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We hear so much about the volatility of the crypto market. Avid investors tell you that this volatility is the key to success, it’s how you make the most profit, and if you learn to manage it you’ll be successful. On the flip side, skeptics use it as a reason to avoid cryptocurrency. They’ll also try and quote the supposed crypto crash as a scare tactic.
Yes, it’s true – crypto crashing is a thing. However, all markets go through cycles, and crashes are part of the process.
What this article aims to do is educate you about how to prepare for and respond to a crypto crash. Yes, it’s an unpredictable time, but you can take action to reduce the risk and protect your portfolio.
It’s no secret that we’re in a bear market. Just looking at crypto prices over recent months will tell you that. There are always certain actions or moments in time that can be attributed to the cause of a market crash.
Most recently, the bankruptcy of FTX and FTX US sent shockwaves through the crypto space. As one of the largest and most trusted cryptocurrency exchanges, it’s thought that FTX still hasn't accounted for over $1 billion of client funds – it’s simply disappeared.
A large portion of retail crypto traders was liquidated due to the horrendous actions of FTX, leaving the crypto markets in crisis, with questions now being asked of all other major crypto exchanges.
Just like there have been stock market crashes, we’ve experienced a crypto crash or two in our time. The best and most obvious example is Bitcoin’s price. Back in December 2017, it hit a new all-time-high price of around $20,000. Only a year later, it dropped to below $3,500.
Don’t worry – it bounced back and recovered to hit its current all-time high of close to $69,000 in November 2021. Unfortunately, as the cycle goes, that didn’t last. We’ve seen a drop in price of more than 70% since then, and we’re currently trading at around $16,000.
The main thing all crypto holders should be aware of is the risks of storing their portfolio on a cryptocurrency exchange. As the collapse of FTX has shown, even the most established of exchanges can’t always protect their users.
What investors have come to learn is that you don’t technically own any crypto kept on the exchange. When creating your account, you’re not given a wallet address or private keys to access it. Therefore, it’s recommended to use either a hot digital wallet or cold crypto storage. This way, you’re creating your own wallet that you retain 100% control and ownership of.
Should the market crash – which it will, your crypto will lose value, but you’ll still own it and can decide what to do with it. Whether you decide to sell, swap, HODL, or buy the dip – it’s up to you.
When a crypto market crash occurs, the value of tokens drops, meaning retail and institutional investors will see the value of their portfolio fall. The main risk here is that you’ve invested money you can’t afford to lose.
Experiencing a crash that sees prices fall by 75% or more means if you HODL and prices don’t recover, you’ve almost lost your initial investment.
As you’d expect, cryptocurrency exchanges use a variety of tokens as assets to maintain the value of the company and the ability to payout withdrawals of account holders. If managed incorrectly or with malicious intent, exchanges could find themselves in a position where they don’t have the funds to pay users.
Where there’s a risk, there’s opportunity. The most seasoned and successful investors will tell you that bear markets are where the real money is made. As fear and uncertainty set in, some investors cut their losses and began to sell off their portfolios, allowing others to sweep up valuable tokens at a cheaper price.
However, as much as Bitcoin maxis and Instagram traders like to tell you to buy the dip. Nobody really knows where the dip will end. When the bottom finally hits, there will be huge gains to be made, but it takes an experienced trader with knowledge and a bit of luck to pinpoint the bottom.
Navigating a crypto crash can be challenging, and we’re not here to pretend it’s anything but stressful. However, we’ve been through one before, as we have with stock market crashes and banking crises. As long as you take steps to protect your financial situation, don’t over-leverage, and retain control of your crypto – the power is in your hands.
Will crypto crash again? Yes, at some point. We’re still in one now, and it will happen again. It’s your responsibility to be prepared – nobody else's.
Action step one today and put your crypto in the most secure wallet available – Zert.