How to Prepare for Crypto Downturns

While it’s true that every stock market dip is followed by recovery and significant growth, for investors, the period of downtime is like living in hell. It's highly stressful and challenging to navigate through such events even for experienced crypto traders and investors alike.

Interestingly, many experts believe that every time the crypto market witnesses a volatile upward movement, they should be prepared for a downward movement.

Investing in the crypto market can take you for a wild ride, and you must be prepared to deal with every adversity you face.

In this article, we discuss how you can prepare for the cryptocurrency downturn and price decrease.

Follow these steps religiously to prepare yourself every time bitcoin or Ethereum plunges.
 

Know your investment reason

One of the greatest threats to crypto buyers is dumping their savings into the crypto market without knowing it. Just because your next-door neighbor got rich doesn’t mean you can become a millionaire by investing in the crypto market.

Before you buy bitcoin with a credit card, ask yourself why you buy one. Knowing what motivates you to make a bitcoin investment can help you make intelligent investment decisions.

However, before investing in a volatile market like crypto, understand that it moves differently from the stock market. So, always be ready to educate yourself and understand investment basics.

Many crypto market consultants believe that the buyer’s crypto holding should be less than 5% of their complete portfolio. It’s the leading way to resolve any losses you might witness due to cryptocurrency volatility.
 

Hold the cryptocurrency for a long time.

While many buyers believe that you don’t incur a loss until you sell your cryptocurrency, it’s incredibly challenging to live the loss. You incur an unrealized loss if your cryptocurrency values have dipped since you first purchased them.

You can realize the loss only when you sell them at a price lower than your buying price. But what’s the point of holding a cryptocurrency for a long time?

Since its inception, cryptocurrency prices have gone up and the crypto market witnesses temporary downfall due to longer bear markets or economic deliveries like scarcity.

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The limited cryptocurrency continues to rise over time. A negative price moment is temporary, and you can easily offset the loss due to price movement. Additionally, in many countries, holding cryptocurrency for a long time can offer benefits in terms of taxation.
 

Have a mindset to bear losses

You’ve heard that cryptocurrency is a volatile market, and it’s essential to have a risk-taking appetite. One of the safest options to provide volatility and protect cryptocurrency is converting some of your crypto holdings to stable assets.

This prevents offsetting the loss incurred due to market volatility. Investors who can actively manage their portfolio in the cryptocurrency bull market face significantly fewer losses.

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Also, many investors have a mindset of selling cryptocurrency at once. While capitalization has significant short-term advantages, buyers can face losses if the market rebounds. That’s why analysts and crypto consultants stress knowing what level of profit and loss a buyer can bear.

It helps you make intelligent and informed decisions under pressure.

Knowing the right time to enter and exit is the key to overcoming potential losses.
 

Invest in cryptocurrency stocks rather than tokens

For beginners who are at the learning stage, consider investing in safer options like cryptocurrency stocks.

A cryptocurrency stock is any company somehow related to the crypto sector.

Generally, if the market widely accepts cryptocurrency, these stocks will indirectly benefit. These stocks are an excellent long-term investment strategy even if the market goes down.

Before making a significant investment in cryptocurrency, buyers need to research buying stable and long-term stocks.
 

Invest a small amount in known cryptocurrency

While it might be tempting to put all your savings in a newly launched cryptocurrency, it could be a disaster if the new currency fails to make a cut.

So, a much safer and wiser option is investing in a small amount of renowned cryptocurrencies that are more likely to grow over time. Though this process is risky, it can significantly reduce your risk when the market or prices fall unexpectedly.

Irrespective of whether you invest in bitcoin or Ethereum, remember that there is no guarantee of success. So, focus on investing money you can afford to lose and ensure a strong portfolio. This prevents you from facing short-term volatility.
 

Harness the power of volatility

As the asset class leads to heightened volatility, investors can harness this power to make investment decisions.

While large price movements are risky, daily volatility is exceptionally healthy for crypto market.

For smart traders, crypto market volatility is good.

It’s essential to understand the type of trader you are to manage the price swings. By following news about blockchain and cryptocurrency and their historical charts, you can quickly identify emerging patterns.
 

Avoid falling into the trap of FOMO

While staying on the top of the cryptocurrency space is critical, having too much information can be disastrous. This is especially true in market downturns, where it’s all too easy to fall into the trap of these miscommunications and make the wrong investment decisions.

Falling prey to the fear of missing out (FOMO) can significantly impact your buying behavior. Often, buyers fall for uncertainty, and doubt (FUD). This is a market sentiment caused by rumors, unfavorable market conditions, and experts undermining the performance of certain assets.  

In such scenarios, investors are forced to sell their assets because they expect a sharp decline.

So, to protect yourself from a cryptocurrency downturn, whatever information you gather, cross-check it from multiple sources before buying or selling a cryptocurrency.
 

Diversify your portfolio

Placing all your eggs in one basket is not an advisable strategy. One of the best ways to diversify your portfolio is by minimizing your risk in crypto investing. Focus on investing in a variety of coins and crypto projects.

You can focus on options such as the internet of things, Defi projects and non fungible tokens, and other coin types.

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You can even diversify cryptocurrency exchanges because not every exchange has the same asset. When you diversify your portfolio, it reduces your overall risk and ensures you don’t lose excessive money.
 

Invest what you can afford to lose

One of the best ways to prepare for crypto downturns is investing only that amount you can afford to lose. As quickly as the prices go down, they can tumble back down.

For anyone apprehensive and nervous about a potential drop in cryptocurrency, you should not invest more than you can afford to lose. Cryptocurrencies are highly volatile, and this asset movement is likely to happen pretty often.

If you’re going to faint every time a cryptocurrency touches its low, it’s advisable to invest in stocks and bonds or look for other safer investment opportunities.
 

Consider dollar-cost averaging

If you’ve decided to stay in the crypto game for a long time, apply the cost-average strategy. 

Focus on dollar-cost averaging if you’re making consistent investments over time rather than investing a lump sum amount.

When you consider dollar-cost averaging, you avoid trying to time the market, which studies have shown in an unlikely way to earn profit from cryptocurrencies.

This approach can help investors bear the risk when the market shows unprecedented swings.

The main idea behind this strategy is that you can cover your losses due to volatility by building wealth over time.
 

Give preference to the liquidity of a cryptocurrency

Another crucial factor that can prepare you for crypto downturns is liquidity. As the crypto market moves extremely fast, crypto traders move in and out. 

This implies that when there is demand in the market, crypto traders can buy at the best price and sell some of their holdings to secure a profit.

What’s the point in buying a crypto asset that’s not being traded, or its growth has stagnated overtime. When such a scenario happens, you’re at the mercy of the market.

So, before investing, look at the recent trading volume of a crypto asset.
 

Key takeovers

While no asset is entirely recession or market volatility proof, cryptocurrencies like bitcoin can survive economic changes and come back stronger. 

For traders to reap maximum benefits, preparing for crypto downturns and price decreases can help you earn profits.

By following one or all of these methods, you can negate the market volatility to a great extent and ensure you don’t end up losing your hard-earned money to a wrong investment decision.

Author’s bio

Priya Jain is a professional copywriter with 8 years of experience. She has an MBA and engineering degree. When she is not writing, you will find her teaching math, spending her day running behind her toddler, and trying new recipes. You can follow her on LinkedIn.

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