Summer comes only once a year (and boy are we feeling it in 2022!). Also winter. But in the crypto world, you never know when, or for how long, a dreaded “crypto winter” will last, but when it does come, it can wreak havoc on your digital wallet.
We are currently knee-deep in the snow of a crypto winter. Panic selling is running amok, bringing sub-zero temperatures to a once-heated crypto market. NFT rug pulls seemingly happen on a daily basis, and the descending fever lines are colored red across the board. In this crypto winter, Bitcoin, for example, plunged from an all-time high of $69,044 per coin in November to a dismal value of $17,745 this June; Terra, now Terra Classic, was at its peak in May, but tanked in June to zero; Voyager went bankrupt; and the mega hedge fund Three Arrows Capital (or 3AC) was MIA. It’s not much colder than this, but then again, it’s not over. With a nod to Game of Thrones: Winter is not here, it’s here!
But if you can adjust your mindset for a moment, consider this: A crypto winter, or crypto bear market, is a great opportunity to “average down” or get into a coin for the first time. Of course, you have to manage your risk properly, but carpe diem during these cold days in crypto.
Here are some of my suggestions on how to stay warm during a crypto winter. (full disclosure: I am not a professional financial advisor. The following suggestions are based on my personal observations and do not constitute financial or investment advice. Consult a financial advisor before making any investment. To read ZDNet’s full disclaimer, scroll to the bottom of this story.)
- Enter the dollar cost average (DCA). As in traditional investing, this strategy of investing equal amounts at regular intervals regardless of price is also applied in the world of cryptocurrencies and is helpful in reducing the pains of volatility in investing your coins. Say, for example, you bought five Ethereum (ETH) coins at $3,500 each in January, but this summer they are trading at $1,300. His initial purchase was $17,000. That investment is now worth $6,500. You have lost $10,500. It’s not a realized loss yet, but you’re way down. Now, let’s say you buy an additional three ETH at $3,900. You now have eight ETH worth $10,400. Because you are averaging down, your cost to break even decreases. By investing in small increments over time rather than all at once, DCA helps you take advantage of market volatility. In the example above, it would have been better to split the original purchase of five ETH into smaller incremental purchases.
- Buy and hold indefinitely (or wait for your life, HODL). Take a break from crypto and wait until prices pick up. HODLs endure the ups and downs of crypto cycles and sell for higher returns over the years. A person who can HODL through a 70% loss is a “boss”. It takes a certain level of commitment to do this. Most HODLers don’t care about fluctuations; they are investing for the long term to maximize profits, just like investing in stocks.
- Trade (all day and all night). In a bear market, shorting cryptocurrencies is a way to make money. Instead of trading on the hope that a currency is going up, you trade on the assumption that the currency is going down and capitalize on profits that way. In my experience, short selling is a more common and accepted practice in the crypto world than it is in the stock market. Many traders go long and short, but to do so successfully, you need to have a solid understanding of how cryptocurrencies are traded and know how to “read” performance charts and price actions. If you like looking at charts and being glued to your computer screen all day, and into the night, this might be right for you.
- Watch the show from the sidelines. Do nothing. Wait, wait and wait some more for the coins to bottom out and then jump in and buy. Exchange holders who paid more for their coins will hate it, but you stand to make big profits when the crypto bull market returns.
- Put your coins in cold storage. In a crypto winter, move your funds into cold storage. Do not trust your funds to a centralized exchange (CEX). You can use decentralized exchanges to lend your coins through smart contracts. If you must use a CEX, get in and out as fast as you can.
- Consider stablecoins. Inflation (currently 9.1%) continues to skyrocket and investor returns are not keeping up. Therefore, using cryptocurrencies to protect your purchasing power through stablecoins is a hedge against inflation. You can generate higher returns by depositing your stablecoins into smart contracts or by lending them. The most popular stablecoins are backed by the US dollar and hold a 1:1 value against the dollar. The most popular by far is Tether (USDT). It is the most liquid of the stablecoins and has a market capitalization of $66 billion. It is the third largest coin by market capitalization in coingecko.com. USDC and USDT are the safest stablecoins to take advantage of (more on that in a future post).
- Read read read. During a crypto winter, take the time to hone your crypto skills by reading more about trading and reading charts or simply learning about decentralized finance (DeFi) and stablecoins. I love learning about different blockchain technologies or trading on test network platforms If you are not familiar with testnet, some platforms allow you to trade with fake money to learn how to use their platform. It is similar to stock trading in simulation mode.
As for staying warm during this crypto winter, here are some key points to keep in mind:
- Never, and I mean never, trade more than you can afford to lose. Crypto can be a great buying opportunity, but it can also lose your shirt. I recommend investing between 1% and 5% of your total portfolio.
- Dollar cost averaging is a must or you will lose your sanity in a bear market.
- Don’t panic, sell at a 70% loss. You will regret it in a bull market. HODL.
- Finally, winter always ends and the warmer seasons return.
Stay warm, friends.
The information presented by Crypto Coach and ZDNet is not intended as individual investment advice and is not tailored to your personal financial situation. It does not constitute investment, legal, accounting, or tax advice, or a recommendation to buy, sell, or hold any particular investment. We encourage you to discuss investment options with your financial advisor before making any investment.