Cryptocurrency was once the darling of investors looking for a chance to hit it big outside of the traditional, slower, and largely regulated investment options available. Think stock market, real estate, and retirement investment accounts. Yet, the recent cryptocurrency crash has contributed to an approximate $2 trillion loss in value for investors.
If your crypto wallet once made you proud and a crypto crash has devalued your crypto assets, you’re probably wondering what you should do. Should you get out now? Should you wait and see if this is simply another crypto winter that will rebound once crypto trends change?
If you’re on the fence about what you should do, keep reading for your options.
Check Your Emotions at the Door
One of the most dangerous things when it comes to investing is your own emotions. Fear, for example, can make people engage in all kinds of ill-advised behavior.
Fear of missing out will make people invest in bad stocks, bad companies, and bad ideas. Fear of loss will make people dump investments wholesale, regardless of whether or not getting out makes sense. You see an investment’s value plummet and want to salvage what you can.
While emotional responses are perfectly normal, you can’t let them drive your decisions. Emotions come and go. You need a level head when making those choices because they can have consequences that will play out over the rest of your life.
Before getting into or out of an investment, give yourself a cooling-off period. Let your emotions settle a little.
You don’t necessarily need a 24-hour wait. You should, however, give yourself enough time to look at what the experts are saying before you make a final decision.
Look at the Why
Cryptocurrency stands in a strange place in the world of finance. Most investments operate in a relationship or potential relationship with revenue generation.
For example, stocks often gain in value courtesy of a company’s performance. A real estate investment can generate cash flow as a rental or through a sale.
Crypto doesn’t generate cash flow in any traditional sense. Its value changes based on two main things: sentiment and government activity.
Sentiment
Sentiment is one of the big drivers of volatility in the crypto market. People invest in crypto because the market is in a good mood or even because the particular cryptocurrency strikes people’s fancy in some way.
Dogecoin and related dog cryptocurrencies, for example, often succeed because people like dogs. It’s often less about the crypto than that human-dog relationship.
When sentiments change in the market, such as people becoming concerned that a given cryptocurrency will fail because they read rumors, values can plummet.
If the reason your crypto investment looks volatile is a batch of rumors, you must decide if those rumors seem likely to prove true. If not, you must decide if you think the cryptocurrency will stabilize once the rumors die off.
Government Action
A different and much more serious reason that cryptocurrency will become volatile is government action. A great example of this was when China banned cryptocurrency entirely.
China is a huge market for most kinds of investment. Removing it entirely from an entire kind of investment meant hundreds of millions of potential investors vanished overnight. Needless to say, that move triggered a serious drop in crypto value.
Other governments have signaled opposition to and even consideration of similar bans in their countries. More bans could potentially cause additional volatility in the crypto market.
While nothing official is in the works, the U.S. government is at least considering the possibility of an official digital currency. The entry of a state-backed digital currency onto the market could send the entire market of less official currencies into a tailspin.
Both official and rumored government actions can create shockwaves in the crypto market. Again, you must evaluate whether you think those shockwaves will result in permanent losses or are simply kneejerk reactions to a possibility.
A grasp of the why of a given crypto crash can position you to make better and more informed decisions moving forward.
Evaluate Your Options
As with most financial situations, there are several potential options. The one you pick will often depend on your level of risk tolerance. Let’s look at some of the more common options below.
Sell It Off
If you evaluate the situation and don’t see a likely path to improvement, you may well decide that the time has come to sell off your crypto assets. This may prove less devastating than you expect.
While you hold cryptocurrency, its value is largely hypothetical. Let’s say that you own 50 Bitcoins. Let’s also say that they’re currently worth approximately $19,000 apiece.
Your hypothetical value is $950,000.
Of course, they peaked at over $68,000. So, the peak hypothetical value was over $3.4 million.
When crypto crashes, it can feel like you lost over $2.4 million. Except, you never had that money.
Let’s say you bought your Bitcoins when they were running at around $3400 in 2019. Your actual investment was only $170,000, so selling at $19,000 is still a gain of around $780,000. No, it’s not millions, but it’s still a meaningful profit.
Hold the Investment
Another option is that you simply hold on to your investment for the time being. It’s always possible that the market will recover. Even it if doesn’t reach its former peak value, you may find that waiting lets you sell at a profit or at least minimize your overall loss.
Holding the crypto investment is an option where your risk tolerance comes into play. It’s also possible that the value will drop even more or simply stabilize near its current value.
You essentially bet that the value will recover when you hang onto the cryptocurrency. You also must accept the possibility that you will face additional losses.
If you find the prospect of more losses intolerable, holding the investment probably isn’t the right approach for you.
Buy the Dip
Even if your preferred cryptocurrency takes a hit, a drop in the overall prices of all cryptocurrencies can provide a kind of opportunity. The top cryptocurrencies might have simply been out of reach for your financial situation when they sold at $50,000.
With the prices much lower now, you may find that your dream cryptocurrency is at an affordable price point now. Again, this is a strategy that depends on your risk tolerance.
Buying the dip assumes an eventual value recovery. It’s a bet, and you might lose.
Hedge Your Bets
When government actions play a role, they can leave the future situation looking murky. The values might recover or they might not.
If you really don’t have a sense of which way you think things will go, you can look for a way of hedging your bets. One option is a partial sale.
Instead of leaving the cryptocurrency market entirely, you sell off some of your cryptocurrency assets. That gives you some liquid capital that you can invest elsewhere or simply hang on to in case you need it. You keep the rest of your crypto assets just in case the value recovers.
If the value does recover, you still make a profit. If it doesn’t recover or drops more, you minimize the overall loss.
You can also open up some options by using a cross-chain exchange. For more on cross-chain exchanges, visit here.
Diversify
Diversify is really an action you should take before and after a crypto crash. Diversifying your investments is one of the best hedges against huge losses. If you have some money in stocks, some in bonds, some in real estate, and some in crypto, odds are good that at least one of them will perform well at any given time.
In essence, you make a lot of smaller bets instead of one huge bet. For example, real estate isn’t the same white-hot market it was a year or two ago, but it’s still doing fairly well.
If you invested in real estate, the improved value of those investments can soften the blow from the crypto fallout. If you invested in rental properties, you at least have a steady cash flow.
Just as importantly, you can diversify at any time. If you sell off some of your crypto assets, you can invest the money in areas that do well during recessions.
Knowing your options can help you feel more in control, which is important. It also lets you make the choice that best suits your situation and level of risk tolerance.
Dealing with a Cryptocurrency Crash
Dealing with a cryptocurrency crash is partially like dealing with crashes in other investment areas, but it’s also its own animal. When other investment areas crash, it’s often because of some flaw in how an industry operates or individual company failures. With crypto, the cause can prove as vague as a change in investor moods.
The most important thing you can do is not make an emotional, knee-jerk decision. Approach the situation logically and consider all of your options. Then make a decision.
Looking for more finance tips? Check out the posts in our Finance section.
