How to winterize without panic
Crypto winter: Here’s what a crypto trader should do to avoid hysterical behavior and survive the potential crypto winter of 2022, according to Viktor Kochetov, CEO of Kyrrex.
Whenever crypto markets enter their bearish or bullish phases, experts shift into their “Oracle mode”. They start making strange predictions.
For example, when the crypto markets were in a bullish run in October-November 2021 and BTC hovered around $60-$65k, these experts envisioned the price of $100k and beyond in 2022. The bullish phases of the market reverse this trend, and the current price on BTC of $20-$25k triggers gloomy forecasts of $5-$10k.
These fluctuations in actual and projected prices signal one thing: immaturity in the crypto market. As a relatively young financial instrument, cryptocurrency markets go into panic mode at the earliest signs of price decline. Similarly, weak growth triggers massive demand, which inflates prices. Here’s how to deal with this situation.
Kryptovinter: Think and trade long-term
The first thing to remember when trading crypto is that it is a currency, not a financial asset like stocks and bonds. It falls into the category of foreign exchange trading (FOREX), just like trading on exchange rates between USD and EUR. Inherently, this type of trading involves additional risks, stemming from a myriad of factors that affect exchange rates. These factors range from the economies of currency-issuing countries to commodity market prices and the state of global financial markets.
Cryptocurrencies are more complex than fiat currencies since there is no single issuing entity. The decentralized nature of crypto markets makes them more challenging to predict. That said, that doesn’t mean trading crypto shouldn’t be completely out of the picture for the average trader. Instead, it is important to consider the risks associated with this type of investment.
The most conservative approach, which limits losses from crypto trading, is to choose a long-term strategy. In particular, a trader will allocate a smaller share of the portfolio with cryptocurrencies and hold this position for a longer period. The method eliminates the risk of large losses during the downturn by removing the need to sell and close the positions in a bear market.
Set buy and sell limits
Using a long-term approach has a major drawback. Since it allows to significantly minimize the risk, it also limits the return on such an investment. As an alternative to the ultra-conservative approach, there is an option to use limits. These make it possible to invest more in crypto and avoid risk. Setting a buy limit requires establishing the return target that will trigger an automated sale of the cryptocurrency when the price reaches the specified level. Sales limits work the other way around. A trader sets the sell limit when the sale occurs at a certain price.
Using buy and sell limits is a common practice against day traders seeking short-term returns. The practice is very effective in limiting losses and rarely prevents significant returns.
Diversify your portfolio
Portfolio diversification reduces the total risk in the portfolio. This also applies to the traditional stock markets and crypto markets. It works best when you include different types of assets in the portfolio. For the crypto space, that means investing in the more common cryptocurrencies, such as BTC and ETH, as well as the lesser-known coins and tokens. The weight of these components should correspond to their level of risk. The higher risk coins and tokens should represent lower shares of the portfolio.
Setting realistic expectations is a good idea when investing in crypto. It is necessary to understand that this is a very volatile instrument with frequent changes in prices. Crypto price forecasts remain limited to the low volume of historical data currently available. Limiting exposure to risk through diversification, setting limits and long-term investing are the best available tools. For example, it was possible to observe a similar crypto winter between March and July 2021, when the BTC price fell from $57,000 to $31,000. The crypto markets quickly recovered with the new BTC peak of $64,400 in November 2021. In Kyrrex, we see that diversification is very effective in protecting against sharp drops in a single asset class.
Crypto winter is coming, but is it?
Without being overly optimistic, it seems that the crypto winter is already coming to an end in 2022. The global economy has recovered after the initial shock related to the war waged by Russia against Ukraine. The central banks brought inflation under control and there are signs of improvement in the stock markets. Cryptocurrencies seem to follow a similar pattern. It may be a good time to add crypto to your portfolio before another bullish market period. Sticking to the approaches mentioned above is a good idea to test the waters, make returns and avoid significant losses.
About author
Viktor Kochetov is CEO of Kyrrex. Viktor’s knowledge in traditional markets is accompanied by blockchain and cryptocurrency experience, gained as an advisor for a number of innovative projects. In 2018, he launched Kyrrex, a crypto-fiat ecosystem that has grown into a broad set of products and services. Today, the main product is Kyrrex Crypto Exchange, where various cryptocurrency transactions are carried out. The Kyrrex fiat ecosystem is based in Malta.
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