heard of “Never catch a falling knife”?
Investors with a sensible risk approach and sufficient liquid assets can undoubtedly look into cost-averaging strategies or look for an undervalued token project. But never, ever, just randomly buy the dip because you feel committed to your position.
Expert investing has to be free of personal feelings and thus free of blind commitment or HODL-ing.
Companies: Although this applies less to companies, the principle is similar to investors. Buy or invest if it makes sense from a holistic perspective, regardless of the market cycle. No feelings, just rational decisions.
Don’t Overexpose Yourself
Investors: Many investors, especially in crypto, believe that leveraging and borrowing means free money and amplified returns. While this might be valid outside of a recession, the tides have changed, and you must adapt. Increasing benchmark interest rates increase the cost of borrowing and bring volatility to risk assets. Reducing leverage lowers portfolio risk significantly. And, it goes without saying that borrowing to try and recover losses is never a good idea.
Companies: Make sure you are aware of risk exposure throughout your business. This taps into the risk management framework we discussed earlier. Overexposure to a specific market, product, or customer segment can produce unexpected drawdowns. Pivot your business from relying on a single revenue stream and diversify your supply chain.
Make sure your leverage ratios align with your risk appetite when it comes to debt. Assess whether your company is overly exposed to the risk of rising interest rates and adjust the way capital is raised.
Don’t Rush Into Decisions
Investors: Be pragmatic in your decision-making process. Take your time and think of the implications before executing. Blindly following the market is not an investment strategy. And remember, a decision is never good nor bad. A decision is a decision; only the outcome is relevant.
If the decision leads to a bad outcome — overhaul your decision-making process and start over.
Companies: Strategic business decisions almost always have long-term implications. Ensure you develop multiple scenarios and evaluate each result individually. Decisions that are long in the making often lead to more sustainable results. Be transparent about your decision-making process; this instills investors’ and clients’ confidence.
There are no wrong decisions — just poor decision-making process.
Don’t Follow Self-Proclaimed Leaders
Investors: The terms like “shilling,” “apeing,” “hodling,” “when Lambo,” and “to the Moon” have nothing to do with investing. Unfortunately, everyone and their dog (pun intended) is a crypto-influencer these days. However, few have a reliable track record of successful investments and exits that would justify following their every word. Be critical and make your own decisions.
Be able to distinguish hype from value and marketing from investment advice.
Companies: Although this subject applies less to companies, many Web3 companies are strongly influenced by how the space markets itself. Owners of Web3 companies are often Gen-Y and Gen-Z, bringing the “everything is possible” mindset to management boards. While the creative spirit and open-mindedness are encouraged, managing a company’s hype and pure trend-following will almost certainly guarantee failure in dire times.
Everybody can be awesome 😎 when things are nice and easy. Difficult times require strong, cool-headed, and determined leadership.
Don’t Be Driven by FOMO
Investors: If you feel like you’ve missed the boat, there is no need to swim after it. Simply wait for the next one. Fear of Missing Out (FOMO) is a relentless psychological enemy, even for seasoned investors. And if you haven’t figured it out by now, this is where the risk management bit comes in.
Companies: The same goes for companies. Watch trends, observe and analyze them. But never position your company in a way that makes you utterly dependent on it.
Although there is no guarantee whether you will survive the Great Crypto Winter of 2022 or not, following a few simple yet effective guidelines we discussed can be the difference between freezing along the way or emerging stronger in the Spring.
As any farmer would tell you, winter is good for one thing — it kills the old weed and makes space for new crops. In the crypto industry, that would mean projects with no value will fade and allow meaningful projects to attract funding.
For crypto-investors, crypto winter is a great time to reflect, let go of the gambling mentality, and focus on projects that create sustainable, long-lasting value for customers and stakeholders. Remove your feelings and be pragmatic about your decisions.
Web3 companies need to focus on their core business and continuously optimize their processes. An optimized business can keep inventing and investing even if the broader market struggles. It gives confidence to investors, attracts capital, and binds clients.
Remember — winter is coming, but so is the next spring. All you need to do is hunker down and weather the storm. And if you come prepared, you are much more likely to survive.
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