‘Crypto winter’ arrives

In mid-June 2022 bitcoin fell below 20,000 dollars for the first time since 2020. The platform Celsius had frozen its customers’ withdrawals and the fund Three Arrows Capital was heading for liquidation. For those who had their money with those entities, the episode was not a financial anecdote but a loss of access to their savings.

The episode was felt as a change of phase in the world of crypto-assets. After a period of enthusiasm, the combination of falling prices, higher interest rates and distrust of intermediaries tested many business models. Beyond prices, what was questioned was the soundness of the platforms that promised returns and how easily customers’ money could become trapped. It is a reminder that financial innovation coexists with risks that are sometimes learned at the expense of those who take part.

What a ‘crypto winter’ is

The term is used for prolonged periods of price falls, distrust and lack of funding in the world of crypto-assets. In them it becomes clear that much of the activity depended on an optimistic investor mood, and that many positions do not withstand a change in the environment. The word ‘winter’ alludes to how long the period lasts: it is not a passing scare, but a time in which the market reorders itself.

Crypto winters follow a pattern: prices fall, liquidity dries up, the weakest projects fail and confidence takes time to return. For the investor, the challenge is not to confuse falls with opportunities, nor opportunities with traps. When the environment is so volatile and the rules so new, caution and position size matter more than any prediction about price. Not even the largest participants are safe from risk-management errors, as shown by the case of a fund heading for liquidation.

Returns without an explanation

Many platforms promised high returns on crypto-asset deposits without explaining where they came from. A high return always comes from some risk taken by someone, and when the price fell, the risk became visible. Freezing withdrawals is a serious alarm signal for any customer.

A simple question helps to stay protected: what does this entity do with my money in order to pay me that return? If the answer is not clear or cannot be verified, the product is opaque, and opacity is itself a risk. Extraordinary returns deserve more scepticism than enthusiasm, and promises of risk-free passive income do not exist in any market. Asking for information in writing, comparing with regulated alternatives and distrusting urgency are habits that protect in any market.

Who holds the assets

In this field, knowing who holds the assets is everything. Whoever deposits with a platform becomes, in practice, its creditor, and their money depends on the solvency and management of third parties. Before entrusting funds to an intermediary, it is worth understanding its terms, its supervision and what happens if it fails. Custody determines who can move the asset, who answers if it is lost and who can claim it in the event of bankruptcy.

In the traditional financial system there are protection mechanisms, such as public supervision or deposit guarantee schemes, whose coverage and limits are worth knowing. In the crypto world, those guarantees may not exist or may be very different. That is why anyone who decides to take part should do so with amounts they can lose without serious consequences, and with clarity about where each asset is held. A good practice is not to concentrate with one intermediary more than could be lost without consequences, and to keep a record of the terms accepted.

The promised return and the risk taken always travel together, even if unseen.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.