You may not like what we are about to say, but it's true: A cryptocurrency crash is inevitable.
The cryptocurrency market crash has wiped off close to a trillion dollars from the market. While this may seem like a surprise, the reality is that it was coming. At its peak of $64k, Bitcoin was up by about 4x its price in early 2020. Most altcoins were also up by upwards of 500% year-to-date.
The market was getting a little too heated up. If you didn’t see it coming and are already caught up in the crash, you don’t have to worry. Here are ten ways to survive the crypto crash and thrive once it ends.
10 Point checklist for the next cryptocurrency market crash
Below is a ten point checklist to get you prepared for the next cryptocurrency market crash:
1. Market corrections are part of the crypto game
With the market dropping by double digits, it could be feeling the world is crashing on your head. It’s not easy watching a significant part of your wealth evaporate overnight. While it may seem counterintuitive, the best thing to do is to relax and know that this is not an isolated event.
The market moves in cycles, and an even bigger rally follows every crash. It crashed in 2013 and emerged strongly from there to hit the all-time highs of 2017 when Bitcoin traded at $20k. It then crashed in 2018 and most cryptos lost over 70% of their value. Bitcoin tested lows of $3k that time.
It has since rebound, and most cryptos and doing multiples of their 2017 all-time highs. Bitcoin peaked at $64k, which was 3X its 2017 highs. This should tell you that it’s all a cycle. The market will rebound and probably come back stronger.
2. Know your crypto risk tolerance levels
Technically, if you are into crypto, it means that you have a high; risk tolerance. It’s a highly volatile market, and what constitutes a dip in this market would easily qualify for depression in the stock markets.
However, even within crypto, there are some higher levels of risk that give investors superior returns during good times. One of them is leverage. Leverage can make you lots of money in a very short time. The downside is that when the market is crashing and volatility high, leverage can wipe you out.
If you are not so tolerant of risk, this is probably the best time to get out of leveraged crypto positions. Since no one knows how low the market can go before it stabilizes, holding crypto without leverage could prevent you from total loss and help you recover all your money once the market bounces back.
However, if you have some tolerance to high risk, then lowering leverage and making use of trailing stop losses would come in handy. The market will go up again at some point anyway. For context, anyone who managed to play around with leverage in 2018 made good money in the 2020/21 rally. It all boils down to how much risk you can tolerate and your motivations for being in the market.
3. Re-evaluate your crypto portfolio
The crypto market is pretty much similar to other markets in many ways. Not all projects in crypto are made equal, and that is something you can say of pretty much all markets. For context, if the real estate market were to crash today, there is a good chance that property in prime markets like London, U.K., and Manhattan, New York, would withstand it better. They would also rebound faster than the rest of the market. The rationale is that there is a lot more to the value of these markets than speculation.
Crypto is the same. Some projects have a lot going on, both in terms of technical development and adoption. At the same time, some projects are just there to ride the wave of speculation. Such projects may have given you huge returns during the rally, but this is the time to reassess if you still want to be in them. If you feel like your portfolio is made up of cryptos on shaky ground fundamentally, this could be an excellent time to reassess and rebalance.
Read Also: 10 Cryptocurrencies with Strong Buy Ratings
4. Be deaf to the market noise
One trend you might notice with all wealthy investors is that they never seem to be perturbed by market crashes. For instance, during the 2008 crash, when it felt like the financial system was going to hell, people like Warren Buffet were pretty relaxed and even buying more. A few years later, they were much wealthier than before the crash.
The reason why it works like that is that seasoned investors know that market downturns are temporary. In crypto at this point, there is a lot of noise ranging from the environment to the Chinese government cracking down on cryptocurrencies. All this noise can make you forget that the same concerns were there in 2018 when the markets crashed.
At the time, the Chinese government cracked down on crypto exchanges and intensified the correction. However, the market still bounced back and surpassed its 2017 highs by a considerable margin. It’s pretty much the same dynamics. If you trust your portfolio and ignore the market noise, chances are things will get much better with time.
5. Have some cash to buy the dips
There are many reasons why wealthy people tend to get wealthier over time. One of them is that they are liquid. As such, whenever the markets correct, they are in a position to build upon their portfolios. You, too, can do the same and create a pretty strong portfolio for the future.
To understand this analogy better, one needs to look at the price of Bitcoin. Anyone who has been buying Bitcoin dips since 2013 is wealthy now. That’s because every dip is followed by a bull rally that surpasses the previous one. Looking at current market dynamics from this perspective, you would quickly realize that the current market dip is not something to whine about. Instead, it is an opportunity to grow your portfolio in anticipation of the future.
To minimize the doubtful thoughts that may come to mind due to the heavy selling pressure, think of it as discount pricing at your favourite retailer. Suddenly the opportunity becomes more apparent.
6. Don’t get into leveraged trading at this point
We have already mentioned that if you are holding a leveraged trade, this could be an excellent time to get out or lower the leverage level. Another thing you need to understand is that this is the worst possible time to try and open a new leveraged trade.
One of the worst mistakes traders make is to try and time the market bottom. Such attempts can be catastrophic if the market falls further. In finance, this is called catching a falling knife. To better understand this, one can use Bitcoin as an example. Many speculators may think that $35-$39k is the bottom, and it can be tempting to make a leveraged trade at this price level. But is there a scientific way to determine that this is the bottom? The answer is No. The market can crash even further from this point. Nothing is stopping a drop back to $20k.
Such uncertainties make leveraged entry at this point risky. It might make sense to buy the dips, but leverage should be out of the equation. The best time to use leverage is during defined trends, not in choppy markets when prices can easily go in any direction.
Check Out: How to Identify Cryptocurrency Market Trends
7. Double down on your winning trades
The crypto market may be in a correction but most projects are still way higher than they were at the start of the year. For instance, if crypto is up by 10,000% year-to-date, even a correction or 20% crash in a day is negligible. However, there are some that have taken a beating and are now in the negative. If you have such cryptos in your portfolio, this is the time to reassess where to add money and grow your portfolio.
If history is anything to go by, the worst mistake is to add to heavily losing cryptos. It would be best to buy more on the winners and leave the losers as they are until they rebound. The rationale behind this is quite simple. The cryptos that have gained exponentially and still holding strong are that way for a reason. It means that they have very strong fundamentals that make them very attractive to investors.
To some extent, the desire to add to losing trades is understandable. It is usually driven by the urge to have more of that asset when the markets rebound. However, reality paints a very different picture. Even after markets stabilize, those that were winning before the crash usually tend to keep winning. The markets have a way of repeating history, and this time around may not be an exception.
Of course, there are bear market losers that rebound harder than the market, but this is speculative. In a market as volatile as crypto, doubling down on heavy losers would be nothing but magnifying the already high risk that comes with this market.
8. Check out cryptos that allow staking and yield farming
At a time like this, when the entire market is tanking, trying to speculate on prices short term is pointless. It would make more sense to focus on other aspects of the market that allow you to earn from your portfolio. One thing that comes to mind is staking, and DeFi yields farming.
When you stake crypto, you have the chance to earn a passive income out of it, regardless of the price movement. While the staking rewards may not make sense when the token price is dropping, you are still accumulating more of it. As such, when the market rebounds, you will have more tokens than before, worth much more than when you started staking. It is much more logical than holding crypto, whose only avenue for gains is speculative value appreciation.
The same can be said of DeFi yield farming. DeFi cryptos may have dropped in value, but the opportunity to earn from them through lending remains. Investing in such cryptos means that you get to increase your holdings despite the crash. The result is that once the market rebounds, you will be in a much better position than you were before the crash. It is simple math that can help you grow your wealth regardless of the market conditions.
9. Remember to focus on value cryptos
In the early stages of recovery after a market crash, investors tend to get more into high-quality assets. This means they tend to recover faster than their more speculative counterparts.
Cryptocurrencies are no different. An excellent example of this is the just ended rally. Once the 2018 crypto crash ended, it is Bitcoin that started the new uptrend. It was only after it started trading in the $40k to $50k price level that most altcoins picked momentum.
Using this approach, it makes sense to look into high-value cryptos once the selloff starts to ease. You are probably wondering, how does one tell a value crypto from a highly speculative one? Well, it may not be clear-cut, but there are factors that are quite basic. One of them is adoption.
The more adopted crypto is, the more likely that it is high value. For instance, Bitcoin and Ethereum are now widely used for payments and other functions such as Dapps development. These two have also seen an increased adoption by institutional players through ETFs and other conventional financial instruments. These are factors that could see some cryptos rebound faster than others once bullish sentiment returns to the market.
10. Average into the market
No one knows when the crypto correction will end. However, you can be certain that it will go back up at some point. For this reason, it makes sense to average in into the market. The best way to do this is to buy in small amounts and get a good average price in the bear market. You will accumulate at low risk, and get considerable gains once the market bounces back.
If you follow the above tips, you should be able to survive the crypto crash, and many more in the future. The unifying factor for all the above is to get rid of fear. Once you get rid of fear, it becomes easier to prudently rebalance your portfolio, hold on to your best cryptos, and get back into the market to beef up your holdings.
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Virtual currencies are highly volatile. Your capital is at risk.