5 Strategies to Position Crypto in a Down Market

When crypto is in a down market, prices can seem attractive compared to the heights they fell from – “on sale,” you might even say. But some investors may be skeptical buy the dip, knowing that a price jump is not guaranteed. Others may be content to do nothing.

It is impossible to say how specific cryptocurrencies will perform in the months ahead. But using battle-tested investment strategies can give your portfolio a better chance of long-term success.

This strategy embodies the investment maxim “you can’t time the market” by emphasizing agnostic consistency rather than waiting to deploy your assets at the optimal time.

Instead of relying on luck to guess whether the market has bottomed, dollar cost averaging means committing to a routine — buying $250 of Bitcoin on the first day of every month, for example — that doesn’t take market conditions into account. You buy according to plan whether the price goes up or down.

This strategy is not good for maximizing short-term gains. But over time, this consistent buying can even out the effects of volatility – and cryptocurrency is particularly volatile. Some of top crypto exchanges will dollar-cost average for you if you set up a recurring purchase.

Asset allocation refers to the mix of all your investments, including stocks, bonds and property. Owning investments of many asset types is another way to diversify. Because crypto is so volatile, NerdWallet recommends investing only what you can afford to lose; as a general rule, don’t invest more than 10% of your portfolio in risky assets like these.

You can adjust your personal target allocation by shares, bonds and other assets that match yours risk tolerance and time horizon. Generally speaking, if you need these funds soon, it is a good idea to have a larger percentage of conservative investments, such as high-yield savings accounts or short-term bond funds, to avoid large fluctuations in value.

Suppose you start with a certain asset allocation – say 75% in stocks, 20% in bonds and 5% in crypto. These percentages will change over time as the values ​​of your investments change. To bring them back to your target allocation, you must rebalance your portfolio.

Rebalancing a portfolio means selling assets that are overrepresented and buying assets that are underrepresented compared to your target asset allocation. For example, if your crypto investment lost money and fell from 5% to 2% of your portfolio, rebalancing would involve selling other parts of your portfolio to bring crypto up to the 5% allocation target.

Some financial platforms have automatic rebalancing, but you may need to rebalance manually if your investments are spread across multiple accounts or institutions.

Many people were burned then crypto crashed in 2022. But if all your funds were invested in Terra (LUNA), which essentially became worthless, you got burned. If you are heavily invested in a single cryptocurrency, now is a good time to think about diversifying your portfolio to avoid the same fate.

Diversification means spreading your funds across different investments. It eliminates the possibility of one investment taking your entire portfolio down. Buying multiple cryptocurrencies that represent a variety of use cases is a more diversified approach than putting all your money behind a single coin.

If you have crypto holdings that are underwater — worth less now than when you bought them — you can use a tax strategy called tax-loss harvesting to mitigate some of the damage.

If you sell an investment at a loss, you can offset taxes you owe on gains from other investments. If you have no gains to offset this year, you can do so in future years. You will consider basic tax loss harvestingas if you owned the crypto for more than a year.