From a high of nearly $70,000 late 2021, Bitcoin’s price plunged below $20,000 by the following summer, marking the crypto market crash of 2022. Contributing to the weakness was the demise of the ‘stable coin’ associated with the blockchain Terra, which plunged to near zero after losing its dollar peg. The crypto market was roiled by this event leaving holders wondering what other landmines might be out there.
The crypto market has yet to see large institutional interest and is as of the time of this writing, still more of a niche industry. Nevertheless, Bitcoin and a slew of other crypto projects massively benefited from the bull run in the equity markets while it was in full swing. Since stocks began to slump, crypto has done what can most fairly be described as crashed, leaving many to wonder what this means for the sector.
Where there is blood in the streets, however, there are opportunities for those with the guts and the premonition to take advantage of them. Below, we are going to take a look at 5 such ways investors can take advantage of a crypto market crash.
Starting with the most obvious. Buy low and sell high is the drum beat that investors and traders march to. This being the case, it stands to reason that a market crash offers the opportunity to get in there and buy where the getting is good. It’s not easy to pull the trigger and press the buy button when everyone is running for the hills and fear is screaming in the heads of market participants like a Banshee, but the most successful are those that over time are patient and wait for those times when people are willing to sell their shares (or their coins) at a discount and scoop up bargains.
Separating the Wheat from the Chaff
Rising tides lift all boats, but in stormy seas, only the strongest ships survive. During strong markets, even the leaky vessels, no matter how poorly managed or constructed, benefit from buyers who fear missing out and who don’t do their due diligence. Some people will buy anything during bull markets, making it difficult to see which cryptocurrency and other crypto projects really have legs for the long run and which are just passing fads. Market crashes separate the wheat from the chaff. Coins that don’t have what it takes sink, go to zero, or go bankrupt during these stormy times, showing savvy traders which projects to avoid.
Dollar Cost Averaging (DCA)
Timing any market is incredibly difficult. Timing the crypto market may be next to impossible given the kind of beta that exists in a market that regularly experiences 85% crashes or more. The good news is that investors have made money over time, not by timing their buys and sells precisely, but by employing the strategy of dollar cost averaging. Studies have shown that regularly investing a fixed investment amount on a regular basis regardless of share or coin price reduces the average buy price. Dollar cost averaging during market crashes especially help lower your entry price.
It may surprise some to learn this, but it is actually possible to earn money in the financial markets – even in the crypto markets – whether the price is climbing or declining. Selling short is a method of profiting from falling markets. This is accomplished by borrowing shares or coins from a brokerage firm with the promise of returning them at a later date. You then sell these on the open market with the hope of buying them back at a lower price. The difference in price represents your profit or loss. Keep in mind that short selling is a very risky strategy and that the potential for loss is unlimited, since there is no limit to how high a price may climb. Don’t do this if you don’t know what you are doing and especially if you don’t have a high risk tolerance.
Most countries tax realized capital gains. This means that you pay a tax on your investment gains once you sell your shares. For investors who are planning on cashing in on some or all of their gains over the next year, a crypto market crash can be just the opportunity they need to help offset some or all of their gains, helping reduce tax burden. Just like gains, losses are typically counted during the year that an investment is sold. Selling some of your worst performers during a market downturn can be a good strategy for certain people under certain circumstances. This is something that is best sorted out with your accountant before taking any action.
A Crypto Market Crash Doesn’t Have to Spell the End of the World
As you can see, a crypto market crash, as painful as it is when you have bought at much higher prices, doesn’t have to be the end of the world. Smart money takes advantage of chaos, volatility and lower prices and uses it to their advantage. You can either shed tears in your cornflakes or decide to make lemonade out of lemons and use the opportunity to give yourself and your family a brighter future.