Crypto markets, much like the changing seasons, are constantly in flux. While traders bask in the summery warmth of rising prices, they can easily overlook the need to prep for the inevitable frost of market downturns known as “crypto winter.”

No investor enjoys seeing their portfolio in the red, but there can still be bright spots in this bleak market environment. Surviving a crypto winter starts with spotting early warning signs and developing strategies to capitalize on potential opportunities. In this guide, we’ll tell you what you need to know.

What is “crypto winter”?

The term “crypto winter” refers to an extended lull in the digital assets market, marked by a significant drop in prices from recent highs that can last a year or more. During this period, pessimism prevails, and traders often doubt that any price rally will be strong enough to break the cycle. Activity in web3 protocols and crypto exchanges slows, and investors generally hesitate to allocate funds, especially toward newer, unproven altcoin projects.

What are the signs of a crypto winter?

Unlike the somewhat predictable changes in the seasons, the onset of a crypto winter is much harder to anticipate. However, traders watch for certain signs that may indicate the market is heading into one:

• Decreasing trading activity: Volume charts, which show the number of assets exchanged over a certain period, often reveal declining interest from both retail and institutional investors. A consistent drop in volume suggests the market is cooling off.
• Declining prices and market caps: Broad price declines across multiple digital assets are another telltale sign. In a crypto winter, not just a few projects suffer; prices drop across the board, shrinking the total global market cap. These downtrends may persist for months or even years.
• Failed projects, bad news, or controversies: Negative press often precedes or deepens during a crypto winter. Hacks, company bankruptcies, or restrictive laws can trigger a wave of panic selling and put further pressure on prices.
• Sour market sentiment: During a crypto winter, critics become more vocal, and negative sentiment floods social media. Even die-hard crypto supporters may express frustration, seeking solace from fellow traders by posting memes or chatting on forums, potentially amplifying the feeling of uncertainty in the market.

When will crypto winter end? 

There’s no "Farmer's Almanac" for predicting crypto winters, and no two downturns end at the same pace. However, after the birth of blockchain technology, some traders identified a pattern called the "four-year cycle theory," which they believe could help predict how long crypto winters last. According to this theory, the crypto market’s movements are tied to an event known as the Bitcoin halving (or "The Halvening"). Every four years, the Bitcoin (BTC) network cuts its inflation rate in half, triggering a supply shock that often leads to a rally for BTC and other digital assets. As the crypto market becomes overextended following this rally, it typically crashes within a year and may enter a crypto winter lasting two to three years or until the next halving.

While the "four-year cycle" theory is popular in crypto trading circles, it’s still just a hypothesis. Many unexpected, complex factors influence the crypto market, and no one theory can predict precisely when a crypto winter will end. The only certainty is that these downturns tend to last at least a year, if not longer.

Learning from crypto winter history: Examining the 2022 crypto winter 

In 2022, the cryptocurrency market faced one of its toughest challenges following the unprecedented highs of 2021, when the global market capitalization nearly hit $3 trillion. Shortly after, the market plummeted to a low of $830 billion, ushering in one of the most notorious crypto winters. In retrospect, many of the contributing factors to this downturn align with the typical hallmarks of a crypto winter:

Multiple failed projects and scandals

One key trigger was the collapse of the Terra ecosystem, which included the LUNA and UST cryptocurrencies. In just a few days, $50 billion disappeared from the crypto market, causing ripple effects across other projects and institutions. Following Terra's downfall, centralized firms like Voyager, BlockFi, and Celsius went bankrupt, further damaging the industry. The final blow came in late 2022 when the centralized exchange FTX collapsed, leaving $8 billion in customer assets unaccounted for.

Regulatory scrutiny

In the wake of multiple crypto scandals, regulators around the world began cracking down on the crypto industry, introducing restrictions such as bans on algorithmic stablecoins like Terra’s UST. Even before this, China's 2021 ban on Bitcoin mining and trading sent shockwaves through the market, and increased calls for tighter regulations only added to the uncertainty surrounding digital assets.

Economic uncertainty

Beyond crypto-specific issues, macroeconomic conditions also played a role. Central banks, particularly in the United States, raised interest rates to combat rising inflation, pushing investors away from riskier assets like cryptocurrencies in favor of safer investments with more stable returns.

Speculative spending bubble

In the lead-up to the 2022 collapse, highly speculative assets such as non-fungible tokens (NFTs) and memecoins surged to unsustainable levels. As the market corrected, these riskier assets saw dramatic losses, with many traders fleeing to more established assets like Bitcoin.

Crypto winters versus bear markets: Is there a difference?

The terms "crypto winter" and "bear market" both refer to periods marked by pessimism and declining prices. However, "crypto winter" typically denotes a more prolonged and severe downturn than a bear market, often lasting a year or more. While there are no strict criteria separating the two, traders tend to use "crypto winter" to describe the most extreme and enduring slumps in the market.

Strategies for surviving a crypto winter 

It may be tempting to hit the sell button during a harsh crypto winter, but cutting losses isn't always the smartest move. Planning ahead helps traders weather the proverbial storm. Here's how to prepare for a possible prolonged downturn in the crypto market:

• Focus on long-term potential: During a crypto winter, staying optimistic about the future of crypto and web3 can be challenging. But historically, these winters have always come to an end, with market enthusiasm eventually making a comeback. Investors who tune out the short-term noise and focus on long-term potential are better equipped to manage the stress of downturns and make more strategic decisions that align with their broader financial goals.
• Consider dollar-cost averaging (DCA): DCA can be a great way to adopt a long-term mindset. This strategy involves regularly investing a set amount into digital assets, regardless of market conditions. Over time, this approach smooths out the average cost and encourages traders to stay invested through the downturn. 
• Invest responsibly: Low prices can entice you to buy more, but it’s important to consider your risk tolerance, as prices can continue to drop for extended periods. Only invest what you can afford to lose.
• Research hedging strategies: Traders don't need to sit idly by during a crypto winter. Various strategies and products, such as put options and short perpetuals, allow traders to profit from declining prices and protect their portfolios during a downturn.
• Use tax-loss harvesting to offset gains: Selling underperforming assets at a loss can help reduce your tax liability by offsetting capital gains. CoinTracker’s tax-loss harvesting tools automatically identify eligible trades, making it easier to optimize your tax strategy during a market downturn.

What are some of the best crypto winter tokens to buy?

During a crypto winter, everything seems to be on sale, but predicting which projects will survive and thrive afterward is impossible. The "best" cryptocurrencies to buy in this period depend largely on individual risk tolerance, trading strategy, and overall goals. Conservative investors might gravitate toward established assets like Bitcoin (BTC) or Ethereum (ETH) for their relative stability, while those seeking higher returns might explore mid- or small-cap projects. Ultimately, it's all about gauging your comfort with risk and making informed choices on how much to allocate to each position.

Monitor crypto during all seasons with CoinTracker 

Whether the crypto market is rising, falling, or staying steady, CoinTracker offers an intuitive portfolio tracker to monitor your digital net worth. By linking your crypto wallets and exchange APIs, you’ll get a complete transaction history, including cost basis, unrealized gains, and tax-loss harvesting opportunities. When tax season arrives, CoinTracker streamlines the process by organizing your data into ready-to-file forms for CPAs or direct integration with platforms like TurboTax and H&R Block.

Get a full view of your cryptocurrency holdings by signing up for a free CoinTracker account today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.