Here’s what to do during a crypto crash in 2022

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Despite the warm weather, the country is still deep in the icy clutches of the ongoing crypto winter. A market long dominated by speculators trying to make money, cryptocurrency has never been a diversifying asset class that investors use to reduce 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 a never-ending beating, here’s what you need to know about weathering the crypto winter that has consumed the entire summer.

Please note that crypto is not your usual investment

Stocks enter a bear market when they lose 20% of their value. After all, losing one in five dollars is a sobering loss of wealth – for stock investors.

In the crypto markets, a loss of 20% is barely registered.

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 plunging 56% a year later in August 2012. In 2013, Bitcoin fell 83% from its peak, and in December of that year it lost 50% in just 24 hours. In 2018, it lost 84%. It was traded for $68,000 in November 2021, but now it is around $24,500.

Bitcoin isn’t the only cryptocurrency, of course, but it’s the biggest, first, and most well-known—where it goes, the larger market tends to follow.

The current crypto crash is undeniably severe and extended, but historically it is not a revelation. Take it as a reality check. This isn’t the first mega-downturn, and it won’t be the last. If you can’t stomach the dizzying highs and terrifying lows, this is not for you – buy an index fund instead.

Treat this crypto crash as proof of the 5% rule

Intense volatility offers the opportunity for big gains – after all, with such highs, one well-timed trade could make you the next crypto millionaire. However, on the other side of the digital token, there is an equally great risk. With the kind of turbulence inherent in crypto investing, the potential for big losses is always just a few trading sessions away – and the current crypto crash is proof.

So, what is 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 make significant gains. Any more and the losses you are likely to incur will be too much to absorb comfortably.

It’s not just de Sousa – 5% seems to be the industry standard, so keep this crypto crash in mind when the market recovers and you’re tempted to flood your portfolio with the hot coin of the moment.

Switch off – and use the time to research

Elizabeth Stark, the mind behind Lightning Labs, told CoinDesk that she likes bear markets like this because they’re less distracting. When the markets are up and everyone is making money, good news about your growing wealth is never more than a click away. Who can blame you for spending the hours watching your line grow?

But when that line starts to go south, you’ll have a golden opportunity to unplug your portfolio tracker and buckle down so you’re ready come winter. Take this time to sort out the bad news and dive into the research that will make you a better investor. Who is on the teams behind the most promising new crypto projects? Which developers have the best results? Which NFT communities give the most value for the digital money? When was the last time you read a white paper or followed the progress of a project on GitHub?

In a crypto crash like this, keeping track of how much you’re losing is a recipe for anxiety and bad decisions. Research and education, on the other hand, is your ticket to making that portfolio worth looking at again.

In this crypto crash, commit to investing for the long term

Stock investing and crypto investing have a lot in common. The most important thing is that the smart money in both cases is on those who buy and hold for the long term.

By frequently buying, selling and exchanging 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 in every decade since 1930 would have earned a 28% return. Those who kept their money in play, on the other hand, would have gained 17,715% – and that’s just the steady and steady blue chips of the S&P 500. In the crypto market, short-term in-and-out investors will miss out on much higher highs.

According to CoinDesk, the proven 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 each 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 in 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 70%. No one could blame investors for wanting to cut their losses and sell before it falls to 80% – but if you buy high and sell low, you’re doing it wrong.

Markets are cyclical and eventually crypto winter will thaw, spring will return and you will have missed 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 sell-off

While your gut may be telling you to sell before things get worse, your brain should be telling you to buy while all the top coins are trading at such a deep discount. The upside 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 to eventually have to hold on for life. While it’s highly unlikely that even the worst bear markets will wipe out 70% or 80% of a portfolio’s value, crypto traders can take such hits quite regularly.

If you decide you have the stomach for all of this, apply the same stock investment best practices 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 brace yourself for the crypto crash that is always just around the corner, remember that when it comes it will not last forever.

The information is accurate as of August 15, 2022.