As a potential crypto investor, you should be well aware that the crypto market is a thrilling rollercoaster ride between two extremes, the bear market, and the bull market. Since the first cryptocurrency appeared in 2009, the cryptocurrency market has oscillated between many cycles of growth and decline.
To start understanding how to manage a crypto down cycle, you have to fully understand how crypto bull & bear markets work and how crypto volatility can influence the cryptocurrency prices.
The last decade has proven that each falling market cycle is followed by a period of market recovery and unprecedented growth. However, many investors panic or lose hope during a crypto winter and give up their long-term thinking strategy.
We've prepared a short guide of tips and tricks to help you manage a crypto down cycle, so you can try to minimize losses and avoid any sleepless nights.
1. Don't allow crypto prices to give you FOMO or FUD
In the crypto space, trading out of FOMO ( fear of missing out) or FUD ( fear, uncertainty & doubt) happens way more often than you'd think.
FUD refers to the negative sentiment in the cryptocurrency markets caused by rumors, detrimental new articles, or price declines. When crypto holders fall prey to FUD, they start panic-selling their digital assets because they expect even bigger losses in the future. The more people panic-sell, the more the asset price starts to plummet.
On the other hand, FOMO refers to the investors' tendency to trade based on wishful thinking when the purchase price is low, and they believe the asset prices will go up.
In any case, the best strategies involve doing your own research before you decide to either sell your coins or invest in new projects.
2. Understand why the crypto market is falling
The best way to avoid making any rash decisions involving your assets is to understand why the market is turning bearish. You can do a technical analysis of the falling market and see if the reasons why you initially invested in a crypto project still stand.
If you risk more by trading your assets now than keeping them until the market recovers, it will be easier for you to hold on to your investment and not react emotionally to whatever is happening around you.
If, on the other hand, you realize that something fundamental has changed in the project you're investing in and you no longer trust the business, it is time to sell your coins and move on.
3. Have a clear & long-term investment strategy
When it comes to volatile crypto holdings, your best bet is to have a proven strategy involving long-term investments and fixed strategies like dollar-cost averaging ( buying or selling small amounts over regular periods). An experienced investor will choose to diversify his portfolio by investing in different kinds of cryptocurrencies and stocks, not just in one particular asset.
New users should try to draw very clear entry and exit points in their trading strategies. Trading within the crypto markets should never be done from an emotional state of mind, and one should never invest money they cannot afford to lose.
4. HODLing as a strategy in a bear market
Short-term price declines shouldn't affect you if you're in this for the long haul. After long periods of bear markets, the price action becomes positive, and the market suddenly rebounds, entering a growth phase.
Awareness of the constancy of the market fluctuations can influence many traders to hold on to their assets during a down cycle, riding out the storm until the cryptocurrency prices start rising again.
5. Buy the dip
During a market dip, it might be a favorable moment to buy a digital asset you've had on your watchlist for some time but couldn't afford to put money into it. However, be aware that buying the dip is done at your own risk, as there is no certainty of which way the market evolves or if and when the asset's value increases. Your investment should be sound and shouldn't involve money you need for other financial products.
6. Look for opportunities even during a crypto down cycle
Practiced investors find profit opportunities even during the dip. They look for the small peaks during a downtrend or use short-selling ( betting on the falling value of a token) to make some profits until the market begins to recover. Some other options to minimize your losses are staking and DeFi yield farming, as they help you level out your return and keep your crypto balance on the plus side.
7. Keep a diversified portfolio
The lesson you can learn from these sudden dips in price is that cryptocurrency investments always come with a certain risk. Investing in different asset classes is the best way to mitigate these risks.
You can balance your portfolio by having a successful major asset, besides a smaller percentage of cryptocurrency. You can also trade stocks, real estate, and other types of assets.
8. Don't try to time the bottom
Trying to predict the bottom accurately is a waste of time. You will only stress yourself out if you keep guessing when the price decline reaches the bottom.
The truth is that the bottom is an elusive concept. You might think you're buying a digital token at what appears to be the bottom price. The only way from here is up, right? Wrong. The price could further drop, only causing your wallet to shrink and you to despair.
9. Staking & Dollar Cost Averaging (DCA)
When the bear market is in full swing and your portfolio seems to be losing value left and right, you might want to consider staking instead of trading. To trade in a declining market is risky, but staking only implies locking away your coins on a PoS blockchain and getting rewarded at the end of the staking period.
Staking works even when the market is going under, as it simply multiplies the tokens you've locked. This way, when the bear turns back into a bull, you'll actually have more in your wallet than before.
If this is news to you, you can read more about it in our dedicated article about how you can generate a passive income with staking.
We've mentioned DCA earlier too. That's because it's by far the best strategy that has been used successfully multiple times in bear markets. It's a simple long-term strategy where the goal is to buy small amounts of cryptocurrency over a long period of time, no matter the price fluctuations.
Last thoughts on the ups & downs of market cycles
Although cryptocurrency crashes are something no one wants to experience, they're part of the rollercoaster ride just as much as the highs. While we don't provide investment advice or anything similar, we can share tips and tricks to help you sail these turbulent waters. Keep your head clear, and don't make rash decisions during such times. Research as much as possible and try to understand the causes. Ultimately, things will turn around, and it's your decision if you want to wait it out or start selling.
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