Investing Rules: What to do When Crypto is Crashing?
Bitcoin, Ethereum, and almost all other coins can rise and fall, sometimes unpredictably.
In this article, we’ll be covering:
- What caused the recent crypto crash
- Some investing rules you can apply during a sudden market downturn
- How you can prepare for the next market crash
Cryptocurrencies’ volatility can lead to dramatic gains, like the incredible 300% increase we saw in Bitcoin in 2020. Other times, it can lead to sudden market crashes of more than 40%, as we saw in January 2022.
That leads us to a crucial question…
What should retail investors do when crypto is crashing?
What caused the recent crypto crash?
Everything points to the recent crash having been caused by the US Federal Reserve’s discussion about raising interest rates earlier and faster. However, this news did not only affect the cryptocurrency markets. In fact, stock markets also experienced a sell-off. The NASDAQ, for example, decreased by 3%, the heaviest decline since March 2021.
Apart from the Fed’s news, in mid-January, Russia also proposed a ban on the use and mining of cryptocurrencies. However, since then, more news has emerged that points to the country restricting cryptos rather than instituting an outright ban.
In the past several years, we have seen other countries, such as China, ban cryptocurrencies time after time. The market overreacts to the news, average people panic sell, and whales are able to accumulate more Bitcoin and other cryptos at lower prices. China is one of these whales, seeing as the country holds about 0.9% of all the Bitcoin in circulation.
Now that we’ve covered what led to it, let’s discuss some investing tips for you to deal with a sudden crypto crash.
Remember that Bitcoin and other cryptos are volatile
Digital assets are at the forefront of technological innovation and are highly speculative assets. This means that this new technology is extremely volatile, much more so than stock markets. Even as Bitcoin gains adoption, it carries inherent risk, meaning that it can still gain and lose a lot of value very quickly.
Understand your risk appetite before investing
Even the most seasoned Bitcoin investors need to consider their risk appetite before investing. This is especially important for new crypto investors who may not be as experienced as crypto enthusiasts.
As discussed, dramatic ups and downs are not uncommon for your crypto holdings. While often riskier assets have the potential for higher rewards, you must consider whether you can stomach this volatility. For that reason, ask yourself a simple yet difficult question:
“Are you comfortable with seeing your portfolio down by 50% or more?”
If your answer is “yes,” then you have nothing to worry about. If you’re okay with this level of risk, then go ahead, but just always do your own research (DYOR) and be cautious with the risks you take.
If your answer is “no,” you may want to consider doing more research about different digital assets to see which is right for you. For some people, this may mean buying stablecoins and staking them for a high-interest rate. For example, the crypto exchange Coinbase offers excellent rates on DAI, USDC, and even ETH!
Don’t panic sell
Like many things in life, our worst decisions usually come when we’re most emotional. A Bitcoin crash can be an event that adds a lot more emotion to our usually rational investment decision-making. As such, it’s important not to panic sell even if your portfolio is bleeding.
While it’s not always a bad idea to sell when you’re in the red, make sure you’re in the right frame of mind to carefully analyze your portfolio before making any investment decisions.
There’s nothing wrong with cutting your losses as long as you’re able to make a level-headed decision. In some cases, for tax purposes (i.e. tax-loss harvesting) it might even make sense to seek investment advice from a financial advisor.
Once you’re in a more relaxed state, then you can reanalyze your portfolio, consider your assets wisely, and decide whether selling your crypto investments makes sense.
Do something else
If you’re worried about plummeting prices, one of the best things you can do during your cryptocurrency investing journey is do something else, like spending time with your loved ones or going outside, or not looking at your portfolio altogether.
If you’re a person who panics when they see red or if looking at your losses may cause you to panic sell, avoid looking at your portfolio for the foreseeable future.
While it can be very tempting to constantly watch the markets, following a popular coin or several coins you’re invested in makes it extremely easy to get addicted to monitoring cryptocurrency prices.
However, it’s crucial to remember that other non-crypto things are more important. If you’re unable to focus on and enjoy other parts of your life, you may have a portfolio with way too much risk. In this case, you may want to consider shifting to an otherwise vanilla portfolio.
Check the Fear and Greed Index
The Crypto Fear and Greed Index is an incredibly useful tool to gauge market sentiment around digital assets for your crypto investing.
Simply put, it provides a range of values between 0 to 100 to analyze investors’ behaviour.
When the score is close to zero, this signals extreme fear and could indicate that many crypto investors are bearish about the price. When the score is close to 100, this indicates extreme greed, meaning that many people are too excited about the price of Bitcoin rising a lot further in the future.
The Fear and Greed Index can be an emotional management tool, allowing you to separate your emotions from the rest. This means that using the scores from the Index could provide you with an opportunity to buy when the market is extremely bearish or sell when it’s overly bullish.
When crypto’s price inevitably drops as we have seen lately, the Fear and Greed Index could be one of the tools you employ to score excellent deals on new digital assets.
Listen to the media with a grain of salt
The media capitalizes on current market sentiment and has a tendency to exaggerate the impact of both good and bad news, which can influence its audience to make emotional rather than rational investment decisions.
The media can be an excellent tool to have a surface level understanding of general happenings. However, if crypto prices are in free fall or Bitcoin recorded a new low, it can serve as a vehicle to scare investors, meaning that you should not base your financial goals around emotional headlines, be they about China banning crypto for the hundredth time or even personal finance experts predicting the next crypto crash.
The best advice we can offer is that when you read your next piece of editorial content, take it with a grain of salt and don’t base single investments on headlines. This way you’ll avoid taking unmeasured risks and unnecessary financial issues.
Remember why you invested in the first place
The last tip we will share for when markets drop is to remember the reason why you invested in your crypto holdings in the first place.
Did you invest in a single asset like Bitcoin because of its potential as a store of value and use it as a retirement fund? Did you buy Ethereum because you believe in the future of DeFi?
If you made a rational investment decision for the long-term, you should probably not be making any financial decisions when markets drop. Like we’ve been saying, don’t give in to emotion and make rushed choices.
But maybe you invested in Dogecoin on a whim because of all of the hype when Elon Musk was tweeting about it. Or perhaps in Shiba Inu because it claimed to be the Dogecoin killer. Or maybe you gambled on any other crypto because you saw other coins surging and saw a moon emoji on Twitter.
Regardless, if your initial reason to invest was not a sound one, then perhaps you should consider cutting your losses to develop a sound strategy to improve upon your past performance.
How to prepare for the next crypto crash
If you felt unprepared during this crash, here are a few things that can help you prepare for the next.
If you were losing sleep because of your portfolio bleeding, maybe reconsider your allocations and investments.
Since this is such a new and volatile industry, only invest what you can afford to lose.
To avoid extreme risk, dollar cost averaging is a common strategy that has excellent benefits for taking the emotion out of investing. In fact, now there are even interactive tools, like robot advisors that make this an even more hands-off approach!
If you want to take advantage of the ups and downs of the market, consider setting aside some cash or stablecoins to buy crypto at a discount during market crashes. As they say, bull markets make you money. Bear markets make you rich.
Stake your stablecoins to get a high, safe interest rate on a centralized exchange, like Binance (Binance US), Gate.io, Gemini, Coinbase, Kraken.
Whatever strategies you employ, if you’ve read this article until the end, you’ll be on your way to joining the ranks of cryptocurrency experts and you’ll be one step closer to being ready for the next Bitcoin crash.
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