Crypto Prices Are in Freefall. What Should Investors Do?

Handling volatility is an important part of crypto investing.

Crypto prices tumbled again on Thursday as markets reacted to Russia's invasion of Ukraine. Market leader Bitcoin (BTC) dipped below $35,000 for the second time this year. In contrast, the price of gold, which many consider to be a relatively safe investment, rose to its highest point so far this year.

The escalating crisis in Europe has given investors yet another reason to pull out of riskier asset classes like cryptocurrency. This comes on top of the Federal Reserve's decision to pull back on pandemic-related stimulus measures, meaning there's less money sloshing around the economy. Some cryptocurrencies are down around 50% or more on their all time highs, and the market is struggling in what is now a more risk-averse climate.

What should investors do?

Most long-term buy-and-hold crypto investors don't need to do anything. As long as your original reasons for buying each cryptocurrency still hold true, now's the time to wait out the slump. So far, Bitcoin's price has recovered from each price drop since 2009 and gone on to reach new highs. Many expect it to do so again. Seeing things through a five- to 10-year lens helps keep even dramatic price drops in perspective.

Avoid panic selling

One challenge with cryptocurrency investing is that there's a lot of uncertainty. You'll frequently see warnings that crypto prices could fall to zero -- it's one reason we advise only investing money you can afford to lose. The trouble is that this knowledge can make it harder to hold on through a price crash. The temptation to cut your losses can become overwhelming.

Here's the thing: If you sell at a loss, you'll definitely lose money. If you hold on and prices rebound, there's a chance you can eventually profit. For example, let's say you bought $500 of Bitcoin in mid-April last year. Prices fell and by mid-July, your 0.86 BTC would have only been worth about $280, according to CoinGecko data. If you'd sold at that point, you'd have lost $220. But by November, the price of Bitcoin had soared again, and your investment would have been worth around $580.

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We don't know when prices will go back up. And in truth, we can't be completely sure they will. We may be in for a prolonged period of low prices, and prices could actually fall further. However, if you bought a particular cryptocurrency because you believe it has the power to transform the way we use money or change the way the internet works, it's unlikely that the situation in Russia has changed this thesis. But if you lock in your losses by selling at a low, you won't benefit if and when those individual cryptocurrencies eventually realize their long-term potential.

What about buying the dip?

There's been a lot of talk about buying the dip on social media in recent months. The idea of buying low and selling high may seem like a common sense way to invest, but it isn't that simple. For a start, it's extremely difficult to call the lows or know when we've reached the highs. Plus, some people may hesitate to buy in the face of so many dire warnings about the future of crypto.

But more than that, a lot depends on your individual circumstances. Do you have spare cash you don't need for other financial goals, such as paying down debt or saving for a house? Are you up to date with your retirement savings? And can you rely on your emergency fund to see you through a crisis? If you answered no to any of those questions, now's probably not a good time to buy crypto.

It's also worth thinking about your overall investment strategy and attitude toward risk. Many financial experts suggest crypto investments make up only a small percentage of your overall portfolio. Perhaps this recent crypto crash has left you feeling overexposed to the crypto market, or you've realized you're not comfortable with high levels of risk. If that's the case, buying more crypto is not the answer.

On the other hand, you may have been waiting for the right time to buy crypto, or to buy more of it. Perhaps you've done your research and know which coins you want. You may have money set aside for just this type of scenario. As long as you're OK with the fact that prices might fall further, buying the dip might make sense for you.

Bottom line

There's no one single way to handle a crypto market crash. But if you invest in high-risk assets like cryptocurrency, in the long run, you need to find ways to mitigate those risks. One way is to only invest money you can afford to lose. Another is to build a diversified portfolio that lets you weather individual storms. Ideally, this should contain a mix of assets, including cash, crypto, stocks, and real estate. What's important is that your overall financial well-being is not dependent on the performance of what is a very volatile asset.