Cryptocurrency investment can give you heartache if the current crash is anything to go by. However, if handled well, you’ll be one of the biggest winners come spring. Here’s what to do.
2022 has been a brutal year for crypto investors. In November 2021, the crypto market peaked at $3 trillion. But by June 2022, a gloomy economy and inflationary pressures spooked investors, raising many questions on the function and role of crypto assets on the economy.
If your crypto portfolio has been taking an endless beating this year, here’s what you should know about weathering the storm. But first, let’s understand the cause of crypto crashes.
Causes of crypto crashes
Cryptocurrencies are largely volatile. As such, their prices are highly affected by major events in the crypto space, like coins and exchanges crashing. Moreover, they can plummet with rising inflation, high-interest rates, and other macroeconomic factors affecting investors’ confidence.
When prices drop rapidly, as has been the case in 2022, the compounding market pressure forces some investors to free their cash to fulfill other obligations.
In the case of FTX filing for bankruptcy, the impact on the market was huge. This didn’t only affect FTX but other currencies like Solana that the exchange had invested in and firms that FTX transacted with. BlockFi, a crypto exchange that had received a line of credit from FTX and was due to be acquired by the company, froze withdrawals and filed for bankruptcy after FTX.
Has a crypto crash happened before?
Yes, numerous times before. The previous Bitcoin high was about $20,000 at the end of 2017. However, by December 2018, it had dropped to below $3,500. It shot back to a record high of $69,000 by the end of 2021, only to drop by 75% a year later.
With that said, it’s important to note that cryptocurrency isn’t an ordinary investment. Bear markets in the crypto market hit differently than in the stock market. And unfortunately, it’s part of the game. So, if you don’t have the stomach for extreme highs and lows, prefer index funds.
What should you do during a crypto crash?
Stick to the 5% rule
The volatility of cryptocurrencies provides an opportunity to reap big. With the giddy highs, a well-timed trade can turn you into a crypto millionaire overnight. On the flip side, it’s a huge risk too. Crippling losses are only a few trades away – the current crash is proof of this.
So how can an investor balance between the gains of their dreams and the devastating losses. Experts say that the magic number is 5%. Say you want to invest $10,000; you should set aside $50 for your crypto portfolio. Anything less than this isn’t enough to make a significant difference, even when the crypto market surges. And anything over this may lead to losses that are difficult to absorb comfortably.
Remember this when the market bounces back, and you’re tempted to build a portfolio on the next hot coin.
Elizabeth Stark of Lightning Labs says she enjoys bear markets because there are fewer distractions. Everyone makes money when the market is up, and the good news is everywhere. It’s only natural to be glued to the screen for hours, watching the line rise.
But when things are not going well, it’s a good opportunity to take a step back, tune out the bad news, and deep dive into research. This will make you a better investor to make your portfolio lucrative again.
Invest for the long haul
Crypto and stock investing have a lot in common. In both, the smart money is on long-term investors. You risk missing out on good market days by buying, selling, and changing coins in the short term. According to the Bank of America, investors that missed out on the 10 best market days in every decade since 1930 lost the opportunity to earn 28% returns. And investors who let their money ride gained over 17,715% on the steady S&P 500 chips. On the crypto market, short-term investors are likely to miss even higher returns.
According to investors, the dollar-cost averaging strategy also makes sense for crypto investing. Contribute the same amount each month or week over time, and you’ll buy more coins when the price is lower than higher.
Don’t panic sell
Managing your emotions is crucial to investing and weathering the crypto crash storm. With a drop of over 70%, it’s understandable why you’d want to sell and cut your losses. However, if you notice you’re constantly buying highs and selling lows, you should change your strategy.
The crypto market is cyclical; eventually, the winter ice will thaw, and spring will come. If you dump your portfolio now, you’ll miss the recovery.
Remember this; you’ve not lost anything until you sell.
It’s a sale, not a crash
Your gut may be inkling you to sell before things get even worse. However, your brain should push you to buy more coins while they are heavily discounted. The silver lining of cryptocurrency is that everything is on a major sale.
Crypto experts say that the current crypto winter presents a once-in-a-generation chance to build a portfolio of currencies currently trading way below their actual value.
Reassess yourself and your strategies
Take the recent crypto crash as a lesson. If you’re looking to invest in digital currencies, expect to have moments you’ll hold on for your life. Although it’s highly unlikely a stock market crash will erase 80% of your assets’ value, cryptocurrency investors should get used to this.
If you evaluate yourself and feel you can stomach such a market, apply best practices borrowed from stock investments. Diversify your portfolio instead of going all out on one coin. Base your investments on strategy and research, not on FOMO or trends.
The golden rule of thumb is to invest what you can afford to lose. When the crypto winter finally ends, you want to be well-prepared with the right information and education. Now is the time to dive deep and get ahead of the herd.
About an author:
Vitalii Nedzelenko is the marketing manager of Good Zone Service & Repairs. He is passionate about technologies, gadgets and digital marketing.