The stock market isn’t the only financial exchange that goes into bear territory; cryptocurrency is also prone to crashing. Here’s just one example: In November 2021, Bitcoin’s value sat at about $68,000. By early June of 2022, Bitcoin was worth a mere $17,800. That’s a difference of $50,000 over the course of around six months.
Ethereum tells a similar story. In November 2021, Ethereum was flying high at $4,865. In mid-June of 2022, it was at $995. And while both Bitcoin and Ethereum might not sit at those lows permanently, the numbers represent part of a greater pattern in overall crypto performance — one that includes semi-regular crashes.
For cryptocurrency investors, many of whom are used to a high degree of volatility, these crashes can be tumultuous times. However, that doesn’t mean weathering the storm isn’t a possibility. If you want to survive a crypto crash, here’s what you need to know.
Crypto Crashes: When and Why They Happen
As mentioned above, a major crypto crash took place in June of 2022. Most major cryptocurrencies saw their values plummet, and many sat at valuations of just half of what they were during the November peak.
In many ways, the decline wasn’t a surprise. Historically, crypto prices often shift in correlation with the stock market, even though cryptocurrencies aren’t tied to underlying assets like stocks. The U.S. stock market hit bear territory in June of 2022 after experiencing declines since the start of the year. While the losses weren’t as large, they did align with the downward crypto trend.
One reason crypto began seeing a dip is the same reason stocks also started tumbling: inflation. Inflation creates challenges that cause some investors to forgo riskier assets in favor of options that they view as more stable. Additionally, some people began pulling money out of the market to make ends meet as inflation continued pushing prices skyward.
Other crypto crashes are usually caused by similar sentiments. When riskier investments seem unwise due to changes in certain financial climates, crypto values tend to tumble because these currencies are far more volatile than stocks.
However, cryptocurrency is also impacted by something called gain harvesting. In December 2017, Bitcoin was sitting near $20,000. Many investors viewed the situation as a bubble, and some began selling their Bitcoin to capture as much profit as possible. This ultimately led to a crash, with the price falling to $12,000.
Additionally, without any assets backing most cryptocurrencies, an offhanded remark or small change to a plan can send a price tumbling. For instance, when Elon Musk said that he wouldn’t accept Bitcoin as payment for Tesla vehicles – something he previously promised to do – Bitcoin’s value sank.
Hacks also influence the price. Whenever hackers make off with a substantial amount of any particular cryptocurrency, investors grow understandably weary. Those hacks highlight the risks associated with digital currency, harm public perception and cause values to tumble.
Finally, regulations – or the threat of regulation – impact crypto. Bitcoin’s price is frequently influenced by activity in China, where Bitcoin was once banned. Government officials in China commonly restrict crypto, which leads to downturns — at least in the short term.
5 Tips for Managing a Crypto Crash
Cryptocurrency values are volatile. That much we know. But even if you’ve prepared your portfolio to tolerate a higher level of risk, that doesn’t mean you want it to absorb all that risk — meaning all those tumbles in crypto value — when a crash takes place. The following tips can help you weather crypto downturns more effectively.
Just as you shouldn’t make any rash selling decisions during a stock market downturn, you don’t want to start offloading cryptocurrencies because of a crash. Remember, this isn’t the first time cryptos have lost value, only to rebound and reach new heights.
At a minimum, you should research your options, look at your overall portfolio composition (and broader financial picture), and determine whether you can potentially afford to wait things out. If you don’t need the cash immediately, sit tight and try to weather the storm. While cryptocurrencies aren’t guaranteed to recover, past crashes indicate that things may move upward once again down the line, so holding could be a worthwhile strategy.
Like investing in the stock market, diversification is essential if you’re adding crypto to your portfolio. It’s wise to balance all your investing activities to mitigate risk. A broad selection of investments typically creates a more stable portfolio.
Make sure you aren’t just investing in cryptocurrency, and never put all of your funds into a single currency. Instead, view cryptocurrency as a single segment of a wider investment strategy. Add in other assets to help offset the volatility that comes with crypto.
When many people first get into the crypto market, they’re somewhat unfamiliar with the landscape. In many ways, cryptocurrency is trendy as an investment. As a result, some people commit funds without understanding the volatility that’s essentially par for the course with cryptocurrency, or they choose individual coins without basing their decision on research. Then, when there’s a crash, they’re far more anxious about the situation than those who understand crypto investing better.
Ideally, anyone who invests in cryptocurrency needs to embrace research. Understand why you want to get into the market. Investigate individual coins to learn about their risks, performance and long-term viability. Look into past price fluctuations to get a feel for the highs and lows and ensure you see what can happen in this market. That gives you a stronger foundation and makes it easier to tolerate the downs that can come with potential ups.
It’s wise to review information from legitimate sources, but watch out for crypto “experts” who use scare tactics and the fear of missing out to drive video views or capture engagement on social media. While they may have experience in the market, that doesn’t mean their advice is sound.
Remember, no one knows for sure what the future will hold. Be wary of anyone promising or guaranteeing returns. Additionally, watch out for language that’s designed to solicit specific emotional responses — particularly fear or anxiety. If you encounter this, it’s usually best to get the information you’re seeking elsewhere.
In some cases, crypto crashes represent opportunities. If a particular coin still has long-term potential, buying it during a crash could allow you to capture some future gains.
Just as it is with stocks, research is a necessity here. You don’t want to over-commit to crypto and create an imbalance in your portfolio. Instead, look at your current asset allocations and see whether an ongoing crypto investment is wise. If you’re comfortable with the risk, are otherwise diversified, and don’t need the cash to offset other issues like inflation, then it could be a wise move.