Crypto Winter Strategy: How to Survive Extended Market Declines

The cryptocurrency market continued decline could be very startling. Where is the market going? Are we in a bear market? How long will it last? It is hard to tell. Yet, a moment like this one, when crypto markets are shaky and directionless, could be a time to figure out what to do (or not to do) with your investments.

Crypto markets have fallen sharply this year, with bitcoin now down more than 70% from its record closing high in November 2021, to confirm a bear market, also known as crypto winter, that began with the collapse of the Terra blockchain in May.

Almost every other cryptocurrency of any significance declined alongside bitcoin. Ethereum (ETH), the second largest digital asset, has slumped 73% from its all-time high. Solana (SOL), Cardano (ADA) and Binance Coin (BNB) are all in the red.

This is just the latest in a cycle of severe bitcoin crashes since 2011 — the fifth such notable crash from the bellwether cryptocurrency to date. Each time, the price of bitcoin has tended to last three or more years trading below its previous high.

But the 2022 crypto bear market feels somewhat different — because it is. The 40% monthly loss experienced in June was bitcoin’s heaviest drop since September 2011.

While past crashes were fuelled by issues of massive exchange exploits like Mt. Gox and Coincheck and ham-fisted regulatory interventions, this year’s crypto winter represents a combination of difficult macroeconomic conditions, geopolitical tensions, and dubious projects/decisions by crypto founders.

As fears grow that the expected aggressive interest rate hikes by the Federal Reserve would push the U.S. economy, the world’s largest, into a recession, observers say the current crypto winter may likely hurt more and last longer, compared to previous bear markets.

Weathering the bear market

Here’s what you may want to do — and avoid doing — as you get through a prolonged market decline.

Keep investing consistently

Periods of heavy losses, so-called bear markets, can be as much a part of crypto investing as the far more enjoyable runs during bull markets.

“Users may keep part of their portfolio in stablecoins to stick to dollar-cost averaging (DCA) strategy,” Iakov Levin, founder and CEO of cryptocurrency investment platform Midas, told Be[In]Crypto.

He said investors could use the funds to buy core crypto assets like BTC and ETH, as well as other major layer one and layer two solutions.

“I see the DCA strategy as a long-term solution for six months to a year. Such a strategy gives users a good entry point and allows them to make satisfactory profits during the next bull cycle,” Levin added.

Dollar-cost averaging is the practice of investing the same amount of money on a regular basis, regardless of the asset price, in this instance crypto prices, according to the know-it-all online financial dictionary Investopedia.

This strategy is a form of systematic investing that can potentially offer efficiency when the market has dropped.

Choose a ‘stable’ digital asset and stick with it

After bear markets, cryptocurrency markets have always bounced back to regain their losses. For the most part, blue-chip crypto assets tend to have more staying power in a market riddled with tens of thousands of copycats.

“One proven way to stay afloat during times of crypto winter is to avoid extremely volatile digital currencies,” Chris Esparza, founder and CEO of decentralized finance platform Vault Finance, told Be[In]Crypto.

“The more stable the digital asset is, the more unlikely an investor will be to lose his or her money. Successful investors shun the prospects of excessive gains during crypto winters and rather, sue for low-risk investments that have a guaranteed rate of return.”

While no crypto asset is without its own inherent volatility and risk, “investment funds should be properly allocated with adequate provision for marginal losses,” said Esparza.

Rebalance your portfolio

The bull market may have inordinately grown the proportion of crypto in your portfolio. If that is the case, rebalance your portfolio. Iakov Levin, the Midas Investments CEO, proposed “to sell all low-liquid digital assets.”

“For example, various altcoins with a low capitalization, up to $100 million – [sell] if there is no specific fundamental precondition for their growth during the current bear market,” he said. “Users can also create hedged DeFi strategies, where they make profits on a market decline.”

Keep your eyes on the prize

Regardless of how deep the crypto market decline could be, it is important for investors to maintain perspective on the long-term fundamentals of investing in this growing industry. Markets have historically bounced back from any downturn. That means do not panic sell your blue chips or act rashly.

“Since it feels like everything is working in boom times, it’s tempting to want to do everything. Maintain a high bar for changing or expanding your scope,” Paradigm co-founder Fred Ehrsam, wrote in a previous blog post.

“The same idea is true in a downcycle. The crypto graveyard is littered with the remains of companies who pivoted away from their core mission in a downcycle, only to watch with anguish as their idea started to work in the next upcycle.”

While Ehrsam’s message may have been primarily targeted at crypto founders, it holds equally true for ordinary investors.