I am now a grizzled veteran of 2 bitcoin market corrections (or crashes, I don’t know what the technical difference between the two are). This most recent correction happened several days ago around Jan 16 when bitcoin dropped 32% from over $14k to mid-$9k. The correction previous to that was in mid-December when bitcoin price dropped 40% over 5 days. (It’s interesting to note that crashes of 20% in the stock market happen only once every 3.5 years and crashes of 40% happen about once every 12 years).
The last two crashes (from coinmarketcap.com)
On the first correction, I went from $1,000 in profits to 0 and this most recent correction my profits went from $1,500 to 0. The important thing to note is that within a couple weeks after the first correction my profits climbed up from 0 to $1,500. So far the market has come back up so that I’m now about $800 back in the black. So fortunately it has bounced back quickly. Of course, that’s no guarantee either. Will bitcoin break $20,000 again? Probably. Will it happen by April because that’s when I have to pay my next rent installment? Who knows. And if you need the money to pay rent, don’t buy bitcoin. The first time bitcoin hit $1,000 in 2014 it lost 80% of its value and took 3 years to get back to that level. Of course, if you held it until now, you’d be feeling pretty good about yourself.
During the December market correction I definitely had thoughts of selling all my coins. This latest one, I bounced back and forth between selling my coins and wanting to buy in more at a cheap price.
Now that the market has calmed down a bit, I’ve tried to write down a few thoughts on how to best handle these market corrections. As I mentioned, there are a lot of similarities between crypto investing and stock market investing. Here’s what to keep in mind when the crypto market crashes:
1. Find out if there a specific incidence that caused the crash. Sometimes corrections come naturally and there’s nothing that had really caused it. If this is this case, I think you have less to worry about. But maybe something concrete happened, like last September when China announced a crackdown on cryptocurrencies. That caused a crash which lasted a couple weeks, but bitcoin has more than recovered from that. So when South Korea announced desires to regulate bitcoin, it caused a slight dip but I think we didn’t really have to worry too much about bitcoin’s long-term future since it already weathered China’s ban.
2. Look for bargains. Imagine in mid-December when the price of bitcoin was nearing $20,000. You probably wished that you bought in at $10,000. Well, here’s your chance! In fact, you’re this is even better than buying in the first time bitcoin was at $10,000 because now you’re buying while knowing that it’s possible for Bitcoin to break $20,000 because it already has.
3. Before markets crash, have a strategy in place. E.g. you might not be willing to lose more than half your initial investment. Don’t feel like you need to buy & hold until your investment is worth zero. That would actually be a terrible strategy. Whenever you buy a crypto coin, have an idea of how much loss you can stomach or how much profit you want to take in. If you wait until the market crashes to put together a plan, your emotions will take over.
4. Diversify. This is a little trickier with crypto coins because the price of altcoins all tend to follow the price of bitcoin. When bitcoin goes up, most coins go up. When bitcoin goes down, most coins go down. But coins go up and down at different rates. So maybe you missed out on Ripple the first time around before it shot up 1000% while Bitcoin only went up 20%. Now might be a good time to get into Ripple now that it’s tumbled back down.
5. And finally, get ready for friends to laugh at you. This is part of the deal. When bitcoin is shooting upwards, you get to brag about how smart and forward thinking you are. When it crashes, they get to laugh at you for throwing your money away.
Know that corrections and crashes will come. The key to getting through crashes is to act rationally and of course never invest more than you can stand to lose.