- The best way to survive a crypto crash is to keep a long-term mindset and ensure your financial situation is strong enough to wait out any dips.
- Diversification is also key. Think about how your crypto investments fit into the rest of your portfolio and consider what percentage you want to devote to high-risk investments.
Check these four points off to give yourself the best chances of weathering a crypto storm.
Cryptocurrency prices have had a rollercoaster six months. Back in November, crypto grandaddy Bitcoin (BTC) reached an all-time high of almost $68,000, before falling as low as $35,000 in January. It's now trading at around $40,000, according to CoinGecko. Some observers are optimistic about a breakout while others worry it could fall further.
Sadly, for cryptocurrency investors, this type of volatility is normal. It's a high-risk asset class and there's a lot of uncertainty about how it might develop. Use our four-point crypto crash survival checklist to survive this and any other crypto crash.
1. A crypto investing budget
The golden rule of cryptocurrency investing is to avoid using money you need in the short term. These are high-risk assets that might outperform over time. But they could also crash completely, so think carefully about how much you want to invest.
It's easy to get caught up in the excitement around stories of crypto millionaires and a potential new form of money. Instead, look at your overall budget and see what money you need for other financial goals, such as your retirement or any debt repayments. Your cryptocurrency investments should not take precedence over building strong financial foundations.
If you only invest money you can afford to lose, a sudden price drop will be disappointing but not devastating. It also means you can wait out even a prolonged price dip without being forced to sell your assets to cover any immediate expenses.
2. An investment plan
Crypto apps and exchanges have become so easy to use and accessible that many people jump in without having a clear plan. It's understandable. But if you first consider how your crypto investments fit with your other financial goals and existing portfolio, you're less likely to get burned if the market crashes. For example, many experts recommend making crypto investments only a small percentage of your overall portfolio. Exactly how much depends on your own financial situation and tolerance for risk.
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The other aspect to having an investment plan is knowing exactly why you're buying for each and every crypto you add to your portfolio. As you research a new coin or token, think about what specific risks exist, what problem it promises to solve, and what your hopes are for its performance in the long term. That perspective can help avoid panic buying -- or selling -- and gives you a clear basis for making a decision.
3. A long-term mindset
Here at The Ascent, we favor long-term investing over short-term trading. Rather than speculating to try to get rich quick, look for quality projects you think could perform well in the coming five to 10 years. This can be difficult with a new asset class like cryptocurrency, especially one with such wild price action.
However, buying and holding assets for a long period of time is a more reliable way to build wealth. It also takes some of the stress out of crypto investing and makes it easier to wait out even extreme price fluctuations. Cultivating a long-term attitude toward your crypto holdings is key if you want to survive the latest price crash.
4. An emergency fund
We already touched on the necessity of building strong financial foundations. Having an emergency fund is so important that it warrants its own point on this checklist. If we've learned anything from the past few years, it is that unexpected crises can happen. An emergency fund that will cover three to six months' worth of living costs can help cushion you against, say, a job loss or medical crisis.
If you don't have an emergency fund, the danger is you'll be forced to sell your investments at a loss. Let's say you bought cryptocurrency last year. Your portfolio may now be worth 40% less than you originally put in. If an unexpected disaster strikes and you don't have cash put aside, you might have to sell now. This would lock in those losses and mean you can't benefit from any rebounds.
The real driver for surviving a crypto crash is managing risk. You can do this by avoiding situations where you might be forced to sell your investments at a loss, diversifying your portfolio, prioritizing other financial goals, and keeping your eyes on the long term.
Don't lose sight of the fact that there are no guarantees in cryptocurrency investing, and you could see huge losses as well as huge gains. That way you can build enough safeguards into your investment strategies to weather even the fiercest crypto crash.
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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.
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