No need to panic! Here’s what you need to know to weather crypto storms.
In January this year, the crypto market experienced a massive crash and lost a total of US$1 trillion in value. With this crash came the fear of the onset of crypto winter, where the prices of cryptocurrencies drop with no upswing in sight. While the fear has since subsided, the crypto market has been experiencing a crash amid growing conflict in Ukraine. On February 24, 24 hours after the conflict first began, the global cryptocurrency market lost 7.9% of its value.
If you are someone who has invested a lot of money in crypto, the mention of a crypto winter might bring up fears of heavy losses and uncertainty of what to do next. Should you stay put, or should you pull your money out of the crypto market? Here are some tips on how you can effectively navigate a crypto crash.
Evaluate the situation
Much like any other kind of investment, crypto investments also require a lot of research. So if you see news reports of the crypto market crashes, dedicate some time to researching why that is and what it means. So, for instance, the concern around the current crash is stemming from an upcoming hike in market interest rates as well as the United States’ plans to strengthen crypto regulations this year. Thus, to fully assess how a crash would affect you, you need to know the complete context of a crash and what its implications would be.
Consider buying
A crash in crypto might actually be a blessing in disguise. If you follow the previous tip and actively research the crash (and the particular crypto that is crashing), then you would get a good understanding of whether this is the right time to buy. Bitcoin, which was trading at US$38,334 on February 1, has already somewhat recovered from the lowest point (US$35,000) that it had reached during the crash. This and a study of Bitcoin’s price history suggests that the currency does bounce back. However, a crash should also tell you that an investment in crypto is risky. Experts recommend investing only as much as you are willing to lose in crypto.
Avoid panic selling
Just because an asset has currently dropped in value does not mean that it will stay on that downward trend. So, avoid selling just because you see the price crashing. Moreover, if you did sell during a crypto crash, it would essentially require you to undersell your asset. If you put in the research before you bought the asset in the first place, you should continue to stand your ground through these murky waters. As we discussed in the previous tip, Bitcoin has had a history of bouncing back and thus, holding your assets might be a smarter choice to make than underselling.
Adjust your portfolio
Once the dust settles after a crypto crash, you must take time to think about your investment portfolio. Analyze how your investments have fared. If you see areas of weakness, it might be time to consider selling said coin or token. Experts suggest that you shouldn’t put all your eggs in one basket, be it crypto or the shares of a specific company. This would protect your overall investments even if a specific company or crypto is experiencing temporary turbulence.
Ultimately, it is important to remember that volatility is part and parcel of crypto investments, and you should have a clear strategy before investing in crypto. One of the most common investment strategies is dollar-cost averaging. Those using this strategy divide the total amount to be invested across a period of time to reduce volatility on the overall purchase. This removes the effort required to time your investment to when the asset is at its best-selling price. Planning the best strategy isn’t the easiest thing to do, so, again, invest with caution to make sure you get the right returns on your hard-earned money.
Header image courtesy of Wikimedia Commons
