Crypto has become so incredibly popular with traders and investors because of its spectacular ability to yield high returns. It’s certainly tempting to invest in an asset class that can increase in value so fast in such a short period of time and even make one rich overnight. But crypto’s remarkable appreciation potential also comes with a high risk of losses, as we’ve seen during the many market downturns that have taken place over the years.
Bitcoin provides the best example in this regard, with its stunning price rallies and discouraging declines, but volatility is a market-wide characteristic. The Ethereum price can spike just as fast as it can plummet, and the rest of the altcoins are no different. Investing in digital currencies can sometimes feel like playing a game of chance, which is why crypto has often been compared to gambling, although describing it as a speculative investment would be more accurate.
For this reason, one can never let their guard down when investing in crypto. The only certainty we have about this asset class is its volatility and unstable nature. Crashes have happened multiple times in the past and will happen again in the future. So, even if the market is bullish at one point, it’s only a matter of time until things start going downhill. And when they do, you better be prepared to ride the tide if you don’t want the current to pull you under.
Unveiling the causes of crypto crashes
Although no one can predict with absolute accuracy when the market might turn bearish, the analysis of past crypto crashes has helped identify a series of factors that have a notable influence on cryptocurrency prices and can contribute to these downward movements.
Macroeconomic factors play a key role in how confident people feel about investing their money in crypto. Monetary policies, inflation and interest rates can either encourage or discourage investors from including high-risk assets like crypto in their portfolios. Geopolitical events can have a similar effect, causing a chain reaction in the industry.
Regulatory developments also have an impact on the evolution of the crypto market. Uncertainties regarding crypto’s legal status, clashes with regulatory bodies, or bans imposed in certain jurisdictions can pose an issue for investors and therefore lead to declines in crypto values. For example, digital assets have been hit hard in the past following enforcement actions carried out by the United States Securities and Exchange Commission (SEC).
There’s also the risk of major players like crypto exchanges going bankrupt, which can cause massive waves in the market. The collapse of FTX in 2022, one of the world’s biggest crypto exchanges at the time, didn’t just affect the platform’s customers, but it shook the entire crypto market to its core.
So, even if crypto investing comes with the promise of high returns, one has to be aware there are also plenty of things that can go wrong and cause crypto prices to plummet.
Staying afloat during times of market decline
If market crashes are inevitable, the only thing left to be done is prepare for these disruptive events to the best of your abilities, so here are a few measures that can help.
Diversification
A popular risk management strategy that applies to all types of investments, including crypto, is portfolio diversification, also known as not putting all your eggs in the same basket. If you put all your money into crypto, you risk losing everything in the event of a market crash. But if you limit the percentage of your portfolio dedicated to crypto to a maximum of 5%, as experts advise, and then spread the rest of your investments across multiple asset classes with different levels of risk, if one or more fail, you’ll still have the others to keep you afloat.
Staying up to date with industry developments
You may not be able to predict the future, but you can keep your eyes and ears open and stay informed about the latest developments in the market so you can spot the signs of an imminent crypto crash as early as possible and adapt your investment strategy accordingly. Knowing what’s going on in the market and paying attention to trends will give you more time to act and help you make better-informed decisions.
Setting realistic goals and expectations
If you go into crypto with the intention of getting rich fast, you’ll get a rude wake-up call when things don’t go the way you had planned. You need to maintain a realistic perspective of crypto investing and set attainable goals so you don’t expose yourself to more risk than necessary. You should also look into risk-management strategies like Hodling and setting stop-loss orders.
Investing in established assets
While volatility is a characteristic that all digital assets share, it’s safer to invest in cryptocurrencies that are well-established and have been in the market for longer. These crypto are generally more resilient and have the capacity to preserve their value and recover faster after a market decline. That’s why it’s wiser to stick to top coins like Bitcoin or Ethereum if you want to stay on the safe side.
Thinking long-term
A lot of investors try to time the market and sell or buy their assets based on potential price movements. While this strategy can lead to quick profits, it also carries considerable risk. That’s why experts advise to practice patience and focus on long-term gains instead of trying to leverage short-term fluctuations.
Keeping your cool
Making impulse decisions based on intense emotional reactions won’t do you any good. On the contrary, when you panic, you stop thinking clearly and are prone to making mistakes that can worsen the situation. Obviously, telling someone not to panic has never helped anyone calm down, but trying to be more disciplined and taking a moment to reflect before acting can definitely help you make better decisions during difficult times.
Crypto crashes are always going to be a part of the intricate crypto investing landscape, so learning how to prepare and navigate these rough patches is a must if you want to enjoy a positive investment experience.
