Crashing is a common occurrence in the cryptosphere. Crypto crashes occur when the price plummets drastically. When a crypto market crashes, almost all gains are erased, as is typical after a bullish market.
Many crypto crashes have occurred this year, but the one that hit the market the hardest occurred in May. Bitcoin peaked at around $64,000 during this time. After China banned crypto trading and mining, Bitcoin dropped to almost under $30,000.
A recent crash occurred on December 4, when Bitcoin fell from around $58K to $48,000. Bitcoin is currently trading between $46K to $49K.
Thus, if you are a cryptocurrency investor, what is the best way to cope with these market crashes?
Here are ten ways to handle crypto crashes
1. Keep an eye on the big picture
The first thing you should do when encountering a crypto crash is to stick with your long-term plan. There are certain tokens that you might want to hold for a long time when investing in the crypto market. When you buy a token with the intention of holding it for two years, and a crash happens just a few weeks or months later, it’s 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. Avoid panic selling
Here is a look at what happened with Bitcoin in May. Prices plunged from $64,000 to $30,000. Trading platforms like Binance experienced outages due to the high volume of traders selling.
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. Market emotions should not affect any decisions
Usually, the crypto market is dominated by fear and greed. A crypto crash causes frantic selling momentum from traders, because fear rules the market.
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. Think about 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.
As whales and institutional investors purchase a large number of tokens, dip buying is a strategy they use. Additionally, the crypto market has a phenomenon known as downtrend exhaustion. Bullish rallies usually follow an exhaustion of the bear cycle. Investors who buy the dip may be in for major gains. All that is needed after, is time.
5. Don’t invest money you can’t afford to lose
It is important to understand the nature of crypto assets before investing in the crypto market. In the financial market, cryptocurrency prices fluctuate at a higher rate than other asset classes, 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. Portfolio diversification
Diversifying your portfolio is another way to avoid a crypto crash. Most tokens in the market fall when Bitcoin falls. However, the extent of loss varies, and some assets can even 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 what is causing the market to fall
Don’t rush to make a decision in the midst of a crypto crash without first understanding what’s happening. Regulations, pandemics, and other factors outside the control of the market usually lead to market declines.
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. Add tokens to your portfolio with caution
In addition to being cautious about the assets you include in your portfolio, you can also avoid losing a lot of money during a market crash.
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. Assess your willingness to take risks
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. Keep up with market news and 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.
Conclusion
Inevitably, crypto crashes will occur because cryptocurrency is a volatile asset. Since cryptocurrencies are still a relatively new market, you can be sure that there will be a crash sooner or later. Although, you may still be able to reduce the extent of your losses by using the above tips.
Stay with your original investment plan if you are investing in cryptocurrencies, and don’t make decisions based on what the rest of the market is doing. An investor who is just starting out could suffer major losses due to greed and fear. A crypto investment journey should also be embarked upon with the help of an expert.
