Most stock market crashes are abrupt shocks, and crypto crashes are no different. As an eminently forgettable year for the cryptosphere winds down, it would make sense to discuss possible crypto crash scenarios and devise an appropriate market strategy.
What’s a crypto crash?
You probably know what it is. Technically speaking, a crypto crash is a drop of more than 10% in the price of an asset in a 24-hour period. The time frame is as important as the percentage fall—a 10% dip over a few weeks is a correction, not a crash.
Crashes usually follow big news that impacts the market directly, such as the FTX collapse. Though 10% is the threshold, BTC prices have lost half their value in the past.
A chronicle of past crypto crashes
BTC feels the heat from Bitfloor shutdown
The US Financial Crimes Enforcement Network (FinCEN) shut down the operations of prominent crypto exchange Bitfloor in 2013, leading to a crash in the price of BTC. The coin, which was trading at $260, nosedived over 70% to a meager $70. It took the crypto market more than six months to rebound to the previous level.
The second most notable crash followed the WHO declaring Covid-19 as a global pandemic on 11 March 2020. BTC fell 50% following the announcement, losing more than $3,200 per BTC in a single day. However, a crash of that magnitude didn’t come as a surprise as Asia, the hotspot of crypto investments also turned out to be the nerve center of the coronavirus.
FTX crash and its aftermath
The FTX crash in November 2022 hurt the crypto market badly. Besides crypto trading, it also dragged down the huge holdings of crypto FTX was holding (like Solana) and the firms closely associated with FTX.
Steps to take during a crypto crash
Timing the market is a fool’s errand. Likewise, it is difficult to predict a crash. Investors are often clueless about unforeseen situations such as the Terra-Luna crash. However, the macroeconomic environment often offers clues about what might happen in the near future. For instance, higher interest rates dampen investor appetite for high-risk assets such as cryptos. Here are some steps you could consider in the unfortunate event of a crypto market crash.
Try not to panic: When you’re losing money literally every second, it’s hard to follow that advice. We still urge you to try your best not to be impulsive. Ask yourself: Are you investing because you believe in the long-term? Or are you trading to make a quick buck? If you’re the former, you already have the answer.
Find out what’s happening: Try to get to the bottom of the issue. What’s driving the crash? Is it news? What has gone wrong with the coin? Your response should depend on what triggered the crash. If you think the news is short-lived and there’s nothing wrong with the project, wait for a couple of weeks for prices to rebound. However, if you think there’s something fundamentally wrong with the investment (founders quitting, vision gone haywire), you should consider exiting. Try investing in a better asset while trying to reduce your losses.
Remind yourself that volatility is part of the game: Cryptos aren’t like stocks or bonds—they’re riskier. When you decided to invest in crypto as an investor, you signed up for short-term uncertainty for long-term profits. Reminding yourself of what’s on the horizon usually takes the edge off.
Blessing in disguise: A crash is a perfect time to invest in projects you truly believe in. It is a good practice to evaluate if there’s something fundamentally wrong with the project before doing that. If there isn’t, this could be a blessing in disguise. In fact, you can use the opportunity to lower your buy average and increase your profits as prices rebound.
Prevention is better than cure
The adage rings true in many walks of life, investments included. Following some of the time-tested safety practices will protect your investments if things go wrong.
Diversification is the name of the game: The evergreen strategy will hold good when it comes to investing in conventional and digital markets. A healthy balance between safe and volatile cryptos, subject to your risk appetite, will protect your portfolio even if some coins lose value.
Risk management: Do not allocate a large portion of your capital to cryptos if you cannot tolerate dips in the short term. Assess your investment profile and goals to find an ideal fit, or consult a professional investment advisor.
Yes, market crashes can catch you unawares. However, downturns are not all bad. While there’s some pain in the short term, prices tend to bounce back in a few months. Besides, crashes often sweep the market clean, weeding out bad actors, institutions, and entities, leading to the enforcement of stricter rules.
The rule of thumb is to adopt effective risk-management techniques and diversify your investments across assets and within crypto.