Opinion pieces are based on the author's personal opinion, and they do not constitute investment advice, financial advice, or trading advice. Securities.io does not recommend that any cryptocurrency should be bought, sold, or held by you. Conduct your own due diligence and consult a financial advisor before making any investment decisions.
Crypto crashes are a common thing in the crypto space. A crypto crash happens when the prices take a massive dip. Crypto crashes usually happen after a bullish market, where almost all gains are erased.
Crypto crashes have happened several times this year, but the one that hit the market the hardest happened in May. During this time, Bitcoin had managed to peak a high of around $64,000. In the same month, China announced a ban on crypto trading and mining, after which Bitcoin fell to almost below $30,000.
The recent crash happened on December 4, with Bitcoin falling from around $58K to $48K. It is still trading at $48K at the time of writing.
Therefore, as a cryptocurrency investor, which is the best way for you to handle these market crashes:
Top ten ways to handle crypto crashes
You can handle a crypto crash in the following ways:
1. Stick to your long-term plan
The first way to handle a crypto crash is sticking to your long-term crash. When you are investing in the crypto market, there are tokens that you might want to hold for the long term. For example, if you planned to hold a token for two years, and a crash happens a few weeks or months after your purchase, it is best to keep your assets intact.
Do not be swayed to sell because of the crash. Having a long-term strategy ensures that you have a solid investment strategy, preventing you from making decisions that you could regret later.
2. Do not panic sell
Let’s take a look at what happened with Bitcoin in May. The prices crashed from highs of $64K to around $30K. Many traders rushed to sell, which created outages on exchange platforms such as Binance because of the extremely high trading volumes.
Those who had bought Bitcoin at around $50K to $60K ended up making losses because of panic selling. However, an investor who chose not to sell and held on enjoyed major profits in November after Bitcoin hit another ATH of $69K.
3. Do not be swayed by market emotions
The crypto market is usually ruled by the emotions of fear and greed. In the case of a crypto crash, fear rules the market, which is why you will see frantic selling momentum from traders.
When the fear index is high, you could sell because that is what the other trader is doing. However, remember that market crashes do not last for long because the market will always recover. If you sell out of fear, you might never recover your losses. However, if you choose to hold on despite the fear, you have a chance to recover your losses if prices gain again.
4. Consider buying the dip
One of Warren Buffet’s popular quotes is, “Widespread fear is your friend as an investor because it serves up bargain purchases.” When the market is crashing, choose to do the opposite and buy.
Dip buying is a strategy used by whales and institutional investors, as they are buying a large number of tokens. Moreover, there is something called downtrend exhaustion in the crypto market. The bear cycle usually reaches exhaustion, and it is followed by a major bullish rally. If you bought the dip, you could be in for major gains.
5. Only invest money you are willing to lose
Before investing in the crypto market, you need to understand the nature of crypto assets. Cryptocurrencies are highly volatile, and their prices tend to fluctuate at a higher rate than other asset class in the financial market, such as stocks.
Therefore, if you are a crypto investor, remember to only invest money you can afford to lose. This will prevent you from making major losses during market crashes. If you had invested your emergency fund or your college fund in crypto and the market crashes, you could end up making major losses that could lead you to a dark financial path.
The most recommended thing is to invest only 1% of your account in crypto. While this could lead to smaller profits than investing with a large account, it could also prevent major losses.
6. Diversify your portfolio
The other way to prevent a crypto crash is to diversify your portfolio. Usually, when Bitcoin falls, every other token in the market falls in response. However, the extent of loss differs, and in fact, some assets could make gains as others lose.
For instance, in September 2021, Solana showed strong resilience because as the rest of the market crumbled, it showed strong resistance and continued making highs. Therefore, investors who had diversified their portfolio with Solana continued to make gains despite the market losses.
Portfolio diversification works across all asset classes. Putting all your eggs in one basket could put you in a very bad position when the market falls.
7. Understand why the market is falling
During a crypto crash, do not rush to make a decision blindly without first understanding what is happening. The market usually falls because of factors such as regulations, the pandemic, and other factors beyond the market control.
Research why the market is failing, and analyze if there is a chance that the market could recover. For instance, a series of regulatory crackdowns could cause a crash, but this could be good for the long term because stability will be achieved in the future.
Sometimes, there are instances when the market could fail to recover despite the factors that led to its crash coming to an end. For instance, between 2016 and 2017, the crypto market entered into a two-year consolidation phase, as prices did not make any major gains or losses.
However, in other instances, the market makes a quick recovery, and it even pushes to new record highs after a crash. Therefore, if you understand what is making the market fail, you are in a position to make an informed decision based on the information you have.
8. Be cautious about the tokens you add to your portfolio
The other thing you can do to ensure you do not make a major loss during a market crash is to be cautious about the assets you include in your portfolio.
Some tokens will make losses because the entire market is failing. However, some tokens fall on their own, despite the rest of the market gaining.
When the crypto market was at its peak in May, a new token called Internet Computer (ICP) was launched through an Initial Coin Offering (ICO). A few days after the ICO, the token had made major gains and even became one of the top ten tokens by market capitalization. However, it suffered from a 95% crash after that.
Another token crash that happened recently was SQUID. The SQUID token made a massive gain to an ATH of over $2,000 in just a few weeks. However, it ended up being a rug pull, with prices dropping to below a cent in hours.
To avoid such individual crashes, research more about the tokens you are buying. Moreover, this takes us back to the initial points of portfolio diversification and only investing money you are willing to lose.
9. Understand your risk appetite
Some investors are not affected by crypto crashes because they have a high-risk appetite. Such investors are usually whales that buy a large number of tokens. Crashes caused by sell-off are mostly attributed to short-term traders frantically disposing of their assets during price dips.
If you do not have a high-risk appetite, cryptocurrencies might not be your cup of tea. Cryptocurrencies rarely maintain their values for long. If the market is not gaining, it is losing. If you are not a risky investor, crashes could affect you immensely.
10. Follow news and market analysts
Last but not least, you should not invest blindly. The crypto market is very active. The fact that it is open 24/7 means that a lot is happening, and the success or failure of your investment lies with what is happening in the market.
Sometimes, market analysts can predict when a market crash will happen. In this case, you can choose to be cautious and take out your investment.
Market analysts are not always right, but if you are the kind of investor who does not want to wait to see if the crash happens or not, it’s best to liquidate your investment. Whether the crash happens or not, you will still have your money.
Cryptocurrencies are volatile assets, and crypto crashes are inevitable. If you invest in cryptocurrencies, you can be guaranteed that a crash will happen sooner or later because the market is still new. Nevertheless, you can consider the above tips to reduce the extent of losses you make during a crash.
If you are investing in cryptocurrencies, stick to your original investment plan, and do not make decisions based on what the rest of the market is doing. Fear and greed are two emotions that could cause major losses for an investor who is just starting out. It is also best to consult with an expert before commencing your crypto investment journey.