What to Do During a Crypto Crash
The cryptocurrency market is highly volatile. In one month, the price for several coins can skyrocket. In the following month, prices can plummet. Prices can even move up and down in the course of a day. The latest crypto crash came in June 2022. Prices across the board fell. The most notable case was Bitcoin’s drop. On June 18, Bitcoin’s price fell to as low as $23,137 CAD. Only a day earlier, the BTC price was $26.67 CAD.
If you are new to crypto investing/trading, crypto crashes can be a nerve-racking time. Should you sell? Should you buy? Or should you do nothing at all and ride it out? Knowing what to do can be a confusing and difficult thing to find out. The goal of this article is to present you with different things you can do to navigate your way through a crypto market crash.
Do some research
One of the most important things you can do before and during a crypto crash is to do some research on the overall crypto market.
To start, monitor the price charts of various cryptocurrencies. You can find them on crypto exchanges like Binance or Kraken, crypto websites like CoinMarketCap, and on some crypto wallets like the Ledger Live app. Most of these charts will provide the historical prices for a cryptocurrency. You also have the option of viewing a cryptocurrencies price history over the past day, week, month, and year. Underneath the chart you will often find a summary of the coin, its history and recent performance.
Outside of looking at price charts, take the time to familiarize yourself with cryptocurrency. Read up on how they work and learn some of the crypto-related terminology. Investopedia is a good source for crypto information. They cover topics such as blockchains, staking, and stablecoins. While there are cryptocurrency articles on Wikipedia, they are usually dense and not reader-friendly.
Doing research before, during, and even after a crypto crash has numerous benefits. Knowing the price history of various cryptocurrencies can help you predict their future performance. Being knowledgeable in the world of cryptocurrency will help you better understand crypto crashes. Concepts and terms will be less confusing, and you won’t be as overwhelmed. And as a result, you will be able to make smarter decisions.
Monitor the news
Global events can have a significant impact on the crypto market. They can either drive prices up, or send them spiralling down. For example, in May 2022, the U.S. Federal Reserve announced its plan to increase interest rates to combat inflation. This led investors to sell volatile assets like cryptocurrency. As a result, the crypto market collapsed, and experts warned that this was the start of a “crypto winter” (a period of decline). Other recent examples include the Russian invasion of Ukraine and China’s ban on cryptocurrency; both events contributed to crypto’s 2022 collapse.
Because of the influence global events have over the crypto market, monitoring the news is a good idea. While you do not have to constantly follow news sources 24/7, still being informed on current events can help you anticipate when the next slump in the crypto market will happen. You will be better prepared when it occurs.
Buy, sell, or hold?
As I mentioned earlier, the question of whether to buy, sell, or hold your crypto assets is an important decision to make during a crypto crash. Here are some considerations for buying, selling, and holding during a crash.
An old principle in investing is “buy low, sell high”. Most people follow this adage during a slump in the crypto market. Selling of crypto assets during a crash will not generate a large return. Plus, large amounts of people selling their cryptocurrencies further drives prices down. I would recommend selling only in dire circumstances, like when the crash of a coin is imminent (e.g., TerraUSD).
A crash might be the right time to begin buying. This scenario is commonly called “buy the dip”. Investors hope to buy a coin at a low price and hopefully get a large return once the price rises again. However, this scenario is dependent on previous trends; the market will go through a lull before peaking once again. This trend may not play out, so always be cautious when buying the dip. Here is another scenario. The price of Bitcoin, Ethereum, and other valuable coins has fallen. You have wanted to buy some of the cryptocurrencies, but their price did not mesh with your budget. Since their price has fallen, now might be the right time to buy.
Sometimes, the best option is to hold on to your crypto assets and ride out the dip. Once the market stabilizes, you can decide whether to buy or sell. Holding on to your cryptocurrencies during a market downturn can be a hard thing to do; you may be tempted to buy or sell. But as long as you made good investments and manage your portfolio effectively, you should experience substantial loses.
At the end of the day, deciding whether to buy, sell, or hold comes down to the person and the current situation. Take the time to assess your portfolio and decide what you are comfortable with.
Switch to stablecoins
Stablecoins are cryptocurrencies that are tied to real-life assets like gold or fiat currencies (like the Canadian dollar). This relationship, or peg, is the source of a stablecoin’s value. Because stablecoins are pegged to a traditional asset, they are much less volatile than other cryptocurrencies. A popular stablecoin is Tether. The coin is pegged to the U.S. dollar. Therefore, Tether’s price has remained $1.29 CAD. During a downturn in the crypto market, swapping some of your assets for stablecoins could be an effective way of avoiding the huge losses. Once prices recover, you can swap your stablecoins for other cryptocurrencies.
Keep calm and be patient
This relates to the buy/sell/hold section. During a crash, many people are tempted to panic sell or buy. Experiencing losses on your investments is a scary and painful experience. Many people are compelled to sell their crypto assets to lighten the hit they’ve taken. However, the market may improve in the following months, weeks, or days. If you have sold off most of your cryptocurrency, you will not benefit from this upswing. Buying the dip is also tempting. Every investor dreams of finding a promising coin at a low price and reaping the returns when the asset’s value increases. But rushing into buying a coin makes you skip some important steps. You may not properly research the coin beforehand. Or you may spend too much money, money you can not afford to lose. Or the market may be in a slump for longer than you expected, which means you will lose more money.
Plan an exit strategy
In the end, you might realize that cryptocurrency is not for you. Maybe you do not like the extreme volatility. Or you may have lost faith or interest in crypto investing. These are both natural things to feel. To get out of crypto investing, you should plan a careful exit strategy. Ideally, you want to make your exit without taking a huge financial loss. For example, you can sell off your crypto assets once the market starts to recover. However, there are some instances where you may want a clean break from cryptocurrency. In that case, selling off your remaining crypto assets immediately would be your best option.
Unfortunately, crypto crashes occur frequently. Unlike other assets, cryptocurrency’s value fluctuates greatly. At the beginning of a month, the price for Bitcoin could be $50,000. Two weeks later, the price can dip to $30,000. To lower the financial damages, this article discussed some of the things you can do during a crypto crash. Practicing some of the strategies listed in this article will better prepare you for when the next crypto crash occurs.
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