- In mid-November bitcoin fell below $5,000, more than 70% below its peak a year earlier.
- The ‘crypto winter’, a prolonged period of low prices and little enthusiasm, hit mining and many projects.
- A speculative asset should not endanger wealth or working cash: the key question is how much could be lost.
In mid-November 2018, bitcoin fell below $5,000, more than 70% below its peak a year earlier. The so-called ‘crypto winter’ hit mining and many projects that had been financed on the expectation that the market would keep rising. What some had presented as a lasting revolution was going through a demanding test. For companies operating in this sector, such as mining, the price cycle is a central variable of the business.
The news is relevant beyond those who take part in this sector. A fall so deep, after a rise so fast, offers a lesson on the nature of highly volatile assets, on the effect of expectations on markets and on the importance of deciding in advance what risk one is willing to take. It is best examined soberly, without celebration or drama, drawing practical conclusions. And doing so without making judgements about the asset’s future, which nobody can predict.
A very deep fall
Almost a year after its peak, bitcoin had lost more than 70% of its value. Falls of this size are characteristic of highly volatile assets and are a reminder that rapid rises can be reversed just as rapidly.
A 70% loss requires a recovery of more than 200% just to get back to the starting point, a calculation that surprises anyone not used to thinking in percentage terms. That is why deep falls are so costly: it is not enough for the price to rise a little again, it has to rise a great deal. This asymmetry is one of the reasons why controlling losses matters as much as seeking gains. Those who think first about how much they could lose usually decide better than those who are carried along by the expectation of gain.
The crypto winter
The phrase ‘crypto winter’ describes a prolonged period of low prices and little enthusiasm. It hit mining, whose profitability depends on the price, and those who had built their plans on an ever-rising market.
When the income of an activity depends on the price of an asset, a sustained fall changes the accounts completely. Costs such as energy, equipment or staff do not fall in the same proportion, so margins narrow or disappear. Projects that had raised funds on the promise of continuous growth found themselves with fewer resources, less interest and less time to prove their usefulness. It is a reminder that financing a project on price expectations is different from financing it on real income.
What lesson it leaves
For an investor or a business owner, the lesson is about proportion and time frames: a speculative asset should not endanger wealth or the working cash needed to operate. Before taking part in any project tied to such a volatile asset, it is worth knowing how much could be lost and whether that can be borne without serious consequences.
A useful rule is to separate clearly the money earmarked for present and future needs, such as payroll, taxes, education or retirement, from that which can go to higher-risk ideas. This second tranche should be an amount whose total loss would not change the family’s life or endanger the company. And every project tied to a volatile asset should be assessed with explicit adverse scenarios, not just favourable ones. Adverse scenarios are not pessimism, but the way to check that the project holds up.
With highly volatile assets, the key question is how much could be lost, not how much might be gained.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
