Being an industry with constant shifts, crypto is not new to major changes. While these changes are great for the most part, sometimes it also takes an alternate route.
Cryptos aren’t shy of crashes. We’ve seen that phase. But that doesn’t necessarily mean these crashes are utterly bad.
Cryptocurrencies are a new asset class where volatility is expected. But this very volatility can also prove beneficial for you.
To profit from a crypto crash, you need to be strategic.
And while that does sound enticing, you need to be very well-aligned with your risk-bearing capacity too.
What should I do when crypto crashes?
A crypto crash can happen for multiple reasons and almost always results in severe hits to market caps, the volume, and of course, your portfolios.
But there are certain things you can do during a crypto crash that could help you earn profit. Let us discuss six such opportunities.
1. Buy the dip
Buying a stock or an index after it has dropped in price is sometimes referred to as “buying the dip” in terms of the stock market.
If the price of the stock “dips”, this might be a chance for you to purchase shares at a lower price, which would increase the amount of money you make in the future if and when the company regains its prior high price (or more).
Buying a dip is similar to investing in an asset that could likely very well not recover as well.
Suppose you believe that the value of a particular cryptocurrency will increase over time. In that case, you can profit by purchasing it when its price is low during a crash and holding onto your investment until the price recovers.
2. Shorting the crypto
Shorting is betting for an asset’s price to fall. For example, in the stock market, you “short” a stock when you think its value will decline within a specific time frame. Here, you borrow the asset from the seller and sell it so that you can buy it later at a lower price and earn the price difference as a profit. The same can be applied to cryptocurrencies.
If you think a specific cryptocurrency is overpriced and the price is likely to go down, you can make money by selling it short and betting it will go down. This strategy involves borrowing Bitcoin from another party to sell it, with the expectation that you will be able to purchase it again at a lower price in the future. At this point, you will give it back to the lender while retaining the difference as profit for yourself.
3. Diversify your crypto holdings
Diversification is a method used to reduce your investment risk, especially during a crash.
For example, if you own a wide variety of cryptocurrencies, you can reduce the likelihood of suffering a financial loss if the price of cryptocurrencies drops.
Furthermore, even if one of the cryptocurrencies in your portfolio drops, the value of the remaining cryptocurrencies may continue to rise or stay steady, thereby offsetting any losses you incur.
4. Make use of stop-loss orders
A stop-loss order is an order that automatically sells a cryptocurrency when the price of that cryptocurrency hits a particular threshold.
If you place a stop-loss order at a price lower than the market’s current value, you may be able to reduce the amount of money lost if the price of the cryptocurrency drops.
This is especially useful when you are holding onto crypto, hoping it will bounce back with time, but there is a specific limit after which you think it can’t bounce back enough to earn you a profit. Similarly, you could set a stop-loss when you invest in itself to protect it from a crypto crash.
5. Rupee-cost average
Rupee-cost averaging is an investment strategy in which a certain amount of money is invested at predetermined intervals, regardless of the price. This may help you avoid the hassle of attempting to time the market and make it possible for you to get into a cryptocurrency at a lower average price, which might increase your earnings if the cryptocurrency price rebounds over time.
6. Trade on margin
Some cryptocurrency exchanges allow you to trade on margin, which means you may borrow money from the exchange to boost the amount of cryptocurrency you can purchase.
This can make you profit from a crash by allowing you to purchase more cryptocurrency than you would have been able to otherwise.
However, doing so comes with significant risks, as you will be responsible for paying back the borrowed funds regardless of whether you profit from the investment.
In conclusion, there are various ways that you may benefit from a drop in the value of a cryptocurrency.
Before making any choices on investments, however, it is important to carry out an extensive study and give due consideration to the risks that are involved.
Because of the high level of volatility that exists in the cryptocurrency markets and the fact that prices are subject to substantial movement, it is essential to be well-prepared for both the possibility of incurring losses and the possibility of realizing profits.
What’s more important is that while you are investing and divesting, there is also an implication of taxes that your portfolio attracts. Luckily KoinX allows you to be very well-updated with crypto taxes and make wise decisions with your investments.