How to minimize losses during a market downfall

WhiteBIT
Published 10 August 2021

Trading cryptocurrency is often compared to playing in a casino — to calculate risks is difficult, to start without background is dangerous, and to predict events that affect market movements is barely possible at all. However, even in this situation, the crypto market attracts more and more newcomers who will either be successful or end in a fiasco. In this article, we will discuss how to prevent losses and multiply your pennies.

The main “manipulators” of the cryptocurrency market are the very volatile course of Bitcoin, the father of all cryptocurrencies, the statements and actions of the major players in the financial sector, and all sorts of events in the political, economic, and even cultural arena. Crypto enthusiasts can only accept the fact that the market will sometimes fall and develop their behaviour strategy in such situations.

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1. Rely only on your knowledge

As in any business related to finance, ignorance is not forgiven in cryptocurrency trading. Often, novice traders, having heard about the possibility of making quick money on cryptos, throw significant assets and their high hopes into any cryptocurrency without understanding the fundamentals of crypto trading. Thus, due to ignorance and inexperience, traders may face problems at the very beginning of their trading path, which, in any market fluctuation, can cause severe financial losses. Therefore, to protect yourself from losing money in a market downfall, you must initially build your trading strategy and conduct a market analysis on preferable assets. Not losing money is already half the battle, so both novice traders and experienced users should always keep their fingers on the pulse and study assets and their behaviour. Here are a few rules for stable trading:

  • Analyze the assets with which you intend to work.
  • Explore the existing trading strategies and develop your own one.
  • If possible, make a trading diary to keep track of mistakes that have already been made.
  • Analyze the trading instruments provided by the selected exchange.

2. Diversify your investment portfolio

Investing most of the capital in one asset is not the best solution, especially for newbie traders. Therefore, experts advise splitting the money allocated for crypto investments and invest it in different assets. On the one hand, this will compensate for possible losses due to a fall in the price of one or more coins. On the other hand, most altcoins still depend on fluctuations in the Bitcoin exchange rate, so you should always pay attention to the development of BTC as well. However, cryptanalysts point out that although this connection between Bitcoin and altcoins still exists, the differences in their behaviour are also becoming more apparent.

In this case, you can diversify your investment portfolio not only through crypto investments but also through other assets. It is essential to understand that the more coins a user buys, the more analysis he has to carry out. At this point, we return to rule 1: study before you purchase something and try to at least save the money before multiplying it.

Another option to secure your assets is hedging with futures and options. Hedging is a risk management strategy that helps to protect the asset from negative market trends.

3. Remove the panic

Nothing stands still in the world of cryptocurrencies, and something important occurs literally every week. This, in turn, may affect hundreds of thousands of users. To be informed is crucial, but what is even more important is to be able to filter the received information, analyze it and learn to predict the market developments. FOMO is a fear of missing out on something that can contribute to positive financial change.

In pursuit of such news, traders often go astray, which can lead to undesirable consequences and stress. The mind of a person whose mind is clouded due to FUD (fear, uncertainty, doubt) works the same way. The term FUD is often applied to cases when famous people express their negative judgments in the direction of an asset or when rumors are spread in the crypto community that can potentially influence asset price fluctuations. Obvious things are usually simple, and instead of succumbing to panic, you need to trust your knowledge solely.

4. Increase the HODLing period

Most successful investors claim that long-term investments are the path to success. If the asset price drops sharply, this is not yet a reason to panic and sell it. Such cases are called “unrealized losses”, which do not pose a critical threat until the assets are actually sold. The story of Bitcoin and other successful crypto projects shows that the functioning of the market is impossible without serious price jumps, due to which occurs an organic market correction. Therefore, the strategy “buy when the price increases and sell when it falls” is not correct. In countries like the United States, long-term investing built on patience and rational thinking is considered the key to financial success. In addition, it is beneficial tax-wise because keeping an asset for a year or more often brings more profit.

5. Always see the perspective

Experienced traders who have been through both rapid ups and downs know that it is possible to make money even when the market is down. However, it is necessary to get a hand in trading in general and be able to notice what others overlook. Usually, these are small fluctuations in assets, which, even during a global fall, can be profitable if you buy the assets at the right time.

Summing up

A market decline is a natural process, which is necessary for the organic correction of the market. Falling into panic and selling all assets during such periods is not a rational approach and will often lead to chaos. Adhering to cold logic, studying the industry, and developing patience will help crypto enthusiasts not only to keep but also to increase their capital.

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