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How to Protect Your Blockchain Portfolio During Sell-Offs

By Zhiyuan Sun – Sep 24, 2021 at 8:30AM

Key Points

  • Cryptocurrencies aren't so much affected by regulatory risks as they are by fraud or overall stock market declines. 
  • A plan to consistently buy cryptos no matter what is superior to timing the market due to short bull-bear cycles. 

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How does one attain investment success with cryptocurrencies without getting knocked out by volatility?

On Monday, a new round of fear, uncertainty, and doubt (FUD) based on potential regulatory crackdowns once again gripped the bourgeoning cryptocurrency sectors. Major cryptos such as Bitcoin (BTC -1.24%)Ethereum (ETH -4.15%)Cardano (ADA -0.51%), and Binance Coin (BNB -0.85%) lost over 10% of their value in a single trading day before recovering. Most of the over 12,000 altcoins out there suffered worse sell-offs. 

But it's important to keep in mind that despite the steep sell-off, they are still up over five- to six-figure percentages since their inception. So let's look at the best plan of action for investors to take to protect their blockchain portfolios

Person holds head and looks worried while staring at laptop.

Image source: Getty Images.

Piercing the shrouds 

Contrary to popular belief, regulatory fears are not the main reason for brutal drawdowns in the cryptocurrency sector. This is apparent to anyone who understands the basic cryptography protecting digital currencies, which allows for the encryption of data in seconds and ensures that it can take decades or millions of years to decrypt them. In addition, recent innovations such as decentralized finance (DeFi), decentralized applications (dapps), and decentralized exchanges (DEX) operate on global peer-to-peer networks and do not have centralized servers. So it's not possible for regulators and police to simply raid a "crypto-headquarters" and seize the servers since there aren't any. In early 2018, Bitcoin tumbled over 12% in a single day after South Korea announced it would ban cryptocurrency trading. However, that ban never came to fruition. Think of it enforcement-wise; the South Korean government would need to seize citizens' phones, PCs, or laptops; scan for wallets; interrogate them for their private keys; and then manually delete them. Heck, even an authoritarian state like China can't go as far as outright banning the ownership of cryptocurrencies.

Understanding crypto cycles 

Hence, regulatory fears more or less represent market corrections. The real bear market threats come from two things. First, there's the correlation with overall global financial markets, especially with stock indexes like the S&P 500. Cryptocurrencies are not hedges against asset meltdowns. Rather, they are far more volatile than stocks. For example, when the World Health Organization declared the coronavirus a pandemic in March 2020, Bitcoin and other cryptocurrencies lost 50% of their value within two days. 

Secondly, it's the internal breakdown of trust among peer-to-peer networks that leads to bear markets. Indeed, cryptocurrencies saw a dreadful 75% drawdown in overall market cap in 2018. At that time, crypto exchanges were not secure and suffered an average of $2.7 million coins stolen per day by hackers. What's more, back then, scammers like the founders of ponzi-scheme cryptocurrency BitConnect, promised ultrahigh yields to investors then ran off with investors' money, leading to losses exceeding $2 billion.

What should I do?

While hacker activity has been on the decline for the past few years, the same cannot be said for the rise of DeFi fraud, or the practice of developers soliciting investors' deposit and making a run with them. Total value of crypto locked in staking, yield farming, borrowing and lending, liquidity farming, etc. (see definitions here) has surged to $163.27 billion. Crypto security firms have not audited all projects' codes, so there's a great deal of suspicious activity out there. DeFi-related hacks and protocol fraud, have skyrocketed to $474 million year to date.

The next crypto bubble will probably burst with some kind of mega fraud, or massive amounts of suspicious activity, with all this money flowing into DeFi. But we still have months to go before then. If anything, all this volatility in crypto means that it can take the industry as little as one year to complete an entire bull-bear market cycle instead of a decade for stocks. For investors who bought at the top and are now holding on losses, don't worry, it won't be long before the next bull cycle starts.

So the key takeaway is to commit to a multiyear crypto purchase plan. For the sake of argument, one should purchase crypto every month with one's disposable income for the next three years -- no matter what happens. Then it's basically guaranteed that investors will be able to catch at least one mega-bullish crypto market cycle during that time. So definitely hold through this correctional sell-off.  

Zhiyuan Sun owns shares of Binance Coin, Bitcoin, Cardano, and Ethereum. The Motley Fool owns shares of and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

Stocks Mentioned

Bitcoin Stock Quote
Bitcoin
BTC
$16,902.19 (-1.24%) $-211.64
Ethereum Stock Quote
Ethereum
ETH
$1,241.37 (-4.15%) $-53.68
Cardano Stock Quote
Cardano
ADA
$0.32 (-0.51%) $0.00
Binance Coin Stock Quote
Binance Coin
BNB
$290.80 (-0.85%) $-2.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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