In choppy waters, as we have seen of late, here are some tips to help guard your crypto assets from the sudden and unexpected.
Known to be volatile, cryptocurrency markets are risky to navigate, as much as they may be at times rewarding. Their price fluctuations can be influenced by several factors, including speculation, demand and supply, or even a confluence of factors.
Some studies say as much as over 95% of crypto day traders eventually lose money. Success may land on the lucky traders, but more typically it finds the resilient ones equipped with the best practices. There are plenty of trading methods and strategies aimed at growing earnings; here we offer a guide on creative techniques to protect yourself from price plunges and ultimately, prevent substantial losses.
What Is Crypto Price Plunge?
A price plunge is a sudden drop in market prices. Low demand is a common factor for price decreases in digital assets. Other influences contribute to pro economy plunges, such as regulatory measures, perceived value and utility, and taxes, to name a few.
Digital assets have a high plunge rate due to their volatility. In June 2021, for instance, the trading volumes of a handful of major exchanges dropped by over 40%. That same month Bitcoin fell by 6% to a monthly low of $28,908.
Although 6% may not seem a lot, it was more than a 50% drop compared to the monthly high just two months earlier. More recently, after surging to an all-time high of over $69,000 on November 10, 2021, Bitcoin’s price has slid nearly 20% to as low as $56,000 just two weeks later.
Creative and Cautious Trading
The majority of crypto exchanges have stop-loss and take-profit orders. They come in handy while trading to protect traders from volatility and plunging prices. Downswings can liquidate trading positions in seconds. So it’s vital to decide how much risk you are willing to accept — how much you can afford to lose — before entering a trade.
Stop-loss orders allow you to specify an asset price where your trade will close automatically. It enables traders to avoid further loss if it occurs. Meanwhile, take-profit orders serve to close trades that are already profitable.
Although a stop-loss can protect you from price plunges, it also prevents you from profiting from an upswing.
Balance Your Portfolio
It’s common knowledge that investors should not pour all their funds into digital assets, nor a majority of them. Rather, having a diversified portfolio offers a more balanced approach to enhancing discipline in trading and protection against loss. An extreme (and perhaps unlikely) example might be someone going all-in on Dogecoin because it has been a much-talked-about asset since earlier this year.
There is a wide variety of crypto assets available for investment, allowing more options that help reduce any possible impact from a sudden decrease in prices. You can allocate more funds in a portfolio you are more comfortable with. Ultimately, diversification helps balance risk and reward; the profit proceeds of one trade could cover the loss of another.
Reduce Leverage and Position Size
One standard mistake in digital asset trading is using incorrect position sizing. Experts would calculate position sizing when using high leverage in margin trade exchanges. Skilled traders can profit from small price swings using high leverages.
However, leveraged positions are more vulnerable to the crypto market’s volatility, so a trader’s equity can plunge into negative figures rapidly. In such circumstances, losses may be higher than in a maintenance margin.
If you are a novice trader, lower the leverage amount. As a rule of thumb, choose to risk a maximum of 1% of your total investment on each trade. This means that you would have to lose 100 trades in a row for you to blow your account. Some exchanges offer a position calculator to help traders size a transaction based on their initial capital investment.
Pegging to Real-world Assets
Another popular way to manage crypto volatility is having digital assets pegged to real-world assets, like stablecoins. Stablecoins are pegged to investments like gold, silver, or fiat currencies like the US dollar. Their values will not experience fluctuations as with other non-pegged ones and, rather, follow the assets they are linked to.
Pegging also increases the liquidity of the assets. This increased liquidity allows traders to exit a position faster. However, unlike other cryptos, they have little value growth.
Practice Patience – Avoid Panic Investing
A major mistake some traders make is rushing to get into a trade position via market orders. You pay a premium in trading fees for exchanges to execute your market order. That may be the worst entry strategy because the price of an asset can reverse and plunge almost immediately, resulting in more losses.
If you feel the urge to rush into a trade when prices are moving fast, you may be suffering from FOMO. Traders should always bear in mind that markets are operational 24/7. Therefore, if you miss out on any trade setup, exercise patience, and a new opportunity will arise. But that may be frustrating for arbitrage and swing traders on weekly or daily intervals. The upside is there will always be another chance, and you will have saved your capital.
Embrace a Long-term Strategy
Similar to stock investments, it would be wise to adopt a long-term investment strategy for cryptos. Rather than selling digital assets off as soon as it starts plunging, it may be better if you held crypto assets longer. That way, you’ll reap the benefits when it revs back up. (In some countries, holding cryptos for long periods may also be advantageous for tax purposes.)
Overall, the best way to ride out a crypto price plunge is to keep tabs on the news around digital assets, especially experts’ opinions about market trends, industry developments, and regulatory sentiment. Research and digest enough information to help you make a sound decision, create a trading plan, and stay calm and in control of your capital, more so in bear markets.
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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.