The first red flag was the LUNA fiasco, which made it clear that major projects can also suffer serious problems. It became obvious that startups that focused not only on technology but also on other aspects of their development will survive. Such areas as tokenomics, management, and community expansion are highly important.
It’s practically impossible to say for sure which startup will hold up in a bear market. Therefore, there are two basic rules for an investor: invest only in high-quality projects and quickly identify those that are not trustworthy. Let’s talk about this in a bit more detail.
Actions to Take During the Crypto Winter
There are a few simple tips to minimize risks during a downtrend:
- Give up on spot markets. Prices there can fluctuate very quickly.
- Adjust your strategy. During the crypto winter, you should step away from your usual market behavior model and think through every move you make.
- Keep your eye on the numbers. Buy coins only for the amount you’re ready to lose. This advice works for any trend and investment.
- Search for information. Relying on other investors’ experience, studying their cases, and learning from them is crucial. This will help you make informed decisions.
Throughout such a period, it’s important to remember that the downturn is just a part of the economic cycle. Knowing this will help you avoid impulsive selling and maintain a sense of perspective. Moreover, you can take advantage of any situation. Experienced investors view the bear market as a chance to find better startups for the future.
Signs of Unpromising Startups
Having figured out the pattern of behavior during the crypto winter, we can move on to the main issue — analyzing projects and identifying potentially unprofitable assets.
Structural Sales
The term tokenomics has already been mentioned above. It refers to the economic model of a particular blockchain project:
- emission features;
- functional specifics of the asset;
- supply-demand relationships.
Understanding tokenomics allows for the prospects of a particular asset to be analyzed. For example, a tiny percentage of tokens in the DeFi ecosystem is in circulation. This leads to a significant discrepancy between the asset’s actual capitalization and its diluted valuation, i.e., total capitalization. Consequently, some coins unreasonably skyrocket in value after their launch, as most crypto investors buy up their entire volume of coins in circulation.
Buying such tokens is a serious risk because investors can stage a massive sell-off in the bear market, putting considerable pressure on the asset’s value. Projects with coins in the open market and a higher percentage of supply are different — they have more chances of surviving the crypto winter.
Lack of Ability to Conserve Resources
Decentralized autonomous organizations (DAO) are actively used today as an organizational form for the collective management of blockchain projects. However, it’s worth noting that these organizations aren’t as good as they may seem at first glance. They have little recourse to diversifying their treasuries. The vast majority of DAOs use only their own tokens, while the other part transfers a mere 5% of their budget to other assets. So, the possibility of high volatility creates additional risks for the organization.
If the organization keeps all its assets in its tokens, any major price fluctuation will completely change the resources available to fund current operations. This could mean a complete failure in the bear market. Without proper diversification, the value of assets under the DAO’s management is expected to decline significantly this year. This is a prime example of how important it is for investors to look at the project’s asset structure and diversify risk.
Management Extremes
The bear market always has a rather tense atmosphere, and trust in cryptocurrencies falls. The project must offer and consistently implement a clear strategy to maintain user loyalty.
Here again, we need to look at DAOs, as these organizations have no management team and everything is run by the community. In this context, solving the token management ownership issue is important. The problem has two extremes: centralization or decentralization.
- DAO’s excessive centralization. When decision-making is in the hands of large holders, it often leads to actions aimed at short-term profits.
- When the DAO is decentralized, it can’t react quickly to the ongoing situation; moreover, disagreements can start within the organization. The roadmap implementation process is hampered in such a situation.
Projects with unstable management should be avoided, as well as those where management lies in the hands of a few people.
The Crypto Winter Means Opportunities
The downtrend is a chance for strong projects to improve protocols and technology and for investors to buy promising coins at low prices.
After a down period in 2021, a bull market emerged. DeFi, NFTs, and the metaverse skyrocketed. Moreover, despite the difficulties the industry is going through right now, it’s fundamentally stronger than ever. A huge number of projects have been launched, new use cases and applications for blockchain technology are emerging, and the interest of institutional investors is only growing.
The crypto winter is useful in the long run. It helps the industry get rid of speculative projects and weak market participants while helping beneficial and in-demand projects reach a new level of development.
