When dealing with cryptocurrencies, volatility is the name of the game.
For those of us who have been riding this rollercoaster for anything more than a few years, though excited when the price pops and grumpy when the price drops, we view each pump with skepticism (“A crash is coming.”), each dump with stoicism (“It’ll come back: I just don’t know how long it will take.”), and each consolidation period with weary endurance (“Come on! Do something!”).
For new investors, though, the emotions of dealing with crypto-volatility can be overwhelming – especially if they bought on one of the pumps only to see their dreams of private islands and lambos evaporate when the inevitable reversal comes. Unfortunately, that’s when many new crypto investors make their first real mistake, which leads us to the first don’t:
If you bought into cryptocurrencies on a pump and didn’t expect a dump, it means that you weren’t paying attention, and not just to the crypto-market. Markets rise and fall because of cycles, news, the weather report, fat-fingered mistakes of traders, the alignment of the planets… Most of the time if people are telling you why the market rose or fell, they are making something up that sounds plausible after-the-fact. If they really knew how to read the market that well, they’d probably be too busy playing the market to be commenting on it.
But one thing holds true: Sell high and buy low. Some of the best investors do little more than watch the market and start selling when everyone says the current all-time-high is the new normal, and buy when people say the market has breathed its last. During a crash, you’ll often hear pundits talk about ‘clearing out the weak hands.’ The weak hands are those who buy out of a fear of missing out (FOMO) when the market is rising and sell out of fear, uncertainty, and doubt (FUD) when it’s crashing.
So, if you bought on the way up, hopefully you bought not only because of the price action, but also because you felt you knew something about the long-term value of the coin. Unless you have gotten some really good, verifiable information that the coin has problems that means it will never come back, then the best strategy might just to be to hold on for dear life (HODL).
What can you do to keep yourself from panic selling and donating your entire portfolio to one of those shark investors?
Zoom Out / Zone Out
This is one of the easiest and quickest ways to get back to stable during a crash. We tend to look at 1-hour or other short-term charts when talking about price action. If you’re looking in that timeframe, a 20% drop can look like the end of the world. If you zoom out to a one-month chart, you might see that that drop is still pretty high up the mountain you just climbed.
I first got involved in cryptocurrency in 2013 when Bitcoin went from 80 dollars to 230, and then I rode the wave up to 1000 before the crash back to 200 and the subsequent nearly two year period of consolidation before the price started seeing life again. Those were terrifying days, and the big lesson I learned is that this is going to take longer than I thought at the time.
If you look at the chart on the right, you can see a tiny bump in the middle. That’s the huge crash of 2014. I have no idea how long the current pullback will last or how low it will go, but nothing about the current pullback has made me think anything other than that in two to three years, I’ll be able to zoom the chart out to today and saying “Oh, look at that little hill.”
With that in mind, if you find yourself checking the price on your phone, watch, computer, specially-purchased crypto-price clock – turn them all off. Know that it’s all going to be OK; just know also that it’s going to take longer than the next minute, day, or month – and that checking every 37 seconds is probably doing you more harm than good.
Unless you’re a day trader, (and if you’re reading this, I think you’re not) then invest in projects you have done your homework on and have reason to think will succeed in the long run, and then largely forget them.
Which brings us to the next tip:
Do Your Own Research (Again)
I’m assuming that you didn’t buy any cryptocurrencies just because they were pumping. I’m assuming that you did your due-diligence before purchasing any coin that you found out about the project, who the founders are, any scandals or hacks, the kind of code, any
premines, what exchanges and wallets use the coin, etc., etc., etc. If you did all this and were impressed enough to risk some of your hard-earned-cash, then it’s likely that those fundamentals have not changed. If they have, then that changes the story, but for most crashes, the fundamentals stay the same.
Putting it into traditional market terms, if you invested in a company with talented management, a good product, a strong customer base, and money in the bank, then if that company’s stock crashes during a market downturn, you are almost certainly going to shake your head and keep hodling that it. Unless it’s
Enron, you’ll know that in the long run, the market tends to rise, and by selling you’re only giving your stocks away at a discount. Going back and researching why you liked a project in the first place can help you weather the storm and come out stronger on the other side.
Be Prepared / Have a Plan
If you’re reading this article during a crash, that likely means that you hadn’t thought about what you would do in the event of one. Well, now you’ve been through one, and you’re going to be through more if you hodl on. Smart investors have a plan describing what scenarios are likely to occur and what they do when things happen. This plan should take into account not only what to do in the event of a crash, but how you should respond if your investment moons (the price goes sky high).
Hodling: the simplest strategy – just buy, hold, have faith, and wait.
Dollar cost averaging: Buy set amounts at regular intervals without regard to the price. Kind of like putting money in a savings account. Sometimes you’ll buy high, sometimes low, and it’ll all even out in the end. When your asset moons and you look back at all the purchases, they should average out to be a rising line.
Taking profit: This is something that people often forget. If the price is shooting up, people become reluctant to sell because it’ll probably go higher. And it will. All the way up until the moment when it doesn’t. And then it will crash. A good thing to do is to set a price point at which you will use some of your assets to improve the quality of your life – pay off your debts, buy a house, take a trip to the Caribbean, … whatever. Know beforehand how much and for what price you will sell. When the price dumps, you’ll be debt free, living in a paid-for house, and with tickets to the Caribbean. You’ll spend a lot less time worrying about the charts then.
Hedging: An old saying in investing is ‘the trend is your friend.’ If you are confident enough, you can consider shifting assets into stable coins or commodities when they hit the highs and back into your crypto-of-choice when they hit the bottom. If you know how much and at what price-points your willing to do this, then it can be a great way to increase your overall wealth. Just be aware, if you shift into cash or commodities and the price really does take a moon shot, you could have missed the big event.
Day trading: Again, if you’re going to be buying and selling this much, you already know everything I have written here. I’m including this point mostly to say that when the crypto price moves, lots of pundits will start talking about technical analysis (TA). This is looking at patterns in price charts to try to predict what’s going to happen next. Looking at charts and noticing patterns is fun and interesting, but at any given moment it is always, at best, a gamble what the market will do. In some ways, it’s like poker – if you know how the cards work really well, and if you have a good read on what the other players are likely to do, you have a chance of winning. But the other players are not neutral. They are playing against you. So if you day trade, study a lot and make a plan.
Never Invest More Than You Can Afford to Lose
There is a tremendous amount of interesting things happening in the cryptocurrency space. Bitcoin and the other major coins are adding technical improvements every day, as you can see on ICO reviews, utility coins are revolutionizing how projects are funded and how blockchains can solve problems previously thought unsolvable, Major players from Wall Street have been leaving their cushy jobs to join crypto-related companies. Those same companies are seeing VC money come in. The CBOE has approved futures trading markets, and the SEC has reopened the possibility of approving a crypto ETF. There is a lot exciting going on in the space, even as the price has plunged.
The recent run-up itself was a positive sign – showing greater awareness and acceptance of cryptocurrencies. The plunge afterwards is normal and expected – as is the return to new highs at some time (no one knows when).
That being said – cryptocurrencies are still new, still relatively untested, and at any time hacks, bugs, regulations or many more unanticipated events may obliterate the value of one or all cryptocurrencies. Investing is a gamble and investing in cryptocurrencies is a high-risk-high-reward gamble. If you’re losing sleep because you have too much invested, then you have too much invested.