Cryptocurrency investors weathering sharp market downturn

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Temperatures outside may be in the 90s right now, but investors in the world of cryptocurrency are weathering a very different kind of season.

The digital currency world is experiencing a downturn those in the field refer to as a “crypto winter,” and some experts are saying this one might be far more painful than similar downturns since crypto first became a big thing internationally with the introduction of Bitcoin, now the world’s largest cryptocurrency, in 2009.

A crypto winter is a stretch when the prices of Bitcoin and what is now thousands of other cryptocurrencies worldwide contract and remain low for an extended period. Two previous such winters have occurred in the recent past, according to an article from the World Economic Forum: one in 2014 and another in 2017-18 after an extended bull market for crypto in 2017.

The idea that cryptocurrency isn’t doing well right now might seem strange to casual observers who don’t follow the market but remember stories from late 2021 when a months-long bull market for crypto caused Bitcoin to reach its highest value ever of more than $69,000 in November. Other cryptocurrencies – even ones that started off as a joke like Dogecoin – experienced similar sharp rises in value.

The crypto markets took off because buyers worldwide flush with cash from COVID-19 stimulus payments, pay raises and increased savings decided to put their funds into crypto. This time, not only tech-savvy individuals got into the market, but many more investors crossed over from the traditional markets as well.

Then it all fell apart, starting back in the spring. How badly? The value of Bitcoin as of July 18 was $22,073.50.

A precipitous fall

Cryptocurrency, once hoped to be immune to inflation and other factors that roil the traditional markets, proved that it had a weak immune system. What caused it? A fatal trifecta of spiraling inflation, worldwide economic upheaval due to the pandemic and the war in Ukraine, and rash decisions all around — from individual crypto investors all the way up to major crypto hedge funds.

“Prior to 2019, the crypto economy was more correlated with the price movement of Bitcoin and not necessarily the larger financial market,” said Connor Borrego, founder and product manager at Missouri-based digital marketing firm Unipro who has done extensive work with digitally based properties like NFTs and cryptocurrency. “Now crypto is a lot more connected with the larger markets, and things hurting the stock market are also hurting crypto. Cryptocurrency companies like other tech companies are taking a huge hit right now.”

The past few months have seen a rash of huge high-profile company failures in the crypto world, from the crash of the Terraluna stable coin – cryptocurrency that was tied to the U.S. dollar – on June 1 to the liquidation and bankruptcy filing from Three Arrows Capital, a large crypto hedge fund. Celsius, a company that offered yields of more than 18% on its crypto accounts, recently revealed problems with liquidity and had to suspend withdrawals to prevent the crypto version of a bank run.

A recent article in the U.K. publication The Guardian described distraught investors in the United Kingdom who have had to check into rehab facilities for “cryptocurrency addictions” and resorted to online primal-scream rooms to vent over the thousands of pounds and Euros they have lost in the crypto market.

A few suicides related to the sharp downturn have even been reported in other nations, but so far experts in the U.S.-based crypto market are not hearing many accounts of people going that far here.

What the industry is seeing is actually the kind of downturn and radical correction that often happens in markets that get too hot too fast, according to Reid Tymcio, a professor in the finance department at the University of South Carolina in Columbia who has been investing in crypto and studying the field since 2017.

“I think crypto is trading right along with everything else in the market right now,” Tymcio said. “Over the past few years, institutional investors have finally stepped up to the plate, and they are sensitive to interest rates in the regular markets, and they’re responding to it with their crypto investments, selling off and withdrawing liquidity from the markets.”

This crypto winter is providing a hard reality check for people who treated cryptocurrency too much like an economic fantasy world, Tymcio said.

“There were also some people in crypto who got a little too big for their britches and thought the asset was completely immune from economic cycles,” Tymcio said.

“People’s expectations were unbelievable, and this is what happened.” 

The path forward

The key to avoiding severe losses and the panic that comes with them is for those interested in crypto or already in the market to follow basic guidelines that could be applied to any kind of investment: Do your research and do not ever invest more than you can really afford to lose.

Tymcio said bad patches like crypto winters or downturns in the traditional market can actually be a vital form of real-world financial education.

“An important thing to remember is with every lesson you learn, you earn,” Tymcio said. “If you invest $100 and lose it, you are going to remember that lesson more than if you had only lost $1. You will reap the dividends in the future having knowledge. Losses are a way of getting your bearings.

“I think of it like paying tuition in school – the reason I’m so knowledgeable in crypto is that I have made tons of mistakes. I’ve been hacked, I’ve had bitcoins I’ve lost the password to. It’s all a matter of learning.”

Tymcio said it is important to remember that Bitcoin and other cryptocurrency are going to be here well into the future.

“We’ve hit a rough patch right now, but at the end, the tech is still going to be there, and it’s going to be a big part of the future,” he said.

While Bitcoin and other cryptocurrency goes through this rough cycle, traditional markets are also not in the greatest shape. Financial advisors are hearing from clients who are wondering if they should take money out of the stock market if it slows down or avoid investing all together.

That is by far the worst decision anyone needing to save for future plans like retirement could make, according to Angie Thames, a financial advisor with Wells Fargo in Columbia. Instead, she said, the onset of the bear market is a good time for people to seriously consider their financial plans, look at their future goals and realize that the key is to plan for the long term.

It is also probably not a good time for those new to investing to consider delving into crypto or other trendy financial products. Thames said during 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 get nervous over what they’re hearing on the news, but to keep focused on what you can control – how much you can save and sticking to a solid plan,” Thames said. “It’s important not to get caught up in everything happening in the economy. Really the only thing you can control is your spending and saving.

“This is an important time to be working with a financial advisor, and if you are interested in taking more risk with your investments, it really needs to be done with money you could absolutely afford to lose.”