Cryptocurrency is the most volatile asset class with a history of violent price swings. While the recent addition of a spot Bitcoin ETF and the upcoming Bitcoin halving in 2024 have pumped up the market, the crypto market is always on the table to be volatile. With the current market crash, investors must learn how to navigate a crypto crash and immunize their portfolios.
Why is crypto so volatile?
The volatility of crypto comes from both inherent issues in the sector and macroeconomic events outside of it. For instance, the collapse of major platforms like FTX in 2022 sent shockwaves through the market, not only impacting FTX but also attendant cryptocurrencies like Solana and corporations like BlockFi. Rising interest rates, inflation, and regulations can similarly cause investor confidence to dwindle, leading to deep price plunges.
The lack of circuit breakers in crypto markets exacerbates the situation. In contrast to stock exchanges, crypto is traded 24/7, and prices fall very rapidly without intervention. This makes the market very dangerous when there is uncertainty.
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Has crypto crashed before?
Yes, crypto has experienced multiple crashes. Bitcoin, for example, hit a record high of nearly $20,000 in December 2017, only to drop below $3,500 by December 2018. Similarly, after reaching an all-time high of about $69,000 in November 2021, Bitcoin lost more than 75% of its value within a year. These crashes highlight the importance of being prepared for extreme volatility.
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What causes a crypto crash?
Several factors can trigger a crypto crash:
1. Systemic failures: Events like the FTX collapse or the Terra-Luna crash can erode trust in the market.
2. Macroeconomic factors: Rising interest rates and inflation often push investors away from risky assets like crypto.
3. Regulatory actions: Crackdowns by agencies like the SEC can create uncertainty and drive prices down.
4. Market psychology: Rapid price declines can lead to panic selling, further accelerating the crash.
How to protect yourself during a crypto crash
1. Diversify your portfolio
Avoid putting all your eggs in one basket. Crypto should only make up a small portion of your overall investment portfolio—experts often recommend no more than 10%. Diversifying into less volatile assets like stocks, bonds, or real estate can help mitigate losses during a crypto downturn.
2. Revisit your investment goals
Remind yourself why you invested in crypto in the first place. If you’re in it for the long term, short-term crashes may not be as concerning. However, if you’re looking for quick gains, consider whether crypto aligns with your risk tolerance.
3. Secure your assets
If you’re worried about the safety of your crypto on exchanges, consider transferring your assets to a secure wallet. Hardware wallets (offline storage) offer added protection against hacks and platform failures.
4. Avoid emotional decisions
It’s easy to panic during a crash, but selling in a downturn often locks in losses. Instead, focus on your long-term strategy and avoid making impulsive decisions.
Should you buy the dip?
While a crash might seem like an opportunity to “buy low,” it’s important to proceed with caution. Crypto prices can take months or even years to recover, and conditions may worsen before they improve. Only invest what you can afford to lose, and avoid overexposing yourself to high-risk assets.
The risks of investing in crypto
Crypto investments come with unique risks:
- No guarantees of recovery: Unlike traditional assets, cryptocurrencies can lose all or most of their value, as seen with Terra and Luna.
- 24/7 trading: The constant trading cycle means prices can plunge overnight, making monitoring and managing your investments harder.
- Regulatory uncertainty: Governments worldwide are still figuring out how to regulate crypto, which could lead to sudden changes in market conditions.
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How does crypto fit into your portfolio?
Crypto should be treated as a speculative investment rather than a core part of your portfolio. Allocate only a small percentage of your funds to crypto, and ensure the rest of your investments are diversified across safer, more stable assets. This approach helps balance risk and reward, especially during market downturns.
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