The temperatures outside may be in the 90s right now, but investors in the cryptocurrency world are going through a very different season.
The digital currency world is experiencing a downturn that those in the field are calling a “crypto winter,” and some experts say it could be far more painful than similar downturns since crypto became a big thing internationally. with the introduction of Bitcoin, now the largest cryptocurrency in the world, in 2009.
A crypto winter is a stretch when the prices of Bitcoin and what are now thousands of other cryptocurrencies around the world contract and remain low for an extended period. According to an article by the World Economic Forum, two such winters have occurred in the recent past: one in 2014 and another in 2017-2018 after a prolonged bull market for crypto in 2017.
The idea that cryptocurrency isn’t doing well right now might seem odd to casual observers who don’t follow the market but remember stories from the end of 2021, when a months-long bull market for the crypto caused Bitcoin to hit its highest value of over $69,000 in November. Other cryptocurrencies – even ones that started out as a joke like Dogecoin – have seen similar increases in value.
Crypto markets have taken off because buyers around the world, brimming with cash from COVID-19 stimulus payments, pay rises and rising savings, have decided to put their funds into crypto . This time, not only tech-savvy individuals entered the market, but many other investors also left the traditional markets.
Then everything collapsed, starting in the spring. At what point? The value of Bitcoin as of July 18 was $22,073.50.
A vertiginous fall
The cryptocurrency, once hoped to be immune to inflation and other factors that disrupt traditional markets, has proven to have a weak immune system. What caused it? A fatal trifecta of spiraling inflation, global economic upheaval due to the pandemic and war in Ukraine, and rash decisions everywhere – from individual crypto investors to major crypto hedge funds.
“Before 2019, the crypto economy was more correlated with the price movement of Bitcoin and not necessarily with the broader financial market,” said Connor Borrego, founder and chief product officer of digital marketing firm Unipro. Missouri, who did extensive work with digital. properties such as NFTs and cryptocurrency. “Now crypto is much more connected to the big markets, and things that hurt the stock market also hurt crypto. Cryptocurrency companies, like other tech companies, are taking a huge hit right now.
The last few months have seen a series of huge bankruptcies of high profile companies in the crypto world, from the crash of the stable coin Terraluna – a cryptocurrency pegged to the US dollar – on June 1 to the liquidation and deposit report of Three Arrows Capital, a large crypto hedge fund. Celsius, a company that was offering returns of over 18% on its crypto accounts, recently revealed liquidity issues and had to suspend withdrawals to prevent the crypto version of a bank run.
A recent article by British publication The Guardian describes distraught investors in the UK who had to check into rehab centers for “cryptocurrency addictions” and resorted to online primal cry rooms to evacuate the thousands of pounds and euros they lost in the crypto market.
A few severe recession-related suicides have even been reported in other countries, but so far, US-based crypto market pundits aren’t hearing many stories from people going that far here.
According to Reid Tymcio, a professor in the Department of Finance at the University of South Carolina at Columbia, who has been investing in crypto and studying the field since 2017.
“I think crypto is trading with everything else in the market right now,” Tymcio said. “Over the past few years, institutional investors have finally taken over, and they are sensitive to interest rates in the regular markets, and they are responding to it with their crypto investments, by selling and withdrawing cash from the markets. ”
This crypto winter provides a harsh reality check for people who treated cryptocurrency too much like a world of economic fantasy, Tymcio said.
“There were also people in crypto who got a little too big for their pants and thought the asset was completely immune to economic cycles,” Tymcio said.
“People’s expectations were incredible, and that’s what happened.”
The path to follow
The key to avoiding serious losses and the panic that accompanies them is for those interested in crypto or already in the market to follow some basic guidelines that could apply to any type of investment: do your research and never invest more than you can really afford to lose.
Tymcio said bad times like crypto winters or traditional market downturns can actually be a vital form of real-world financial education.
“An important thing to remember is that with every lesson you learn, you win,” Tymcio said. “If you invest $100 and lose it, you will remember this lesson more than if you had only lost $1. You will reap the dividends in the future by having knowledge. Losses are a way to find your bearings.
“I think it’s like paying tuition in school – the reason I know crypto so well is because I’ve made tons of mistakes. I’ve been hacked, I’ve had bitcoins whose password I lost. It’s all about learning.”
Tymcio said it’s important to remember that Bitcoin and other cryptocurrencies will be around in the future.
“We’ve been through a tough time right now, but in the end the technology will still be there, and that will be a big part of the future,” he said.
While Bitcoin and other cryptocurrencies are going through this difficult cycle, traditional markets are also not in great shape. Financial advisers hear from clients who wonder whether they should withdraw money from the stock market if it slows down or avoid investing all together.
According to Angie Thames, financial adviser at Wells Fargo in Colombia, this is by far the worst decision someone who needs to save for future projects like retirement can make. Instead, she says, the onset of the bear market is a good time for people to seriously think about their financial plans, examine their future goals, and realize that the key is to plan for the long term.
Now is also probably not a good time for new investors to consider diving into crypto or other trendy financial products. Thames said that at times like these, she advises new investors to look at companies they already use or are familiar with when considering what to invest in.
“I keep telling people not to worry about what they hear on the news, but to stay focused on what you can control – how much you can save and stick to a solid plan,” Thames said. “It’s important not to get caught up in everything that’s going on in the economy. Really, the only thing you can control is your spending and your savings.
“Now is an important time to work with a financial advisor, and if you’re interested in taking more risk with your investments, it really needs to be done with money you could absolutely afford to lose.”
Contact Christina Lee Knauss at 803-753-4327.