How to Survive a Crypto Winter
After hitting all-time highs in the fall of 2021, the crypto market has been on a precipitous decline. For a time in November 2021, Bitcoin was trading at over $67,000 per coin. By mid-2022, it had fallen to under $20,000 per coin.
While these lower prices have some investors itching to buy, others are concerned about how long the downtrend will last. With the collapse of Luna and scandal around Celsius, some investors are worried that cryptocurrency will even survive beyond this latest crypto winter.
Here are some tips to help your portfolio survive these bearish times.
1. Understand That Crypto Platforms and Coins Can Fail
The first thing to keep top of mind during troubling times is that cryptocurrency exchanges and coins can go under. Back in the last crypto winter of 2018, even major crypto platforms went under.
Hit especially hard were altcoins that provided little utility. With this in mind, it is important to stick to bigger and more established projects, like Bitcoin and Ethereum – they have a much better chance of surviving through times of financial uncertainty. However, even established coins like Bitcoin and Ethereum are volatile assets to hold.
The dangers increase when holding “non-bellwether” assets or trading on exchanges that are less reputable. In mid-June 2022, a leading U.S. cryptocurrency platform known as Celsius Network froze all withdrawals on its platform. Even the gold standard exchange, Coinbase, released a statement to its users that their crypto holdings could be at risk if Coinbase goes bankrupt during this crypto winter – though management later clarified the disclaimer was mandated by a regulatory authority.
While executives at these major crypto platforms express hope that the future will be brighter, there are no guarantees in the world of cryptocurrency. With all of this in mind, it is essential that you understand the risk of trading on crypto platforms and in altcoins at this time.
One way that you can try to safeguard your crypto assets is to move them from platforms like Celsius or Coinbase into crypto wallets that are solely in your control. However, this will place extra responsibility on you because you will be fully responsible for keeping track of your wallet keys.
Billions of dollars worth of Bitcoin have already been lost over the last decade by people who have simply forgotten or misplaced their wallet keys. Unfortunately, there is no “forgot password” button when it comes to crypto wallets. Once you lose your wallet keys, you lose those digital assets forever.
It’s essential that you understand the potential pitfalls of both keeping your holdings on a crypto platform that could go bankrupt and keeping your holdings in a crypto wallet that you are solely responsible for. There are risks to both, and you will need to decide which risk you are willing to take.
2. Only Invest Money You Can Afford to Lose
It seems obvious in retrospect but when buying digital assets, invest only money you can afford to lose. This tip goes for all investing and it’s especially important to follow during downtrends.
Crypto is a volatile asset to hold, and going “all-in” on something so volatile could completely derail your long-term financial goals and plans.
In some scenarios, you may be better served to place your funds in an emergency savings account rather than investing in crypto during a crypto winter.
In addition, the rules of smart diversification suggest that crypto should not be the only type of asset in your investment portfolio. Because of its volatility and the uncertainty that surrounds the entire crypto space, sage advisors recommend crypto should only represent a small portion of your overall portfolio.
The bottom line is that when it comes to crypto, you should only invest money you can afford to lose because the exchange you trade on or coins you buy could go completely under if a crypto winter persists.
3. Prepare to Capitalize on Future Price Dips
While the goal is to buy low and sell high in any type of investment, this practice is much easier said than done. You can always try to “buy the dip” when crypto prices fall, but the truth is no one really knows how long or far a dip will go.
In November 2021, Bitcoin was trading for over $60,000 per coin. If you “bought the dip” in January 2022, when Bitcoin was trading around $35,000 per coin, you might have thought you were sitting pretty. However, with Bitcoin subsequently falling to under $20,000 per coin, the additional loss was almost 50%!
With that said if you have cash on the sidelines and want to lower your overall cost basis because you are optimistic about the future price of digital assets, dollar-cost averaging is a good way to lower your average price per coin. Even if you did buy Bitcoin in November 2021, you could lower your average price per coin by purchasing some Bitcoin now.
Dollar-cost averaging is a good strategy to mitigate losses during fluctuating markets. In addition, during all-time highs, it is best to avoid purchasing as you would be better served to place your funds in an emergency account and buy when prices fall. However, trying to time the market can be a losing game.
