Lessons from crypto winter (so far)

Where did the term crypto winter come from?

I’m not sure. 

But when I hear the word winter, I am reminded of my old rowing coach. 

We used to train down in the rifle range in the basement of what was called the old gym. And I remember him telling me about the value of winter. 

You see, this guy had been in a car accident when he was younger. And they said he would never walk or talk again. 

Which was pretty grim for a young man with his whole life ahead of him.

But that’s not what happened. 

He went on to row for Canada in the 1964 and the 1968 Olympics. He then coached high school students that went to Henley in England and won numerous times over 20 years. He coached Canada’s gold medal-winning heavy eight in 84′. And followed that up by helping Cambridge beat Oxford for the first time in years. 

We were lucky to have him. 

And I recall something he said to me about the value of winter one time before a training session. 

He said, “the races in the spring are won in the weight room in the winter.”

Now, you and I aren’t in the weight room, and we’re talking about crypto here, not rowing, but the same thinking can apply. 

So during crypto winter, let’s take a look at what’s been going on and see where this can be applied to the crypto spring that lies ahead. 

Polar bear head underwater surrounded by air bubbles. Image courtesy of Pixabay on Pexels.

Leverage “don’t get no respect”

Nobody knows how far we are through crypto winter, but like the previous winter, the building continues. There is lots of cash and talent in the space building, developing and experimenting. 

Down markets also reveal numerous valuable lessons. 

One lesson is that leverage remains the Rodney Dangerfield of the crypto world. Dangerfield’s famous quote about “don’t get no respect” applies to the way in which certain entities abused leverage. The result has been numerous institutional implosions by centralized entities due to hidden leverage and asymmetric information in a decentralized unregulated environment. 

While leaders in the space like FTX and Binance have reduced leverage for retail participants, everyone remains subject to big swings due to the wide use of leverage elsewhere. This has led to weakness in several businesses and failure in several more.

The crypto market is still small enough for concentration to be an issue when leverage is deployed. Leverage is neither good nor bad, but its impact is not insignificant. 

Crypto trading opportunities are unfolding

Throughout the worst part of this winter so far, there were also numerous opportunities. These are the opportunities you will see in retrospect. But for savvy traders, these opportunities will represent great entry points. 

We covered using leverage without leverage by exploiting liquidations. And to help you do this, you can use some basic technical analysis like support and resistance lines and volume changes. 

By examining the whole market, you can see where opportunities may be shaping up. 

ETH for example has had a wild ride so far. And you may, for example, be looking at a catalyst trade similar to the previous Bitcoin halving as they move to Proof-of-Stake. There is definitely risk there, but there may also be opportunity. 

The reason is that risk operates on a pendulum. We talked about this concept recently. The idea is that you can see risk being added and when it’s being reduced. Leverage is a substantial part of this process. 

More confidence means more risk. Less confidence and a high level of fear mean less risk. The risk pendulum is an ongoing process that benefits traders looking for opportunities. 

The path out of winter means recognizing that risk has been sufficiently lowered without most people realizing it yet. 

Too good to be true is still a reality

Another lesson is that too good to be true is still too good to be true. 

Celsius built what could have been a viable business model and a very profitable one. But, by scaling beyond the capability of the market and their skillset, they took on unnecessary risk and transferred it to their customers. 

The customers of Celsius were looking for unusually generous passive income and were either unaware of the risk or ignored it. Here, we are reminded that return of capital is still more critical than return on capital

So yields and advertised rates should reflect both return and potential risk and be assessed accordingly. 

One of those risks involves custody in the fine print. So you gotta read these disclosures. 

Related to this, we can see how important reading those white papers is. The guys at Terra showed their thinking and potential vulnerabilities. This included how they understood the very complex Federal Reserve system and thought they could recreate it. 

Concentration versus diversification

Another important observation is the concentration of assets in one project. We discussed this in the article on thinking like a financial advisor. 

There are still too many people putting substantial or all of their assets into a single high risk speculative project. Crypto, with all of its promise, has risks. And those risks create outsized opportunities for gains, as well as for losses. 

The court documents on Celsius include a transcript from people affected by the bankruptcy filing. These stories all too often describe people who have bet their entire savings, retirement, or money they would need in the short term on the unrealistic business model. 

And this lesson should not have to be repeated every cycle. 

Being your own bank means you’re the risk manager. Therefore, asset diversification or diversification of projects should be a paramount consideration. And this should include making use of crypto’s self-custody advantage. 

Because things happen sometimes. 

Code breaks. 

Hacks happen. 

Business models fail for various reasons. 

So concentration, especially in one DeFi project or one crypto asset, token, or altcoin, should be thought about carefully. 

The cheer of the crowd can (still) be dangerous to your account 

Reading one account in a British newspaper, there was a story of a guy who got into crypto in 2021. He started with 3000 euros. Built it up to 525,000 euros.  

Now he is back to 2500 euros. Yes, you read that right, a round trip.  

What happened? 

Part of the story was the crowd. He was part of an anonymous community that had his back. They cheered him on. He felt good about what he was doing and kept doing it. And to be consistent, he eventually started doing things for the “support” and approval of the community. 

He started dreaming of possibilities and forgot about the risk. 

Oh, but he was an addict! That’s what many journalists say about people that trade anything.

This story has happened in many markets since the advent of forums and anonymous advice. 

We’ve talked about this before in our piece on news and narratives. Community is great, but when it comes to money, keep your own council and avoid groupthink. 

Sometimes it works, but there is no way to know when it will stop working. And when it does, often, one is too committed to consistency to see things differently. 

There is no reason to take a fat win and lose it all by embracing consistency or not taking some off the table. 

Community and liquidity

We are also seeing the challenges with community and its relationship to liquidity. 

Strong communities continue to thrive and evolve. But even these go quiet from time to time. This is common behavior in any market. In bull markets, liquidity is high, and action gives the appearance of forever liquidity. It flows like water. 

But when things quiet down, this can change dramatically. The results can be widening spreads which can increase slippage. 

It can mean difficulty selling positions or assets like NFTs and difficulty pricing or valuing them. Or it can mean that clearing prices, where liquidity can be found, are much lower than you may have expected when you entered the position. This can happen in any asset. 

If you have something calling itself a currency and it’s tough to buy and sell due to a lack of liquidity, then it may not represent an effective currency. 

And, of course, this is all based on how you look at the asset. For example, if you are looking at the price in dollars, the situation looks one way. But if your assets are priced in ETH and you think in ETH, these changes might not seem as significant. 

Regulatory feeding frenzy

Regulation is another thing that has come to the forefront. This has always been a hot topic for crypto. But when you have meltdowns and significant public losses, regulators start to look more closely. These calamities end up being a catalyst for more regulation.

The challenge with most regulation is that it is focused on the past instead of the future. Meaning that every market calamity means regulators are fighting the last war instead of the next one. Decisions around the last war inevitably lead to unintended consequences for markets in the future. 

Crypto has the benefit of an international, fluid, and decentralized nature. This provides some constraint on regulatory mistakes as nations compete to have a bigger slice of the future innovation  pie. 

Competition for regulatory control is ongoing, and in this crypto winter, particularly in the US, events of 2022 have created a battle between the CFTC, SEC, and other parties to attempt to control crypto’s future. 

What’s in development for spring?

Coming out of the previous crypto winter, there were numerous projects that took turns surfacing, DeFi, NFTs, stablecoins, some new platform concepts and the metaverse. 

These were all in development during the last winter.

In spite of some carnage leading to the current winter, quite a few of those projects have held up, including many decentralized protocols in DeFi. They did pretty well, all things considered. 

Right now, many projects are cashed up and have the talent to build and develop. There will be new products and services on the horizon. 

New DeFi concepts are being developed. Bridges between chains are being developed. NFTs are moving from a focus on creativity to creatively looking at mundane use cases like tickets. The metaverse has commitments from numerous luxury and big name brands. 

And some have finally realized that UX will be a critical element of its adoption and success. So that is in the process of being improved too. 

What comes next and the timing cannot be known for sure, but for those that are cashed up and ready, the opportunities will be there.

The existing projects that get through the current period will be stronger and battle-tested. These will provide the foundation for crypto spring. 

And remember, all of these projects require risk takers to try and test to validate their efficacy. Those opportunities lie ahead, but risk management will still be paramount. 

Get ready for the next crypto spring

My old rowing coach understood the power of preparation during the winter. Because when you get on the water, anything can happen. The winds can shift. On some courses, you can end up in a lane with a current that works against you. There are times when you can have a mechanical, like your slide coming off the rails. And you might meet the one crew that’s better than you on race day. 

But if you are trained, know that these things have happened and can happen, you can prepare accordingly to compete. 

And that starts with preparation in the winter, well before the race. 

As a trader, you are working your way through one of the most important periods in history. And by that, I mean economic and world history. Crypto is growing up in a period of extreme turmoil, and the participants developed here will help shape the future. 

One of the ways you do that is by looking at the problems identified in this winter and using them to your advantage. 

These insights will help you going into crypto’s upcoming spring and summer. And then, when the next winter comes, you will have a playbook to keep more of your gains and exploit the downside. 

Is crypto winter over yet? Some think so. I don’t know, and none of us will know for sure until we look back. 

But in the meantime, get prepared. Change the way you think. Shift your perspective. 

You’re part of the future. 

Make sure you are ready for it. 



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