Since its inception in 2009, the Bitcoin and cryptocurrency markets have experienced many cycles of ups and downs, even in large, sustained trends known as bull and bear markets. It’s true that in the past the market has always dropped and then picked up and gone up significantly. But downswings can be stressful and difficult to navigate for experienced traders and novice investors alike.
Here are five strategies you may want to implement during market downturns to preserve the value of your portfolio, avoid emotional trading, and lose less sleep.
#1 – Don’t fall prey to Fear of Being Left Behind (FOMO) or Fear, Doubt, and Distrust (FUD)
Staying on top of the latest news and trends in the crypto space is extremely important, but too much information is definitely not good. This is especially true during market downturns when impulse drives it too easily to make badly timed trades.
FOMO (fear of being left behind) and FUD (fear, doubt, distrust) are common terms in the cryptocurrency space, and they may influence their buying and selling decisions in ways that many investors don’t want to admit. .
FUD generally refers to negative market sentiment fueled by a rumor, an unfavorable news story, or concerns expressed by the signatories about a particular market or stock. Such sentiment can have a negative impact on prices as traders sell their holdings in anticipation of further price declines. FOMO is the opposite, where traders get lost in wishful thinking after seeing or hearing a strong move or positive news, sometimes in a rush to jump on the next rocketship to the moon, looking ahead to fundamental signals. It refers to the tendency to put away.
Remember: No one can predict the future, and no one can advise you on your own research and conclusions. Influencers and publishers may actually have a strong interest in causing FUD or FOMO to steer the market in a particular direction. Always check multiple sources to stay up to date on the cryptocurrency market.
#2 – Set clear goals, diversify, and trade only within your strategy
No matter how confident you are in a particular asset, you should never invest more than you can afford to lose. The last thing anyone wants is to get caught up in the emotional swings of waiting for a strong price move as the valuation of a portfolio dwindles.
To diversify their portfolios, many experienced investors also choose to hold several different types of assets for the long term, from alternative crypto assets to stock market index funds.
It is often said that the cryptocurrency market never sleeps and its price fluctuations are well known. Investors should pre-define trading strategies and, if possible, entry and exit points to counteract their impact.
Even with all the information available, sudden black swan events, hacks, and high-profile tweets can cause prices to plummet. Therefore, it is extremely important to plan ahead and take steps to reduce losses in the event of any sudden crash.
Investors can consider certain strategies such as dollar-cost averaging (the process of buying and selling small amounts on a regular basis). Such a strategy could help investors avoid emotional trading altogether when buying crypto assets, and eliminate the need to watch charts 24/7.
Things to keep in mind: It’s very easy to lose yourself when you own volatile assets like cryptocurrencies. Trading can be an extremely risky activity, especially in a bear market. Investors should therefore aim to set goals that balance minimizing potential losses and achieving potential returns.
Part 3 – Retention and Long-Term Thinking
“It’s not a loss until you sell it” is not entirely true, but it’s a market adage with some weight. If the value of a cryptocurrency goes down after you buy it (this is called a loss), the loss will only be realized if you sell the asset at a level lower than the purchase price.
Bitcoin has been on a consistent, long-term upward trend for years. Past performance suggests that even if prices fall during temporary market corrections or longer bear markets, supply and demand drivers such as scarcity will eventually rebound. is showing. Due to this limited supply, many investors believe that the price of Bitcoin and other crypto assets will continue to rise over time. If the investment horizon is long-term (years rather than weeks or months), weak price movements can be viewed as temporary.
Long-term holding has become a proven strategy so far, with Bitcoin perhaps the most successful major asset of the last decade.
Note: In countries such as the United States, long-term holding of crypto assets is tax-friendly. For example, holding a stock for more than a year is more profitable than selling it in a short period of time.
4 – Ride the market down and prepare to take profits
One of the safest ways to avoid cryptocurrency price volatility and protect yourself during market downturns is to exchange some of your volatile cryptocurrency holdings for more stable assets. This option could help investors “lock in” their balances and reduce risk during a cryptocurrency bull market, as well as the need to actively manage their portfolios and stress levels.
Stablecoins such as USDC aim to maintain their value at a constant price. Therefore, exchanging part of your portfolio to stablecoins can reduce your exposure to price volatility during periods of market calm.
But keep in mind that selling everything at once, known as capitulation, can be a missed opportunity if the market rebounds sharply. Therefore, it is very important to form your own thoughts on the level of profit you are comfortable with and the level of loss you are comfortable with before you are forced to make decisions under pressure.
Note: Many investors now choose to move money in and out of stable assets as part of a larger exit-and-buyback strategy. Doing so, if the timing is right, can help you grow your portfolio over time. However, doing so is not easy and even the most experienced investors often fail to enter or exit at the right time. (Again, dollar-cost averaging can be the preferred method for many investors to avoid even trying to time the market.)
Part 5 – Find Investment Opportunities
Even during a cryptocurrency market downturn, there are opportunities to invest if you know what to look for. While other investors are witnessing a dark and cold crypto winter season, enthusiastic investors find new opportunities to buy their favorite stocks cheaply and make a profit.
“Buying dips” is a common way for traders to enter the market and increase their positions after feeling that the price was too high to buy in a previous uptrend.
Markets are always volatile, so there are price peaks and troughs even during downswings. Traders who have honed their technical analysis skills can stand to benefit here. Specifically, we use that knowledge to anticipate such short-term price movements and use them to buy at short-term bottoms and sell at peaks.
Short-selling, betting on declining asset values, is also a good strategy for profiting during market downturns.
Staking and DeFi yield farming can help stabilize returns even further and help keep your crypto balances growing, even during bear markets and downturns.
If you believe that a particular crypto asset will eventually increase in value, whether the market is rising or falling, dollar cost averaging works. On top of that, when the market goes down, more cryptocurrencies can be bought for $1.
A word of caution: This type of investment behavior (with the possible exception of dollar cost averaging) is not for the cautious investor and can actually lead to big losses. At the very least, you’ll spend significantly more time in front of your monitor staring at stressful price charts.