How to prepare and navigate a crypto crash? The price movements in the crypto market are wild and can move in both ways significantly.
Just as the price of crypto assets may rise at a rapid pace at any given point of time, it can drop at an equally fast pace down to 50% of its value in a matter of a couple of months.
This is because the crypto market is extremely volatile and the traders and investors are aware of this notorious attribute of it.
For example, the crypto market experienced a significant hike in prices of coins in November 2021 but has fallen significantly by the start of this year.
Therefore, a crypto market crash is commonplace, big or small, and therefore every trader and investor should know the ways to face it, navigate it, and be successful in the end.
The best way to do so is to be ready to face such things as and when they happen.
But sadly, most of the crypto investors and traders are not aware of the ways to prepare themselves for such dire situations and they often end up incurring heavy losses.
A few of them stay on even after that but most of them leave the crypto space and try out other avenues.
Starting 2022 with a thud, most of the coins paid high returns to their investors but then Bitcoin price started to fall off from all time high by 40%. Others followed suit.
First of all, you should remember that you cannot do anything to prevent a crypto market from crashing.
All you can do is prepare yourself to minimize your losses.
If you do not want to be one of them then follow this article to know about the ways to survive a crashing crypto market as well as several other aspects to handle the situation and continue your trades.
How to Prepare and Survive a Crypto Crash?
Prices of crypto coins have fluctuated before and will continue to fluctuate in the future.
There are different factors that drive the crypto market to crash but when it comes to dealing with the situation it is the same principles followed in traditional investments that apply to this exciting yet volatile space as well.
Therefore, your primary focus should be on managing your risks to avoid the side effects of volatility as a crypto investor.
Here are a few things that you should do for a start.
Make sure that you do not feel the urge of investing an amount of money that you may need in the long or in the short term.
You should be comfortable letting your investment remain untouched and let it grow over time.
Also, it is important for you not to get carried away by the crypto stories that tell that crypto has grown 5000% in a year.
Though it is easier said than done, a successful crypto investor is the one who can make the right decisions and follow the golden rule of investing in such a risky asset class like crypto.
Another important factor is to invest an amount that you can afford to lose.
Do not over-stretch your budget or borrow money to invest in crypto, which, as said earlier, is an extremely risky asset class.
This way you will have enough money to meet your day to day needs and also save you from being devastated if the crypto market falls, which is disappointing for sure.
Most importantly, you will not be compelled to sell your holdings at a loss. Instead, you can hold on to it and wait for the market to recover.
It is good to have a backup always.
Therefore, create an emergency fund which will act as a financial airbag to protect your investments from unexpected disasters and take out the stress to some extent if the market crashes.
Ideally, an emergency fund that will allow you to meet your daily expenses for 3 to 6 months is good to have.
You should always think for the long term when you invest in crypto.
This will protect you from panic selling when prices of coins drop, which is a common action performed by the investors who look to make short term gains.
Long term focus will save your investments from market crashes which is part and parcel of crypto.
And, do not invest all your money in crypto. Typically, it should represent only a small percentage of your entire investment portfolio.
This amount however may vary based on your knowledge on crypto, your risk appetite, and potential of the coin to outperform others.
Diversifying your portfolio is the key since it will enable you to handle the situation if one particular market sector collapses.
Finally, since only a handful of crypto coins will produce high returns and fail less frequently it is also necessary for you to choose the right type of crypto to invest in.
And, never expect that the coins will produce the same kind of returns year after year.
Here are a few things that you should look for while choosing your crypto coin to invest in:
- Look for an established crypto though smaller coins may offer a better chance of making higher gains. These smaller coins come with more risks and often cannot survive a serious market crash as the established coins like Bitcoin and Ether with high trading volumes can.
- Look for a coin with more utility because these are less likely to fail when the market crashes. Your coin should have a purpose, ability to solve specific problems, and offer beneficial solutions to people. Also, check how it compares to its competitors.
- Look for a coin with a strong team behind to support. A coin with an experienced, reliable, and proven leadership will offer better management and guidance during tough times. Do not ever go for a coin with anonymous project leaders.
Finally, make sure that the coin has an active and responsible development community because without the developers working on the coin, it is sure to fail during a market crash.
Questions to Ask
Here are a few questions that you should ask yourself to further prepare yourself to survive during a market crash.
Has the coin crashed previously?
Dramatic gains and drastic losses are very common in the crypto scene and therefore every coin is highly likely to have faced such situations before.
Find out whether the coin has failed before and how frequently it has.
The ups and downs in prices can be incredible and knowing them precisely will help you put your moves and long term objectives in perspective.
You may even consider a dip in value as your opportunity to buy more of those coins.
What are the risks involved?
You should know about the risks involved in Bitcoin or any other crypto investment in the first place.
This awareness will help you to plan your future moves to avert such situations or minimize the potential losses when the crypto market crashes.
How much downturn can you tolerate?
If you feel that you will lose your sleep if the value of the crypto you invested in moves down by 80 or even by 90%, you should not invest in crypto.
Remember, these are not uncommon situations in a crypto market, especially when it crashes.
Are you influenced by FOMO or FUD?
FOMO or Fear of Missing Out and FUD or Fear, Uncertainty and Doubt are two specific factors that make people sell or buy crypto.
If you are influenced by these you will surely end up making wrong buying or selling decisions and take on unmeasured risks.
What are the reasons for a crypto market crash?
There are many factors that may cause a crypto market to crash such as inflation, high interest rates, government regulations, and other macroeconomic factors.
If you only know these reasons you will be able to find ways to deal with them more efficiently which will grow your confidence while making your investment in such a risky alternative asset.
Are you okay with new technology?
Crypto operates on blockchain technology which is novel and is a bit complex.
The effects it has and may have on the world economy in the future is still not quite clear because crypto is still in its nascent stage.
If you do not know how it works, you may be in for a surprise.
Ideally, if you are not made for crypto, you should not include it in your portfolio.
If you find that most answers to the questions above are positive or satisfactory, you should go ahead with investing in crypto.
Instead, you should focus on investing in other markets.
There are some alternatives to crypto that have high potential to offer long term returns that you may try if you are not comfortable with the volatile and speculative nature of the crypto market which is prone to crashes.
- Individual stocks
- Dividend stocks
- Index funds.
However, no matter whichever way you choose to invest your money in, never make any rash judgment.
Always give yourself as well as the market some time to settle before you react to a crash and start selling.
Ways to Handle
Here are a few proven ways in which you can handle and manage your crypto investments when prices and the market fall.
If you follow these tips you will neither be scared when the market plummets nor be thrilled when you see an opportunity to buy coins cheaper.
Always act with a cool head to any given market situation instead of reacting to it impulsively or in panic.
Staying calm is the key when you sell your crypto or buy more coins in a dip.
Take emotions out:
Never make any crypto trading or investing decision by being influenced by your emotions.
It will seldom produce the good results that you are expecting.
Instead, you should tarry a little and reflect on the situation as well as your reasons to act in the way you intend to in the given situation.
Review the situation:
You should never jump into a river without knowing how deep it is! The same applies to crypto investing.
Know and review the situation before you react during a market crash.
Go through the news and the discussions going on among the crypto community and forums to assess the situation.
This will not influence your decisions due to the rumors, unreasonable actions or sentiments.
Let volatility be:
Volatility in the crypto market is something you cannot help and therefore let it be as a part of your investment game.
Since there are no cash flows literally in this market, you will have to depend on the changes in the market sentiment that drives the prices.
Therefore, react responsibly when the market swings between rabid optimism and pessimistic despair.
Assess the future:
No matter whatever happens to the crypto market, whether a ban is imposed on crypto like in China or the mining rewards being halved, always evaluate what effects it would have in the future before reacting to it.
Not all countries may follow the same rules and regulations and therefore if the future of crypto looks bleak in one specific country, there is a high chance that it is bright in some other.
Follow a plan:
You should have and always follow a plan when the crypto market crashes.
If you stick to your plan you will not deviate from your investment objectives and will also be in a much better position to decide what you should do next.
Remember, a buy-and-hold strategy is usually the best way to build wealth in the long term but depending on the existing situation it may not hold water.
It may be better to exit your positions in such situations.
Therefore, whether you invest more or cash out, the key is to make decisions according to your plan and by being well informed so that you do rush into anything.
Ways to act:
Finally, now that you have cooled down and have carefully evaluated the current situation as well as the future, you should determine the specific ways in which you should act when the crypto market falls.
Find out whether the risks in a crashing market are opportunities in disguise.
If that is so, hold your positions and even invest more using the dip in the price of the coin to make further profits in the long term.
Find out whether the current risks have any chance of growing into more severe ones.
If so, take the losses and stay out of the game till the time the market recovers, as said earlier.
If you find the situation to be too murky to decide what lies ahead of the crashed market it is better to consider splitting the discrepancy.
You may sell a portion of your position to minimize the losses and still hold some to make the best of the potential upsides in the future.
Tips to Invest
Your investments in crypto can go to the moon and then come back to earth off and on.
Keeping this aspect in mind, here are a few tips that you should follow while investing in crypto.
This will ensure that you know what you are getting into and what exactly you can expect.
It will also make you aware of the market crashes and make prior adjustments to your investing strategies to make profits even during or after the crash.
Follow your goals:
You will need to have a specific mindset when you invest in crypto and expect to make good profits out of it.
Therefore, know your investment goals and have a mindset in accordance with it.
If you are investing to make the best out of the opportunities in the long term your mindset should be different if you intend to make quick gains from short term trading.
This will help you to make the right decision.
Focus on long term charts always:
As said earlier, you should have a long term perspective while investing in crypto.
This will allow you to make profits from it even if the market crashes because such a situation is not everlasting and will recover sooner or later and prices may even reach new all-time highs.
Therefore, if you consider looking at the price charts then stay away from those 24-hour charts and instead focus on the Year to Date.
Buy the dip:
Ideally, the most common process followed in crypto, especially in trading, is to buy when the prices are low and sell when the prices are high.
However, it may not be always possible to time the market precisely in this manner.
Therefore the best long term investment approach is to buy crypto when the price dips significantly.
This will allow you to own more of your favorite coins and earn more in the long term.
But, make it a point that you do not give in to panic buying either.
Research well about the potential of the asset for the long term and do not simply buy it just because it is on sale.
Invest small percentage in different coins:
Even if you buy the dip, do not intend to invest a huge percentage in only one type of crypto.
It can be risky because prices may not go up always and quickly for the crypto you invested in.
It takes time and therefore it is important for you to make sure that you will not need the money invested in crypto soon.
Also, a small percentage will allow you to mitigate the risks more easily by minimizing your exposure to risks and prevent ruining your financial health.
This is because when prices of one crypto falls, chances are that the prices of the others go up.
There are also some other important strategies to follow while investing in crypto that will protect your money.
You will be better off if you stay away from the crypto market after a crash till the conditions become normal once again.
Dollar cost averaging is another good strategy to follow because things will surely go up in the long term.
Follow the crypto cycle and max it up depending on the momentum of the market.
Always try to figure out how things pan out before you make an investment to prevent it from reaching the bottom.
Look out for new developments in the market, especially regarding Decentralized Finance or DeFi and NFTs or Non-Fungible Tokens as they are in vogue currently.
You may sell some of your holdings when the price is ripe and invest in a few DeFi or NTF majors.
Also, if you find that a particular crypto is quite high in price, sell them off and then invest the proceeds in a few second tier crypto coins that are yet to boom.
No matter whichever way you choose to react to a market crash, you will always need an action plan that will reflect your view on the potential opportunities and risks.
However, if you want to follow the tips of the most successful crypto investors and experts, you should never touch your crypto as it grows, irrespective of the ups and downs in the market.
Windows of Opportunity
There is no reason to believe that when a crypto market crashes it brings an end to the world.
On the contrary, this situation can create a lot of opportunities in the process some way or the other.
It is for you to find out these windows of opportunities and choose the best one to follow.
Here are a few ways in which you can capitalize on the crypto market crashes and on the chances of the coins to bounce back in the long term.
One of the best ways to do so is to invest in the stocks of the companies that are associated with the crypto market some way or the other.
The list of some of the good companies to follow includes and is certainly not limited to:
- Tesla or TSLA, the leading manufacturer of electric vehicles in the world known for its enormous Bitcoin investment
- Nvidia or NVDA, one of the largest manufacturers of highly efficient and powerful crypto mining GPUs
- PayPal or PYPL, a platform that aims to make buying, selling, holding, and managing crypto easier
- Square or SQ, an extremely trendy Cash App that allows sending crypto remittances and
- CME Group or CME, the largest market in the world for derivatives and Bitcoin futures contracts.
You will be better off if you purchase a Bitcoin derivative such as an Exchange-Traded Fund or ETF.
In this process you purchase shares of an investment fund.
This fund typically aims to make the best out of the current as well as the future prices of Bitcoin.
Ideally, investing in a Bitcoin ETF is much safer than storing actual Bitcoin because it minimizes both the complexity and risks involved in it.
This is perhaps one of the easiest ways to add an alternative asset to your crypto portfolio.
However, to make the most out of your crypto investment even during a market crash you should be rational and calm to judge the cyclical movements.
This will help you to choose the right timeframe to make your investment.
One good thing about crypto, especially Bitcoin, is that no one has ever lost any money by holding the coins for at least 4 years.
Therefore, investing for a long term is the key to be a successful crypto investor whether the market is in boom or is crashing.
If you are patient, you will be rewarded and not miss out on any promising prospects.
Research a lot when the market is in a downtrend to know how exactly it will affect the price of the crypto coins and whether it will be a brief or a long term effect.
However, you should not be very seductive in your approach and selection and know the best possible ways to make profits and beat the volatility of the crypto market, which, needless to say, is not for everybody.
Typically, crypto is quite an exhilarating digital asset class to invest in provided you know how exactly to overcome the adverse effects of a market crash which is a pretty common thing to happen in this space.
If you want to be successful as a crypto investor then the best is to be prepared for the worst.
Through this article you have come to know some of the best ways in which you can do that exactly and be able to achieve your long term objectives.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.