Because cryptocurrency prices are driven by supply and demand—like stocks, commodities, and a gallon of milk—cryptocurrency prices experience highs and lows. Large pullbacks in cryptocurrency prices are called crypto winter.
So, if you pull up a Bitcoin chart today, you can see the market is in crypto winter now and that the last one endured an 80% pullback between 2018 and 2020. The only difference between now and then is that the cryptocurrency market cap has grown significantly since the last crypto winter causing this crypto winter to have broader ramifications—it’s important to understand: what is crypto winter and why do we have them.
What is Crypto Winter and What Makes This Different?
The last crypto winter occurred after a steep price rise brought about by what some people now believe to be price manipulation. Once the manipulation stopped, Bitcoin became a household name, and prices pulled back for about two years.
This time around, because interest is more universal, cryptocurrency prices rose due to Institutions got the OK to trade cryptocurrencies and placed large, levered bets. In addition, DeFi and many other coin types were launched as Bitcoin prices crept their way up to the $60,000s. Levered bets and debt-based projects mean that the cryptocurrency market experienced a large influx of debt.
The market is no stranger to debt, so it’s not bad; it just means that this crypto winter is not like the others because the fundamentals have changed significantly.
Patience is of the utmost importance; take MicroStrategy, for example. The company’s leader began investing near the highs and had no plan for what to do if prices went down. Instead, he campaigned for higher prices by giving speeches about Bitcoin and other cryptos and did the same with his position, adding all the way down. The company lost close to $1 trillion in Q2 2022 because of this strategy, and the leader stepped down.
Whatever the reasoning behind investing this way, these types of traders cause volatility across the cryptocurrency sector. And the other contributing factor is failed and fraudulent projects that started in the last crypto boom period.
Crypto Winter and My IRA
Due to all the institutional speculation in cryptocurrencies today, the correlation between Bitcoin and the S&P 500 rose from 0.2 to 0.6 at the end of 2021. At this point, that might indicate that the two could be roughly running in tandem, ultimately meaning that investors of all types might have difficulty in this market.
While it can be challenging to time these things, markets generally operate in bull/bear cycles; they oscillate or go up and down. To prepare for pullbacks and crypto winters in your IRA, think like a savvy and active investor. You can trade around a core position, which differs from all-in or all-out types of thinking.
Core position trading means that if you are bullish on Bitcoin over the next 10 years, hoping it will rise to $400,000, you can initiate the start of a position at essentially any price. If the price increases from there, great, sell some of your position and wait for a pullback to add to it.
The point is that you start out with a small enough position that if it goes against you for a few months, you will be fine to add to the position when the price stabilizes and reverses.
Another way you could protect your portfolio from events like crypto winter is to diversify strategically. In the stock market, utilities may perform well during pullbacks because people will continue to turn the lights on at night regardless of what the market is doing.
Opening a Cryptocurrency IRA
According to Baron Rothschild, “the time to buy is when there’s blood in the streets.” Though he said this in the 18th century, it continues to be true today. This makes crypto winter a great time to start investing in cryptocurrencies.
Bitcoin IRA is the world’s first and most trusted crypto IRA platform, offering 24/7 trading and allowing users to buy, sell and swap more than 60 cryptocurrencies in self-directed retirement accounts. To start investing crypto for your retirement, visit Bitcoin IRA to learn more about how to open an account or rollover an existing IRA.