5 Ways to Handle a Crypto Crash
Cryptocurrency crashes can be extremely stressful. Here's how to weather the storm.
- Bitcoin and other cryptocurrencies have tumbled in recent weeks.
- Volatility is part of crypto investing, so it is important to think long term.
- Avoid panic-selling and trust your investment plan.
Cryptocurrency prices have tumbled in recent weeks, with Bitcoin (BTC) losing over 30% since its Nov. 10 high. In spite of another sharp drop this weekend, Bitcoin is still up about 55% on the year. But that doesn't make this volatility any less nerve-wracking for investors -- especially if you're new to cryptocurrency.
If you're watching with horror as the value of the assets in your crypto exchange account falls, you're not alone. Here are some ways to handle the rollercoaster 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 significant price dips. After each dip, crypto prices eventually increased and went on to reach new highs.
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Don't focus on the 24-hour charts. Instead, zoom out and look at the year to date. Ups and downs are a normal part of all market cycles, but they are more extreme with a new and relatively untested investment like cryptocurrency. As long as you haven't invested money you need in the short term, you can afford to wait out the drops.
2. Don't panic-sell
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 you sell at a low, and don't benefit from any subsequent recovery.
Let's say you see the price of Bitcoin fall by 20% and sell your holdings. What happens if the price suddenly rises back to its original value? You've lost 20% of your investment and may be reluctant to buy it back.
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You never really know what prices will do in the short term. They may continue to fall, but they may also quickly spike upwards. So trust your original research and investment thesis. If you believe in the long-term value of your cryptocurrency investment, be confident that the price can recover.
3. Consider buying the dip
People talk a lot about buying the lows and selling the highs, but in truth, it's almost impossible to time the market in this way. That's one reason The Ascent advocates a long-term investment approach -- if you only buy assets you think will perform well in the coming five or 10 years, short-term price fluctuations are less of a worry.
However, significant dips may present an opportunity to pick up more of your favorite tokens at a low price. For example, there may be tokens you've had on your watchlist for some time and were waiting for the right time to buy. Or you may want to buy more of certain tokens you already own because you think they have strong long-term potential.
That said, don't fall into the trap of panic-buying, either. There's no point in buying an asset you haven't researched and don't really want, just because it's on sale. And it's certainly not a good idea to spend money you need to meet other financial goals (or worse, borrow money) just to buy the dip. Crypto investments are still volatile, and there are a lot of unknowns -- especially as the specter of increased regulation still hangs over us. You might try to buy the dip only to see prices fall even farther.
4. Understand why the market is falling
It's a good idea to understand why prices are falling, in case it impacts your original investment hypothesis. If your reason for investing still holds water, then the points I made above all stand. But if something has drastically changed -- perhaps there's been a security breach, and you no longer trust in a specific project -- it is a different story.
For example, let's say you bought a cryptocurrency because you think the underlying blockchain technology could revolutionize a certain industry. The price starts to fall on rumors that quantum computing developments have made that technology redundant. If those rumors are true, it might be time to re-evaluate your investment -- your rationale may no longer stand up.
In the case of the recent crash, there are a couple of reasons for the market-wide tumble. One is fear over the new omicron COVID variant, which caused investors to pull away from riskier assets. Plus, the Fed warned it may raise interest rates, and there are still rumblings about stricter regulation.
5. Make sure crypto is only a small part of your overall portfolio
Finally, these sudden dips in price are a good reminder that cryptocurrency investing is extremely risky. When prices are going up, it can feel easy to make money. But any type of investment takes time and effort -- and prices don't always go up.
It is wise to mitigate the risk by only investing a small percentage of your overall portfolio in crypto. There are plenty of other -- safer -- investment options, so try to balance your exposure to risk by keeping a good proportion in things like stocks, ETFs, and real estate. That way, if the current dip is the beginning of a larger crash, it won't lead to financial ruin.
Cryptocurrency crashes are part and parcel of this type of investment. If this is your first dip, the best advice is to hold on tight and wait for prices to recover. At that 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.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Emma Newbery owns Bitcoin.