Cryptocurrencies are facing the stiffest test since 2018 in what pundits have dubbed “crypto winter”.
Over the last couple of weeks, there has been a big shift in the macro environment of a lot of people going risk-off, and crypto markets have been bucketed into the larger market’s bearishness,
Bitcoin has lost 55% since reaching an all-time high of $69,000 in November 2021. Ethereum has lost half its value YTD. Recently, the collapse of Terra, the second-largest DeFi ecosystem, left behind the most significant loss of wealth in modern history.
No doubt, cryptocurrencies are experiencing what some call a meltdown. So what does this mean for retail investors and how can they limit losses and position themselves for the next bull cycle? Below are some tips.
7 Things Investors Can Do to Limit Losses During Crypto Winter
1. Limit your exposure.
Due to their highly volatile nature, it is only expedient that you reduce your e-posture to cryptocurrencies in your portfolio.
The current crypto meltdown has seen about $500 billion flushed out of the value of crypto assets today from the year-ago date (as at the time of writing).
As such, it only makes sense to limit your exposure to the crypto space (even in a bull market). Because of its highly volatile nature, we recommend having only 1% of your portfolio invested in cryptocurrencies.
2. Evaluate the situation.
Crypto investments, like any other type of investment, need extensive study.
So, if you hear about crypto market collapses in the news, spend some time investigating why that is and what it signifies.
Concerns about the current meltdown, for example, arise from an impending jump in market interest rates as well as the US government’s intentions to tighten crypto rules this year.
To completely analyze how a collision might effect you, you must first understand the whole context of the incident and its repercussions.
3. Prepare for the next bull run.
While about $500 billion has been flushed out of the crypto market, there are VCs which are getting ready to deploy capital into cryptocurrencies. Andreessen Horowitz just launched another crypto fund—the biggest so far—pushing the firm’s total investment in the space to more than $7.6B.
The new $4.5B fund will target both seed investments ($1.5B) and venture investments ($3B) in startups of all stages, including DAOs, decentralized social media, DeFi, NFT communities, and creator monetization.
JP Morgan is also increasing its investment in the crypto space. The Wall Street bank is the first bank to publicly embrace the metaverse. The bank is also investing in blockchain analysis firm TRM Labs, indicating its intent to expand its portfolio in the cryptocurrency industry in 2022.
The fact that major financial institutions are still interested in the space and deploying capital only means that cryptocurrencies are currently going through a rough patch at the moment. This provides ample opportunity to prepare for the next bull cycle.
4. Consider buying.
A crypto meltdown might turn out to be a gift in disguise.
Whereas some envision a dark and bleak crypto winter, others see a fresh window of opportunity to buy their favorite assets at a bargain and profit. Those who bought Bitcoin in 2018 when it crashed by 65% reaped astronomic gains during the 2020/2021 bull market.
As such, though the crypto space is experiencing a rout, this may be an opportunity to lock in some long-term gains for your portfolio.
5. Don’t sell at these current levels.
If you have held till this level ($28k), it would be financial suicide if you sell at this point.
Just because an asset is now depreciating in value does not indicate it will continue to do so. As a result, don’t sell just because the price is falling. Furthermore, selling during a crypto meltdown would force you to effectively undersell your asset.
If you did your homework before buying the item in the first place, you should be able to hold your ground in these choppy waters.
6. Trade based on technical levels – not sentiment.
Crypto trading is mostly driven by technicals. Most people who are invested in crypto are in it for the gains, not its use case. As such, much attention is paid to technicals over fundamentals.
An example of this is the meteoric rise of Dogecoin which was a cryptocurrency that started as a joke. However because cryptocurrencies are highly volatile, the price action of the digital asset affects the sentiment of traders.
In 2020, the prevailing sentiment was bullish, with most people believing that cryptocurrencies were going “to the moon”. That sentiment has reversed this year with many believing that the current meltdown has marked the end of cryptocurrencies.
The cycles in cryptocurrencies imply that using sentiments as an indicator to time your trades would lead to losses. You would spend much time chasing trends, buying at the top or selling at the bottom.
Traders that have brushed up on their technical analysis skills can stand to benefit from market fluctuations by using that knowledge to predict these short-term movements and capitalize on them by buying the short-term lows and selling the highs.
By focusing on key technical levels, you can better manage your risks and exposure. You would also have more realistic expectations of your profit margins. Plus you can trade cryptos both ways (long or short) rather than buying to hold.
7. Explore other crypto investment vehicles.
Most crypto enthusiasts are fixated on buying and holding, or trading short-term market movements. But there are other viable ways you can make money from cryptocurrencies in bear markets.
Activities like staking and DeFi yield farming can further help level out returns and provide support to make sure your actual crypto balance is always growing, even in a market downturn.
Key Takeaway on Crypto Winter
Bitcoin has a history of ‘coming back from the dead’.
Retaining your assets may be a better option than underselling. Because emotions of fear and greed tend to trump logic, many people have forgotten the lessons of 2018.
Rather than pander to the news of gloom and doom being projected by the media, this may be a good time to dig in and stand your ground. This would work only if you have a three to five-year timeframe for your crypto assets.
