Businesses are preparing for a crypto winter — here’s what that means

Companies are showing concerns of a recession, and in the crypto space, many are preparing for a crypto winter.

Coinbase is laying off 18% of its workforce, or roughly 1,100 people, according to an email sent to employees Tuesday morning. CEO Brian Armstrong said the company grew “too quickly” during a bull market and expressed concerns of a looming recession.

“We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period,” Armstrong said in the email. “While it’s hard to predict the economy or the markets, we always plan for the worst so we can operate the business through any environment.”

Here’s why businesses are preparing for a crypto winter, and what that means for investors.

What is a crypto winter?

People have been speculating for a few months about the possibility of a crypto winter, which refers to when crypto prices fall and stay low for an extended period of time.

Bitcoin has dropped around 55% year-to-date and sits at around $ 21,000 per coin. It’s down about 70% from an all-time high of $ 69,000 per coin in November. The overall market capitalization of crypto assets dropped to less than $ 1 trillion from its peak of $ 3 trillion in November.

The most recent crypto winter happened in late 2017 and early 2018, when bitcoin crashed as much as 80% from all-time highs and took about 18 months to recover. Meanwhile, stocks officially entered bear market territory this week, with the S&P 500 index down around 23% since the beginning of the year as of Friday afternoon. Experts are predicting a recession could be around the corner.

It’s hard to say how the current swing will shake out, says William Luther, an economics professor at Florida Atlantic University and director of the American Institute for Economic Research’s Sound Money Project.

He says it’s important to keep the long view: If you think these are valuable assets, then you believe their use will be more prevalent in the future and “you see this as more of a seasonal swing. That’s why folks call it a crypto winter , because it suggests that there is a spring on the horizon. “

“Judging by past experience, there have tended to be these ebbs and flows in the in the crypto market,” he tells CNBC Make It.

Why executives are worried

Businesses are worried that with crypto assets dropping in price, investors will decrease their trading activity, which is how firms make money.

That means companies have to find ways to reduce costs, like by reducing their workforce. Coinbase joins a growing list of crypto companies, including BlockFi and Crypto.comthat recently announced hiring freezes and then staff cuts in order to reduce costs.

For most businesses, current swings in the market are still relatively small, “so you do not see most companies in the economy laying off 20% of their workers when there’s a market decline,” Luther says.

With cryptocurrencies, though, “there’s the potential for their value to fluctuate a lot more than other assets, and so you see companies adjacent to those coins expanding and contracting much more.”

What this means for investors

Luther says the good news is that current crypto volatility should not change your broader portfolio strategy. “You should have a strategy in place where you have a diversified portfolio of stocks and bonds and potentially crypto assets as well, where you’ve thought carefully about that asset allocation.”

Other than rebalancing your portfolio if the value of your assets has changed, “I do not see anything that’s happened in the last six months that would cause me to change my portfolio strategy,” Luther says.

Experts typically advise crypto remain a small part of your total portfolio, between 1% and 5%, and that you only put in as much money as you’re comfortable losing.

However, for those interested in getting into crypto, now is not the best time, Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management, recently told CNBC. He made one exception for people with very long-time horizons and who are dollar-cost averaging into the asset.

Those buying in now should have “long-term conviction,” Tyrone Ross, CEO and co-founder of Turnqey Labs, Inc. previously told CNBC. He said buying into crypto now has a similar risk and potential reward of venture-backed investing.

If anything, Luther sees the current crypto swings as a reminder of what he tells his students: Be cautious of owning too much stock in their employer, especially if they work in a volatile industry.

He knows it’s a tough sell to people building the technology: “They’re very excited about it, and they naturally want to own a piece of the assets that they’re creating.

“But they should at the very least recognize that’s a very risky proposition, when they could be diversifying away some of that risk by by holding a more traditional portfolio.”

Check out:

Stocks have officially entered bear market territory — here’s what that means and what you should do

You should not look at your investment accounts every day — here’s why

Tech experts call for Congress to bring ‘skeptical approach’ to crypto industry

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