Cryptocurrency crashes can be very stressful. Here’s how to weather the storm.
the main points
- Bitcoin and other cryptocurrencies have plummeted in recent weeks.
- Volatility is part of investing in cryptocurrencies, so it is important to think long-term.
- Avoid panic selling and trust your investment plan.
Cryptocurrency prices have plummeted in recent weeks, with Bitcoin (BTC) losing more than 30% since its November 10 high. Despite a sharp drop again this weekend, Bitcoin is still up about 55% over the year. But that doesn’t make this volatility any less nerve-wracking for investors – especially if you’re new to cryptocurrency.
If you watch in horror as the assets in your cryptocurrency exchange account drop in value, you are not alone. Here are some ways to deal with a roller coaster ride which is cryptocurrency.
1. Maintain a long-term perspective
Cryptocurrency investments are very volatile. If you look at the chart for 2021, we’ve already seen several big price drops. After each drop, cryptocurrency prices eventually rose and continued to reach new highs.
Don’t focus on the 24-hour charts. Instead, zoom out and look at the year so far. Ups and downs are a normal part of all market cycles, but they are more extreme with a relatively new and untried investment like cryptocurrency. As long as you haven’t invested the money you need in the short term, you can wait for the cuts to expire.
2. Don’t panic sell
When you see the value of your cryptocurrency investments go down, it is natural that you want to cut your losses and sell your assets. However, this often means that you are selling low, not taking advantage of any subsequent recovery.
Let’s say you see the price of bitcoin drop by 20% and you sell your holdings. What happens if the price suddenly returns to its original value? You have lost 20% of your investment and you may be hesitant to buy it again.
You never really know what the prices will do in the short term. It may continue to decline, but it may also rise rapidly. So trust your original research and investment thesis. If you believe in the long-term value of your cryptocurrency investment, then be confident that the price can recover.
3. Consider buying a dip
People talk a lot about buying the lows and selling the highs, but in truth, it is almost impossible to time the market in this way. This is one of the reasons why The Ascent takes a long-term investment approach – if you only buy assets that you think will do well in the next five or 10 years, short-term price swings are not a cause for concern.
However, big drops may represent an opportunity to pick up more of your favorite tokens at a lower price. For example, there may be tokens you’ve had on your watchlist for some time and you’ve been waiting for the right time to buy. Or you may want to buy more tokens that you already own because you think they have strong potential in the long run.
However, don’t fall into the trap of panic buying either. There is no point in buying an asset that you haven’t looked for and don’t really want, just because it’s for sale. And it certainly isn’t a good idea to spend the money you need to achieve other financial goals (or worse, borrow money) just to buy the dip. Cryptocurrency investments remain volatile, and there are many unknowns – especially as the specter of increased regulation still hangs over us. You may try to buy the dip only to see that the prices drop further.
4. Understand why the market is down
It is a good idea to understand why the prices are lower, should it affect the original investment hypothesis. If the reason for the investment still stands, then the points I mentioned above all remain. But if something changes drastically – perhaps a security breach has occurred, and you no longer trust a particular project – that’s a different story.
For example, let’s say you buy cryptocurrency because you believe that the underlying blockchain technology can revolutionize a particular industry. The price began to fall due to rumors that the developments of quantum computing made this technology redundant. If these rumors are true, it may be time to reevaluate your investment – your reasoning may no longer hold.
In the case of the recent crash, there are two reasons for the entire market to crash. The first is the fear of the new omicron COVID variant, which has led investors to stay away from riskier assets. In addition, the Fed has warned that it may raise interest rates, and concerns remain about tighter regulation.
5. Make sure that cryptocurrencies are only a small part of your total portfolio
Finally, these sudden price drops are a good reminder that investing in cryptocurrencies is a huge risk. When prices are up, it can be easy to make money. But any kind of investment takes time and effort – and prices don’t always go up.
It is wise to mitigate the risks by investing only a small percentage of your total portfolio in crypto. There are plenty of other investment options out there – safer ones – so try to balance your exposure by keeping a good ratio in things like stocks, ETFs, and real estate. In this way, if the current decline is the beginning of a larger crash, it will not lead to financial ruin.
Cryptocurrency failures are an integral part of this type of investment. If this is the first drop, the best advice is to hold on tight and wait for prices to recover. At this point, you may decide that investing in cryptocurrency is too stressful for you – understandably so. But don’t make any rash decisions. Give yourself and the market time to breathe before you start selling.
Buy and sell cryptocurrencies on an exchange chosen by experts
There are hundreds of platforms around the world waiting to give you access to thousands of cryptocurrencies. In order to find the right feature for you, you will need to decide which features are most important to you.
To help you get started, our independent experts have tested the options to bring you some of our best cryptocurrency exchanges for 2021. Check out the list here and start your crypto journey, today.