Whether you’re a short-term trader or a long-term investor, at times you find your crypto portfolio in the red zone with one or more of your holdings moving against you.
Before you know it, you can find yourself in a FUD situation (crypto talk for fear, uncertainty, and doubt), which can become incredibly frustrating and can contribute to your making an emotional decision rather than executing a well-thought-out strategy.
This article covers ten potential next steps when the market isn’t on your side.
1. Reevaluate Your Risk Tolerance
Measuring your risk tolerance is the very first step you need to take when you start investing in anything. But as life goes on, circumstances change in ways that may impact your risk tolerance.
A down period for your portfolio may be a good time to reassess your risk tolerance to identify the best thing to do next. For example, if you now have a higher risk tolerance than you did when you entered a position, you may consider adding to your losing position.
But if your financial situation has impacted your risk tolerance in a negative way and you don’t have much time in your hands, you may consider cutting losses (also described later).
The bottom line, however, is never make a rash decision based only on emotions and the feeling that your risk tolerance is high or low. By carefully calculating your tolerance, you may get a surprise to the contrary.
2. Look at the Big Picture
You can evaluate the bigger picture from both technical and fundamental viewpoints: » On the technical side, you may get a better idea of where the market is going by switching to longer-term time frames.
For example, the market may be on a very long-term uptrend, where the price has been going up for quite some time. In that case, the current dip may be a healthy correction, which can even be a good point to buy more of your crypto asset.
On the fundamental side, you need to go back to the basic reasons you chose to invest in a specific cryptocurrency — things like the cause, the management and community, the technology, and everything else that can contribute to the long-term growth of the cryptocurrency’s valuation.
3. Research the Fundamental Reasons the Crypto Is Down
When evaluating the big picture as I discuss in the preceding section, you may find that a core fundamental problem is driving the devaluation of your crypto asset. Perhaps the cryptocurrency is no longer backed by giant financial corporations, has gotten involved in a scam, or is running out of money and therefore not able to invest in its technology.
You can use your favorite search engine to look into the fundamental details of any specific cryptocurrency. Simply search the crypto’s name online and go through the most recent search results under the “News” category. If the fundamentals have changed for the worse and are the reason the value is down, you may need to reevaluate your position and potentially cut losses.
As a crypto enthusiast, I recommend that you keep up to date with the most recent crypto news anyway by following websites such as TopGold Forum Cryptocurrencies Section, CoinDesk, NewsBTC.com.
4. Consider Hedging
Hedging is a common investment practice to manage risk. By hedging, you basically go against your current position or industry to offset the risk it involves.
For example, if you’ve bought Bitcoin versus another cryptocurrency like Ethereum and Bitcoin’s price is dropping, you can consider selling Bitcoin in a different trade and take advantage of the current downtrend.
Positional hedging is especially useful when you’re trading cryptocurrencies on brokerages that allow short selling. For more on hedging strategies, consider joining Invest Diva’s premium group at https://learn.investdiva.com/ join-group.
5. Diversify within Crypto Assets
Adding other crypto assets that are exposed to a different type of risk than your losing cryptocurrency is another form of hedging (see the preceding section) that may help you balance out your portfolio.
Identifying such cryptocurrencies can be very difficult, though, because at least at the time of this writing, most crypto assets are exposed to similar types of risk.
6. Diversify across Other Financial
Assets Until cryptocurrency investing becomes mainstream, you may find this strategy most helpful. If your analysis shows a longer doomsday period in the cryptocurrency market while other financial instruments like bonds are lucrative, you may consider diversifying away from cryptocurrencies to distribute risk. This approach is yet again a different form of hedging, which I discuss earlier in this chapter.
7. Exchange with a Better Crypto
After redoing the IDDA for your crypto assets that are down, you may realize that a particular crypto isn’t worth holding onto. Unlike the stock market, where you have no choice but to take losses, in the crypto world you may have the option to exchange with a different, better cryptocurrency.
For example, say you bought a bunch of a crypto called CrappyCoin at a high price, but its value has been plummeting with no signs of recovery. At the same time, you hear of a new, cheap cryptocurrency with a bright future.
Though you may not be able to buy a ton of the new crypto with your devalued CrappyCoin, you still may benefit from cutting your losses on CrappyCoin early and exchanging with the better crypto.
8. Think about Adding to Your Current Position
Warren Buffett is a famous investor who adds on to his losing position — buys more of a falling stock at a cheaper price — when the markets drop.
But of course, he does so only for assets that have strong fundamentals and are in the midst of a temporary, healthy pullback. He also can handle the risk. This strategy has the potential to work for cryptos as well.
Before you get too excited, keep in mind that the cryptocurrency market may act differently than the stock market (which is what Warren Buffett invests in) and may continue to be unpredictable and volatile in the coming years.
That’s why you must make sure you can afford a bigger prospective loss for a period of time until the crypto market gets back on track. Avoid using margin and borrowing money from your broker when adding to your losing position.
Those approaches increase your investment risk. By adding on to your losing position, you can bring your average holding price lower and therefore profit more when the price eventually goes back up.
9. Contemplate Cutting Losses
Personally (and famously), I’m not the biggest fan of stop-losses, which are market orders you set to cut losses if the price of an asset like a crypto is going against your investment position. However, sometimes you have no other option for various reasons, including personal risk tolerance and market conditions.
In that case, you may want to consider simply getting out of your losing position, calling it quits, and focusing on a different source of profit. Short-term traders are more likely to use stop-losses.
Long-term investors are supposed to have made the risk-management calculation ahead of time, making sure they have enough time to wait things out.
Using a stop-loss may become incredibly beneficial if you invested in a scam and learned about your mistake afterward because it will enable you to limit your losses before the value of the asset goes down to zero.
10. Do Nothing
In most cases, patience is a profitable virtue. If you got into a specific position after doing a thorough analysis from all points of the Invest Diva Diamond Analysis, or IDDA, chances are the current dip in the market is temporary.
If you give it time, you may find yourself in positive territory again. Even the toughest markets find their way back up again if you wait long enough.
Of course, the cryptocurrency market is very new and hasn’t shown enough evidence to prove that it follows the sentiment of other markets like the stock market.
However, because most investors categorize cryptos as a capital gain asset just like stocks, the crypto market may well follow a market psychology similar to other such assets.
Capital gain assets are those you invest in expecting a gain in their value to give you a positive return. Of course, waiting for a long time may not be suitable for all traders and investors.
Depending on where you are in your life and what your financial goals are, you may be able to take advantage of making time your best investing friend. If you’re on a ten-year plan to reach a financial goal — buying a house, for example — you shouldn’t worry about the minor ups and downs in the markets.