Since the middle of 2020, the crypto market has experienced a substantial downturn. The COVID-19 pandemic kicked off the crypto market’s slump. Throughout 2021, Bitcoin faced an extremely volatile market, falling nearly 50 percent between April and July before recovering abruptly and then dipping again. By the end of 2021, Bitcoin reached $47,000, falling short of expectations. In the middle of October 2022, Bitcoin fell in price to $19,000, a 70-percent decline compared to November 2021. Ethereum has also experienced a rapid downturn of 64 percent. Meanwhile, Terra Luna collapsed to $0.00025454 in May 2022, only within a month from its highest price yet of $115 in April 2022.
Despite going through several boom-and-bust cycles in the past two years, the crypto market really does not have a long track record yet. Bitcoin, which was invented in 2009, only gained traction in 2017. With the long-term application of blockchain technology and optimism about the digital asset ecosystem, however, investors remain confident of the future of cryptocurrencies. If you have interest in crypto, especially if you are a beginner, it is important to exercise caution to limit losses and position yourself for greater gains in the future.
Here are three tips for navigating the crypto market during a decline:
1. Only Invest What You Can Afford to Lose
Similar to trading stocks, investing in crypto carries substantial risk, as prices can go up and down significantly within a short period of time. While this is part of the appeal of crypto investing for some investors, its volatility and level of uncertainty can also cause financial stress. When a cryptocurrency’s prices decline quickly, as was the case with Terra Luna, short-term recovery is extremely unlikely. If you have not diversified your investments, you have no choice but to injure the financial loss associated with that risk. This begs the question: how much can you afford to lose?
Experts advise you not to jeopardize your financial security when investing. This often means putting away money equivalent to three to six months of expenses to ensure you have enough to pay your living expenses if your initial investments do not turn profitable in the short-term. More importantly, invest in crypto only if you are meeting all your financial obligations, such as paying debt and contributing to retirement.
Regarding how much to invest, various financial advisors stated that crypto should not exceed more than 5 percent of your total portfolio. According to Michael Kelly, CFA and president of Switchback Financial, crypto investment should be minimal despite being a valid financial vehicle for diversification. There is nothing wrong with starting at 1 percent and increasing it simultaneously as you grow your investments in other asset classes.
2. Be Patient and Focus on Your Long-Term Investing Goal
During a recession, cryptocurrencies experience “winters.” This refers to a significant period of low asset prices. Typically, long-term and more experienced investors with a higher risk tolerance buy during the dip, expecting to profit when the crypto economy rebounds. However, some investors also tend to panic and sell to cut their losses. When this happens, it is important to remember that markets can rise and fall.
Certainly, with crypto, this is not the last time that prices will decline before it rises again. Even though analysts expect Bitcoin to reach $10,000 by the end of 2022, it is still higher than two years ago, resulting in a significant net gain for investors. Investors almost always have a better chance at accumulating wealth with long-term investing than timing the market and gaining a quick profit.
3. Don’t Rush. Do Your Research before Investing in Another “Hot” Crypto Coin
Many aspects of the crypto markets are driven by trending topics on social media and in online communities. While there are expert investors in crypto groups that you can learn from, there are also individuals and groups with ill intent. When new and hyped cryptocurrencies are introduced, avoid making a rush decision. Instead, conduct proper diligence and risk assessment using credible resources.
Exercise caution when reading crypto strategies online that promise quick and guaranteed returns. Unlike cryptocurrency scams, legitimate platforms are well-documented and offer many details about the blockchain and any or all associated tokens. In addition, only legitimate cryptocurrencies disclose their whitepapers, outlining trading protocols, formulas, and the network’s functionalities.
Legitimate cryptocurrencies also identify and publicize the members and developers behind the project. Marketing communications about legitimate cryptocurrencies are typically discussing blockchain developments or security updates. Rarely do real crypto projects promise free coins, claim quick returns, or ask for private cryptocurrency keys.
The Bottom Line
With the rough economic conditions facing the world since 2020, it is not certain when investment sentiment on crypto will change. However, when macroeconomic conditions pick up, analysts expect cryptocurrencies to recover. Early investments in depressed prices of cryptocurrencies allow investors to leverage lower investment costs to achieve greater rewards during bull runs. To avoid being victimized by fraudulent activities brought by crypto scams, conduct in-depth due diligence and subscribe only to legitimate platforms that are trustworthy and transparent. By being consistent with your investment goals and strategy, you can navigate the crypto market with confidence even during a recession.