Cryptocurrency prices have fallen in recent weeks, with Bitcoin (BTC) losing more than 30% from its November 10 high. Despite another sharp drop this weekend, Bitcoin is still up around 55% year-on-year. But that doesn’t make this volatility any less scary for investors, especially if you’re new to cryptocurrency.
If you watch in horror as the value of your crypto exchange account’s assets plummet, you are not alone. Here are a few ways to handle the roller coaster ride that is crypto.
1. Keep a long-term perspective
Cryptocurrency investments are extremely volatile. If you look at the chart for 2021, we’ve already seen several big price drops. After each drop, crypto prices eventually rose and hit new highs.
Don’t focus on 24 hour charts. Instead, zoom out and look at the year to date. Highs and lows are a part of all market cycles, but they are more extreme with a new and relatively untested investment like cryptocurrency. Until you put in the money you need in the short term, you can afford to wait for the dips.
2. Don’t panic
When you see the value of your crypto investments plummet, it’s natural to want to cut your losses and sell your assets. However, this often means that you are selling low and not benefiting from any further reversals.
Let’s say you see the price of Bitcoin drop 20% and sell your holdings. What if the price suddenly rises to its original value? You have lost 20% of your investment and may be reluctant to buy it back.
You never really know what the prices will do in the short run. They can continue to fall, but they can also increase rapidly. So trust your original research and investment thesis. If you believe in the long-term value of your cryptocurrency investment, be sure the price can rise again.
3. Consider buying the 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 The Ascent advocates a long-term approach to investing – if you only buy assets that you think will perform well over the next five or ten years, the price swings. in the short term are of less concern.
However, big drops can be an opportunity to grab more of your favorite tokens at a low price. For example, there may be tokens that you have had on your watchlist for a while and were waiting for the right time to buy. Or you might want to buy more of some tokens you already own because you think they have great long term potential.
That said, don’t fall into the panic buying trap either. There’s no point in buying an asset that you haven’t researched and really don’t want, just because it’s for sale. And it’s definitely not a good idea to spend the money you need to meet other financial goals (or worse, borrow money) just to buy the downside. Crypto investments are always volatile and there are a lot of unknowns, especially as the specter of increased regulation still hangs over us. You could try to buy the drop only to see the prices drop even more.
4. Understand why the market is down
It’s a good idea to understand why the prices are dropping, in case this impacts your original investment assumption. If your reason for investing still stands, then the points I raised above all hold. But if something has drastically changed – maybe there was a security breach and you no longer trust a specific project – that’s another story.
For example, let’s say you bought a cryptocurrency because you think the underlying blockchain technology could revolutionize a certain industry. The price is starting to fall on rumors that developments in quantum computing have made this technology redundant. If these rumors are true, it may be time to re-evaluate your investment – your reasoning may not hold.
In the case of the recent crash, there are several reasons for the market downturn. One is the fear of omicron’s new COVID variant, which has prompted investors to pull out of riskier assets. Additionally, the Fed has warned that it could raise interest rates, and there are still rumors of tighter regulation.
5. Make sure crypto is only a small part of your overall wallet
Finally, these sudden price drops are a good reminder that investing in cryptocurrency is extremely risky. When the prices go up it can seem 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 risk by investing only a small percentage of your overall portfolio in crypto. There are plenty of other – safer – investment options out there, so try to balance your risk exposure by keeping a healthy proportion in things like stocks, ETFs, and real estate. That way, if the current decline is the start of a bigger crash, it won’t lead to financial ruin.
At the end of the line
Cryptocurrency crashes are an integral part of this type of investing. If this is your first drop, the best advice is to hang in there and wait for prices to pick up. At this point, you may decide that crypto investing is too stressful for you, which is understandable. But don’t make any rash decisions. Give yourself and the market time to breathe before you start selling.