How To Cope With The Current Crypto Market Crash

Cryptocurrencies have had a rough spring, with drawdowns this month, bringing assets like Bitcoin down more than 50% from their all-time highs in 2021.

The losses were especially severe on May 9, when the largest cryptocurrency crash in recent memory occurred .So, why is cryptocurrency collapsing? Several factors could have played a role in the recent drawdown. As US policymakers tighten the monetary supply, investors have been moving away from risky assets like cryptocurrencies.

As a result, crypto prices have fallen, putting pressure on institutions and other large players who made investments near the market’s peak. Investing in cryptocurrency has never been easy. Digital assets are extremely volatile, and such swings have previously occurred. Though the causes of each crypto crash differ, it’s useful to remember a few tried-and-true investing principles.

When negative sentiment spreads in cryptocurrency circles, some refer to it as FUD, or fear, uncertainty, and doubt. Though these feelings can help you spot red flags, it’s also important to keep a level head and consider whether short-term instability will impact your long-term plans.

How To Manage Your Risks in a Volatile Market

Are you afraid of a drop or excited about the prospect of a lower price? In any case, here are five things you should do if cryptocurrency prices plummet.

1. Maintain your composure.

You must act calmly whether you decide to sell your cryptocurrency or see a dip as an opportunity to buy more. Making emotional decisions, particularly when trading, rarely yields positive results. So, before you rush into the market in a panic, consider why you’re trading cryptocurrency in the first place. Are you investing because you believe in the potential for long-term growth?

Or are you only interested in making a quick buck through short-term trading? The answers to these questions can assist you in making the best decision possible. In either case, you should act in accordance with your personal objectives. To put it another way, think long-term if you believe in the opportunity. If you’re looking for a quick deal, keep that in mind.

2. Determine the situation

Is news driving the price of Bitcoin and other cryptocurrencies? It’s possible that fundamental news, rather than price action or rumor, has shifted market sentiment. In 2021, China’s decision to prohibit financial institutions from providing crypto-related services was a step further in a crackdown that began in 2017 when the country banned crypto exchanges but did not prohibit individuals from owning cryptocurrencies.

The Federal Reserve then decided to reduce liquidity in the financial system late in 2021, causing many cryptos to plummet into 2022. Early this month, the stable coin TerraUSD plummeted as traders engaged in a classic “bank run,” fearing that it lacked the crypto assets to back its dollar peg. This news spread to other cryptocurrency markets as traders feared that selling would lead to more selling.

As a result, these actions have dealt another major setback to the burgeoning market, which had been receiving significant capital inflows.

3. Remember that crypto is a game of volatility.

Cryptocurrency is inherently volatile. Because there is no cash flow in crypto, traders must rely on changes in sentiment to move the price. That means the market can swing from rabid optimism to pessimistic despair, as it did in early 2021. The uproar surrounding the Coinbase IPO in 2021 aided positive sentiment toward crypto, while the reduction in monetary stimulus at the end of 2021 and the beginning of 2022 fueled pessimism.

When you have an asset that is driven by sentiment, the market is propelled by traders’ emotions. This is also true for stocks, but they may have a real stream of growing cash flows from their issuing company to propel them higher. Professional traders, who use high-powered algorithms to make sophisticated trades, are drawn to this volatility, which “mom and pop” traders do not typically have access to. Traders enjoy volatility because it allows them to profit — that is the game of Wall Street.

4. Consider the future

Examine how new developments might affect the fundamental situation for crypto: Will governments take it more seriously? Will they encourage more people to use it? Will new regulations benefit the cryptocurrency market rather than hinder it? What other factors could influence the market? Is China’s decision to ban cryptocurrency a sign of things to come? Maybe. India had been considering outlawing cryptocurrency, and the Russian central bank has also expressed opposition.

Other countries, including the United States, are looking into ways to regulate cryptocurrency rather than outright prohibiting it. El Salvador and the Central African Republic are two countries that have made it legal tender. It’s unclear how other major countries will proceed, but it’s clear that cryptocurrencies face real regulatory threats, including regulations that could put them out of business. As cryptocurrency grows in popularity, it runs the risk of becoming a victim of its own success.

5. Choose your course of action.

You’ll want to think about what to do after you’ve cooled down and assessed the situation and what it means for the future.

• Are the dangers merely disguised opportunities? If you see it that way, you may want to keep your position or take advantage of a price drop to invest more.
• Are the dangers likely to continue or even worsen? If this is the case, you should cut your losses now and retire from the game.
• Is the situation too complicated? If you’re having trouble predicting the future, you might want to consider splitting the difference and selling some of your position today while still having potential upside tomorrow.

Whatever path you choose, you’ll need an action plan that reflects your perspective on the risks and opportunities associated with cryptocurrencies. However, some of the world’s smartest investors will not touch cryptocurrencies and will strongly advise you against doing so as well.

Conclusion

A drop in the cryptocurrency markets could make you nervous. Use it as a wake-up call to reconsider why you’re in the market in the first place. What are the advantages and disadvantages? While Bitcoin, for example, has rebounded strongly after previous major drops, there’s no guarantee that it will do so again.

Especially if it faces serious existential threats as countries ban its use and possibly even ownership. And if the reality is less severe than the expectation, that’s the kind of real risk that can destroy or profit an investment.