The crypto market is unlike traditional stocks because the former is more volatile. It means that prices could go high and low in just minutes. Crypto assets can also have no value, even in the top cryptos in the market. A great example is the Terra (LUNA), a well-known stable coin that crashed a few weeks ago. Many have lost their savings as they plummeted to less than a dollar’s worth. You may not have lost millions of dollars in crypto crashes, but here are some ways to recoup from losses or minimize losses when trading cryptos:
1. Diversify Your Assets
Whether you’re trading or investing, it’s still best to diversify. It means you shouldn’t only focus on investing in cryptos so that when market crashes occur, you won’t lose all your assets. You should avoid putting all the eggs in one basket in simpler terms. If you put them in multiple baskets, you won’t break all the eggs.
It may be best to balance your portfolio. For instance, have a 60/40 portfolio of cryptos and stocks or treasuries. When the other market crashes, your portfolio won’t be in red. It is an excellent way to fight volatility since stocks aren’t as volatile as coins.
Another way of diversifying your crypto portfolio is to buy different coins that aren’t correlated. It means that they don’t do it in the same direction when these coins move. When you have uncorrelated coins, you can salvage your portfolio when the others are bearish.
For instance, bitcoin prices rely on the miners, unlike other coins that depend on the traders’ sentiments. But you need to check if the coin’s fundamentals are still solid. You need to understand how mining affects Bitcoin and such a good point details mining in Australia. Understanding this allows you to weigh if buying Bitcoin is worth it.
2. Always Consider The Volatility Of The Market
By nature, crypto is volatile. To drive a crypto’s price, traders depend on changes in sentiment since these digital currencies don’t generate cash flow. It means the market can swing from pessimistic despair like what happened months before to rabid optimism as it did in 2021. At the beginning of 2022 and the end of 2021, the reduction in monetary stimulus drove pessimism. Meanwhile, positive sentiment in 2021 was due to the furor around the Coinbase IPO.
As a result, the emotions of traders can affect the market of crypto. Unlike stocks and other investments with a stream of growing cash flows, the crypto market may be driven by sentiment.
Use this volatility to choose what cryptos to invest in because buying cryptos is one of the good ways to make money. Do in-depth research, and check what people are talking about the coin you’re eyeing for. Then, grab the opportunity to make money from the insights or sentiments you’ll be learning to know if you should buy or sell a coin in a crypto exchange.
3. Decide Whether To Catch A Falling Knife Or Buy The Dip
When the market crashes, investors are more likely to average down the cost basis of an existing position or ‘buy the dip’ because the prices of the coins are at a discount level. And this is an excellent way to recoup losses because you can sell crypto at a higher price once it rebounds. It means you can change your losses much quicker.
However, there’s a risk to this strategy. You might ‘catch a falling knife’ if the dip never stops going down. It means that the price of the coin keeps decreasing, which could have a negative meaning. The coin may never recover – this is what happened to the first version of the Terra (LUNA). Before taking the risk of ‘buying the dip,’ you must have an exit plan, keep up with the company news, and check the fundamentals of the coin.
If the price is falling, always find out why it’s happening. If the reason is company-specific, you should weigh if the company’s problems are long or short-term for company-specific reasons. Use this to decide whether to sell or buy the coin.
For instance, if the coin’s company’s long-term outlook appears negative and its fundamentals have changed, it may be best to cut your losses. You may lose some, but at least you won’t lose all your assets.
But if it’s due to a broad market decline or bear market, it may be sensible to buy at a lower price, especially if the company is resilient to market factors. Hold the coin, and wait for the price to go up before selling to gain profits and recoup from losses.
Losing is part of trading or investing in cryptos and other investments. It is especially true in a highly volatile market such as cryptos. However, you can minimize and should minimize your losses by considering the tips above. Doing such things can help you decide whether to exit the market or hold the coins. This way, you will avoid losing your hard-earned money and grow your investment through informed financial decisions.