A drop of more than 20% in the stock market is commonly regarded as the start of a bear market. However, that definition does not apply to cryptocurrency because it is so volatile that prices can fluctuate by 20% in a matter of days. A crypto bear market is best defined as a long period of consistent price declines. A bull market is the polar opposite of a bear market, when prices are rising and confidence is high.
Long and sharp price drops are among the most difficult times for any investor. Especially when cryptocurrency prices plummet by up to 50% in a matter of months, as they have several times over the last decade. However, investments do lose value from time to time, and we all have to deal with bear markets.
When everything appears to be going wrong, here are four things every investor should do.
1. Don’t sell in panic.
When faced with massive price drops, it’s all too tempting to try to cut your losses. If you do, however, you will not benefit when prices begin to rise again. Furthermore, selling after a significant drop goes against one of the oldest investment rules: buy low and sell high. Granted, timing the market is difficult, so this is easier said than done. Selling at a loss, on the other hand, will lock in your losses.
Take a deep breath and remember why you decided to invest in cryptocurrencies in the first place. Perhaps you believe that blockchain technology will revolutionize the way we manage money, or that Web 3 will be the internet’s next generation. Examine why prices have dropped, and consider whether your initial investment thesis still holds water. If this is the case, now is not the time to sell.
2. Keep a long-term perspective.
Focusing on your long-term goals is another way to keep this latest drop in perspective. We’ve seen drops like this before in cryptocurrency, and we’ll almost certainly see them again. When investing with a five- to 10-year horizon, however, it’s much easier to hold on to when times are tough.
It’s also useful to look at the price history of Bitcoin (BTC). Bitcoin is the first cryptocurrency, and a look at its price history reveals a number of significant price drops. It has always recovered and gone on to new highs, which is reassuring.
3. Take advantage of this time to do some research.
Instead of concentrating on how much the market has fallen, try to use this time to do some research. It is never a waste of time to learn about cryptocurrency in general or specific cryptos in particular. If you want to learn more about a specific aspect of crypto, this is a good place to start. Perhaps you want to improve your investing skills so that you can better manage risk in the future.
4. Think about purchasing the dip.
Every time prices drop, the rallying cry on social media is “Buy the Dip.” It can also be a good move if you follow the logic of buying low and selling high that we discussed earlier. Warren Buffett famously said, “Buy when there’s blood in the streets, even if it’s your own blood.”
However, it is not the best option for everyone. For starters, prices could drop even more. This is why some investors buy dips in smaller increments, such as $100 today and another $100 next week if prices drop further. It’s a type of dollar cost averaging that can help to mitigate the effects of price drops that last for a long time.
The greatest risk is that people become enthralled by the prospect of crypto being “on sale.” As a result, they may spend money that they didn’t intend to invest in cryptocurrency — or money that they need for other financial objectives. They may also purchase cryptocurrencies without conducting standard due diligence, which can be detrimental in the long run.
Don’t try to buy just because prices are low if you don’t have cash to spare, already have a high crypto exposure in your portfolio, or don’t have time to research which cryptos to buy. There will be more lows, and perhaps you’ll be in a better position to take advantage of them the next time.
Risk management is critical.
The steps outlined above will assist you in waiting out and possibly profiting from a bear market. Bear markets, on the other hand, serve as a good reminder to limit the amount of risk we take. That means you should only invest money you can afford to lose so you are never forced to sell at a loss. It also ensures that crypto only accounts for a small portion of your overall portfolio. A diversified portfolio ensures that if one type of asset performs poorly, it will not result in financial ruin.
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