Despite the hot weather, the country is still deep in the icy clutches of the ongoing crypto winter. A market long dominated by speculators trying to make a fast buck, cryptocurrency has never been a diversifying asset class that investors use to mitigate risk and hedge against losses.
But the ongoing crypto crash has been brutal even by the standards of the notoriously volatile world of investing in digital tokens.
If your portfolio is taking what seems like an endless beating, here’s what you need to know about enduring the crypto winter that has consumed the entire summer.
Take Note That Crypto Isn’t Your Ordinary Investment
Stocks enter a bear market when they lose 20% of their value. Shedding one dollar in five, after all, is a sobering forfeiture of wealth — for stock investors.
On the crypto markets, a 20% loss barely registers.
From the earliest days of Bitcoin, roller-coaster volatility was baked into the blockchain. According to CoinDesk, the original cryptocurrency lost 99% of its value in June 2011 before falling 56% one year later in August 2012. In 2013, Bitcoin fell 83% off its high and in December of the same year, it lost 50% in just 24 hours. In 2018, it lost 84%. It was trading at $68,000 in November 2021, but now it’s around $24,500.
Bitcoin, of course, is not the only cryptocurrency, but it is the biggest, first and most famous — where it goes, the larger market tends to follow.
The current crypto crash is undeniably severe and extended, but historically speaking, it’s not an apparition. Take it as a reality check. This isn’t the first mega-downturn and it won’t be the last. If you don’t have the stomach for the giddy highs and terrifying lows, this isn’t for you — buy an index fund, instead.
Treat This Crypto Crash as Evidence of the 5% Rule
Intense volatility presents the opportunity for outsized gains — after all, with highs so high, one well-timed trade could make you the next crypto millionaire. On the other side of the digital token, however, is an equally outsized risk. With the kind of turbulence that’s natural to crypto investing, the potential for huge losses is always just a few trading sessions away — and the current crypto crash is proof.
So, what’s the balance between the soaring gains that every investor dreams of and the crushing losses that they all fear?
Bruno Ramos de Sousa, head of global expansion at Hashdex, told Forbes that the magic number is 5%. If you have $1,000 to invest, you should dedicate $50 to crypto. Anything less isn’t enough to make a real difference, even if your coins post significant gains. Anything more and the losses that you’re likely to incur will be too much to absorb comfortably.
It’s not just de Sousa — 5% seems to be the industry standard, so remember this crypto crash when the market rebounds and you’re tempted to flood your portfolio with the hot coin of the moment.
Tune Out — And Use the Time to Research
Elizabeth Stark, the mind behind Lightning Labs, told CoinDesk that she enjoys bear markets like this because they’re less distracting. When markets are up and everyone is making money, good news about your growing fortune is never more than just a click away. Who could blame you for whiling away the hours watching your line go up?
But when that line starts heading south, you’re presented with a golden opportunity to unplug from your portfolio tracker and buckle down so you’ll be ready when the winter passes. Take this time to tune out from the bad news and delve into the research that will make you a better investor. Who’s on the teams behind the most promising emerging crypto projects? Which developers have the best track record? Which NFT communities offer the most bang for the digital buck? When was the last time you read a white paper or tracked a project’s progress on GitHub?
In a crypto crash like this, keeping on top of how much you’re losing is a recipe for anxiety and bad decisions. Research and education, on the other hand, are your ticket to making that portfolio worth watching again.
In This Crypto Crash, Commit To Investing for the Long Term
Stock investing and crypto investing have a lot in common. Most importantly, the smart money in both cases is on those who buy and hold for the long term.
By frequently buying, selling and changing coins, you increase the likelihood of missing the market’s best days. Bank of America data shows that investors who missed the market’s 10 best days of each decade since 1930 would have earned returns of 28%. Those who kept their money in play, on the other hand, would have gained 17,715% — and that’s just the steady and stable blue chips on the S&P 500. On the crypto market, short-term in-and-out investors stand to miss out on much higher highs.
According to CoinDesk, the tried-and-true strategy of dollar-cost averaging makes as much sense for crypto investors as it does for stock investors. Contribute the same amount at the same time every week or month, and over time, you’ll buy more coins when prices are low and fewer when prices are high.
Whatever You Do, Don’t Sell Out of Panic
Just like on the stock market, managing your emotions is part of weathering a crypto crash. According to Cybernews, the global crypto market cap has cratered by $3 trillion, and the top coins are down by 70%. No one could blame investors for wanting to cut their losses and sell before it drops to 80% — but if you’re buying high and selling low, you’re doing it wrong.
Markets are cyclical, and eventually, the crypto winter will thaw, spring will return and you’ll have missed out on the recovery if you dump your holdings now.
It’s hard to watch your portfolio sink day after day, but the old adage is true — you don’t lose until you sell.
It’s Not a Crypto Crash, It’s a Sale
While your gut might be telling you to sell before things get any worse, your brain should be telling you to buy while all the top coins are trading at such a steep discount. The silver lining of the current crypto crash is that just about everything is on sale.
Analyst Mehdi Farooq of Animoca Brands — known for blockbuster crypto projects like The Sandbox — told Business Insider that the ongoing crypto winter represents a “once-in-a-generation opportunity” to build a portfolio of cryptocurrencies that are trading far below their true value.
Take This Time To Reassess Your Strategy — And Yourself
If nothing else, the current crypto crash should be a lesson — if you’re considering investing in digital currencies, expect that you’ll eventually have to hold on for dear life. While even the meanest of bear stock markets are highly unlikely to erase 70% or 80% of your portfolio’s value, crypto traders can and do take those kinds of hits fairly regularly.
If you decide that you have the stomach for all that, apply the same best practices of stock investing to your crypto strategy. Diversify your holdings instead of betting big on one coin, invest based on your research and strategy, never on trends or FOMO — and while you should steel yourself for the crypto crash that is always just around the corner, once it arrives, remember that it won’t last forever.
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Information is accurate as of Aug. 15, 2022.
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- Bloomberg. 2022. "The Crypto Winter Is Here."
- CoinDesk. 2022. "Putting Crypto Volatility in Context: What We Can Learn From the History of Bitcoin Crashes."
- Forbes Advisor. 2022. "How Much Crypto Should Be In Your Portfolio."
- CoinDesk. 2022. "9 Survival Tips for Crypto Winter."
- CNBC. 2021. "This chart shows why investors should never try to time the stock market."
- CoinDesk. 2022. "Dollar Cost Averaging: Build Crypto Wealth on a Budget."
- Cybernews. 2022. "Crypto spring will return: don’t panic sell."
- Business Insider. 2022. "A crypto analyst at Sequoia and Soros-backed investment firm Animoca Brands breaks down why the bear market is a 'once-in-a-generation opportunity' to invest in crypto for cheap — and why one altcoin in particular is ready to pop."
- Kiplinger. 2022. "8 Facts You Must Know About Bear Markets."