January 20, 2022

What to do when cryptos crash?

Cryptocurrencies might be the future but are volatile.

Since the creation of the first cryptocurrency in 2009, Bitcoin (BTC) has climbed to the top of the crypto world, with a current valuation of just over $41,000. However, the popularity and price behind Bitcoin wasn't smooth sailing the entire time, with multiple major crashes along the way. For example, in December 2017, the Bitcoin price was at an unprecedented $19,000, but only six months later, it plummeted to $3,400. The price once again skyrocketed between late 2020 and early 2021 to $63,000. However, once again, the Bitcoin price fell by more than 50% to $30,000 by July 2021. Before again soaring to new heights in November of 2021 with an all-time high price of $67,500, which has slowly dropped off in recent months to what the price stands at today, around the $41,000 mark.

There is no other way to describe Bitcoin and cryptocurrencies but as volatile. While the crypto world has seen immense growth in the last ten years and undoubtedly will continue to grow, the challenge for investors is being able to predict the crashes, which is close to impossible. Thus the next best move is to know what to do in these situations when cryptos crash.

With the crypto world expanding rapidly, in combination with the advancements of blockchain technology, crypto has trickled over into the traditional financial markets, with financial experts expressing their concerns that the next crypto crash could affect more than just cryptocurrencies such as Bitcoin and Ethereum and affect stock markets from around the world.

What to do when Cryptos crash?

For some, when the crypto market crashes, this presents a great opportunity as it allows them to enter the market at a much lower price, while crypto enthusiasts will see this as a chance to lower their dollar cost average. Furthermore, Greg King, founder and CEO of Osprey Funds says that before investing, one should consider the personal effects if the price was to drop by 80% or 90%, if this would result in you losing sleep or feeling the urge to sell, then King suggests not to invest in crypto, as the volatile market could have a severe impact on one's mental and physical health. Kiana Danial, author of "Cryptocurrency Investing For Dummies" states that the rule of thumb is only to invest the amount you can afford to lose. Additionally, Danial highlights that many of the cryptocurrency's ups and downs are due to the hype and fear of missing out around certain cryptos. Thus, anyone who does extensive research and has generated significant belief in a project shouldn't be swayed when the market drops. Regardless of whether you are nervous about the drop or excited to buy at a lower price, we have compiled a list of what to do when the crypto market and prices drop.

Composure is key

Before making rash decisions, the first thing to do is take a step back and try to calm yourself, as making decisions based on initial emotions without thinking through and doing research will only hinder you in the long run. Additionally, you need to refer to your game plan, are you invested because you believe in the project and the long-term goals, or are you just here to make a quick buck. Keeping these in mind will help guide you to making the correct individual decisions.

Understanding the situation

Next is to do your research, try to understand what is causing the drop in the price. It may be due to a famous celebrity promoting another crypto or stating they are selling. On the other hand, it could be related to government regulations being implemented that could negatively affect cryptocurrencies or perhaps a technical issue that has caused a delay in the cryptos long-term plans. Examples include pretty much any of Elon Musk's tweets about crypto, the Chinese government banning Bitcoin mining, or Cardano's constant push back of their DeFi space.

Assessing the future

One factor that makes crypto lucrative to some and scary to others is the lack of regulations. For example, China and, more recently, India have indicated their unwillingness to adopt cryptocurrencies which could be a sign for other nations to follow. By contrast, Mexico and El Salvador have gone in the opposite direction by exploring the acceptance of cryptocurrencies, either in the form of existing cryptos such as Bitcoin or in creating their own central bank digital currency. There is no doubt that crypto needs to have some set of regulations applied. Still, the degree to which they are implemented will play a huge role in future success, with the United States of America playing a significant role as constant discussions occur throughout the SEC.

Time for decisions

Once you have gathered your composure, addressed the situation, and researched likely changes to take place in the future, you will need to consider how to react.

You need to identify the risks and determine whether these are potential opportunities. First, you might want to hold your position or use the price drop to invest more and lower your dollar cost average. Secondly, you should try to identify if the risks are likely to increase. If so, it might be worth it to cut your losses. And additionally, if you struggle to commit to a project fully and if you believe that regulations or other factors will hinder the progress of the project and the crypto world. Therefore, you might want to consider selling some of your position to ensure that you haven't lost everything if it does crash. In contrast, if it does flourish, you still have the chance to win big.

Regardless of which approach applies to you, your plan of action must reflect your overall game plan concerning the potential risks and opportunities in the crypto market.

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