5 Important Ways To Manage A Crypto Down Cycle
From avoiding FOMO to having a plan, here’s how to reduce your losses (and make clever decisions) in a bearish market.
Since the cryptocurrency market came into existence in 2009, it has had many cycles of rises and falls. These cycles are also present within the bigger ongoing trends called the bull and bear markets. Each market decline has been followed by a recovery and a considerable increase. Yet, these periods of decline can be hard to navigate. They also cause stress for experienced and inexperienced investors alike.
This article shows you five strategies you can choose to follow during a market decline. These strategies help you to keep the value in your portfolio, trade objectively, and sleep more.
#1 – Don’t be a victim to fomo and fud
Knowing the latest news and trends in the cryptocurrency world is important. Yet, excess information is certainly bad. This is particularly true in market declines because it becomes easy to make some emotional decisions that will result in badly timed trades.
FOMO (fear of missing out) and FUD (fear, uncertainty, and doubt) are known terms in the crypto world. They have a greater influence on our purchasing and selling decisions than most people would like to admit.
FUD refers to negative market sentiments. It can be caused by rumors, unfavourable news articles, or notable figures showing concerns about an asset or market. This has a negative effect on the value as traders sell their assets since they expect a more significant decline in price. FOMO is the opposite of FUD. It refers to the possibility of a trader overlooking basic signals in a haste to make profits from an uptrend after seeing positive price action or news.
Remember: No one predicts the future. Researching and getting your findings is better than people’s advice. Sometimes, influencers and publishers will want to manipulate the markets in a given direction. They will then knowingly cause FUD or FOMO in order to achieve their goal. When looking for updates across cryptocurrency markets, always verify them from multiple sources.
#2 – Set clear goals, diversify, and budget.
You should never invest more than you can afford to lose in any asset. Nobody wants to go on an emotional roller coaster while waiting for positive changes as the value of their portfolio slowly declines.
Most clever investors choose to hold different assets for the long term to diversify their portfolio. These assets range from alternate cryptocurrencies to stock market index funds.
It is said that crypto does not sleep. Cryptocurrency markets are well known for their volatile nature. So, crypto investors must have planned trading strategies and entry and exit points if possible.
Even if you had access to all the available information, a sudden event can cause asset prices to drop. This is why it is necessary to make plans and take steps to reduce your losses if a sudden crash occurs.
Investors can consider using fixed strategies like dollar-cost averaging (buying or selling small amounts over regular intervals). This can help an investor avoid emotional trading or having to stare at the charts continuously.
Remember: It is easy to get emotional while holding volatile assets like cryptocurrencies. Trading can be a very risky activity, especially in a bear market. Investors should set goals that balance reducing potential losses with increasing potential gains.
#3 – Long-term holding plan
Although the saying “it is not a loss until you sell” is partially true, it carries some weight. If the value of your assets has reduced since purchase (called unrealized losses), the losses are realized when they are sold for less than the purchase price.
Since its inception, Bitcoin has constantly had an uptrend over the long term. Prices decline due to a temporary market correction or a longer downtrend. Yet history has shown that prices eventually recover due to economic drives like scarcity. It is believed that the rarity of cryptocurrencies like Bitcoin will cause a continuous rise in their value over time. So, negative price movements are viewed as temporary for investors using a longer timeframe.
Long-term holding is a proven strategy. Bitcoin is also the most successful major asset.
Remember: In certain countries, holding cryptocurrencies long-term can be beneficial in terms of taxation. For example, holding for one year and above may be better than selling in the short-term.
#4 – Trade Smartly-Learn to set take profits or stop loss
Converting your volatile crypto assets to more stable assets is one of the best ways of avoiding crypto volatility. It also offers protection during a market decline. The conversion helps investors secure the value of their portfolio and reduce their risk. It also reduces the need for active management in a bull market. This then reduces an investor’s stress levels.
Stablecoins like USDC try to keep their value at a fixed price. So, if you convert part of your portfolio into stable-value assets, you reduce your exposure to price changes when the markets are in respite.
Capitulation (selling everything at once) can cause crypto holders to lose out if there is a sudden rebound in the market. This is why it is necessary to plan for the level of profit and loss you would be comfortable with.
Remember: Most investors today choose to move between stable and volatile assets as part of a larger withdrawal and buyback strategy. If the timing is right, this strategy helps them grow their portfolio gradually. However, even the most experienced investors find it difficult to time their entries and exits correctly. (Again, dollar-cost averaging can be a good strategy to avoid attempting to time the market.)
#5 – See the opportunities
There are opportunities even in market declines. Clever investors see a window of opportunity in times where others don’t. They use such opportunities to get their favourite assets at discounts and make profits.
“Buying the dip” is a common way for traders who feet excluded from previous gains to get back into the market.
There are small peaks and valleys in a downtrend as the market fluctuates. Traders with improved technical analysis skills can benefit from these fluctuations. They can predict the short-term movements and make profits from them by buying the lows and selling the highs.
During dips, you can use the strategy of short selling or betting on the decline of an asset’s value to make a profit.
Even activities like DeFi yield farming and staking can help ensure even returns. They also ensure the continuous growth of your crypto balance even in a downtrend.
If you believe the value of an asset will increase, the dollar-cost average works in both up and down trends. You actually get more cryptocurrency for your dollar during downtrends.
Remember: these activities (except DCA) are for daring investors. In fact, they may result in significant losses. At least they increase the amount of time you spend watching stressful price charts.