Just a couple of months ago the internet seemed to be abuzz with the sudden rapid rise of cryptocurrency prices - we saw the entire asset class rise up from around $780 billion at the start of the year to a peak of over $2.5 trillion (with a T) in May. But now, just a few months on from that run, the entire market is down by about 45% and there seems to be less excitement and a lot more discomfort as those still hodling are keenly watching the price. With the slightest move being excruciating, what are some of the methods to deal with the ups and downs of crypto?
The cryptocurrency market moves in cycles and though the pause in the latest run up may feel like the party is over, the fact is that this isn't exactly unfamiliar waters for those who have been involved for a few years. When you push aside all the excitement and fear of missing out you will find that those who have been able to hold on for the long term are those who have a deeper understanding on why they're in the market, and have also made preparations outside of it. Volatility and big moves are part and parcel of cryptocurrency, so the element that brings discipline and control needs to be the investor themselves.
1. Understanding the fundamentals
A common mistake made by people looking to get into cryptocurrency is the lack of research and understanding they have for the asset that they're buying.
You see a lot of memes and jokes on the internet on how the person who takes the steady and more cautious approach will lose out to the person who simply "YOLO's" their money in.
But don't let such things sway you towards making a poor decision.
Chances are you're going to be on the wrong side of the move and since you made it based on a meme it's going to feel a lot worse than if you got in based on some underlying understanding of what you're putting your money into.
Now let's be real here - there's so many different cryptocurrencies and the space is moving at such a rapid pace that it's going to be difficult to keep up with it all. You don't want to get sucked into an information black hole that actually yields very little value to you.
But you should at least know the fundamentals.
Decentralised finance, blockchain, and the double-spend problem are some of the core topics you should at least gain a basic understanding of before you start thinking of risking your money.
And you want to know how the specific cryptocurrency you choose to invest into addresses some of these.
When you have that foundation of understanding you're going to be able to make much clearer decisions on why you're investing into cryptocurrencies, and that's going to help you get through some of the periods where the value of your holdings may become quite suppressed.
2. Less than 5% exposure
This is just a "finger in the air" figure but if you imagine cryptocurrencies being around 20 times more volatile than more traditional investment assets, such as stocks, then it makes sense to adjust your risk and exposure accordingly.
For many people it might be tempting to go "all in" with the hopes that the price will skyrocket in the following week, making you far better off financially than you were before.
But the problem is that this scenario is unlikely to happen.
What's more likely to happen is that you'll either see the price rise somewhat but then fall back down almost as quickly, or do the opposite. Such rollercoaster movements is going to take its toll on you as you start to wonder if you should've gotten out when you had the chance.
Or if you should get out to preserve the money you still have left.
Needless to say this is going to lead to constant worrying over your holdings and eventually you'll mentally exhaust yourself to the point where you can no longer stay in the game.
By taking a more risk adjusted approach and limiting your exposure to something that corresponds with the level of volatility, you're going to be much better positioned to handle the movements.
With a total portfolio of £10,000 you should only have around £500 invested into cryptocurrencies - if following the 5% exposure tip.
A 25% decrease in value of your cryptocurrency holdings would therefore only be a drop of £125.
This is much easier to stomach than a drop of £2,500 had your entire portfolio been invested into cryptocurrencies.
What's more, it's possible that the rest of your portfolio invested into other assets could have risen. If you imagine that raise being 1% then the £95 (1% of the £9,500 not invested into cryptocurrencies) you "gained" would offset the drop, meaning you're only actually down £30 overall.
Suddenly your entire portfolio doesn't seem to be under so much risk anymore, despite holding some highly volatile assets.
3. Don't expect to get rich overnight
The problem with cryptocurrency "news" is that you suddenly hear a lot more about it when the price is rising really quickly.
Mainstream media will start writing articles with clickbait-like titles, you'll see many more posts on social media about it, and some of your acquaintances will pop up out of nowhere to talk about how they "saw the move from a mile away".
And maybe they did - but it's still rather obnoxious for them to bombard you relentlessly after laying low along with the price.
With regards to media clickbait titles - honestly the biggest % move in a single day since last month isn't really that big of a deal.
This sudden bombardment leads to a couple of problems:
An impression that the price will continue to skyrocket like it already has in the past month.
Fear of missing out (FOMO).
It's listed as three problems but each one sort of develops from the prior.
With the impression that the price is going to continue to skyrocket, a person who becomes concerned about missing out may make the poor decision of putting in far too much of their money.
Like... all of it.
They're hoping that when they wake up the next day their money will have doubled or tripled, and maybe they'll even have some "plan" to reduce their exposure by taking out what they put in and letting the profits run.
They'll convince themselves that the plan represents the pinnacle of strategic thinking and start imagining the high-rolling lifestyle that awaits them.
Problem is, when they wake up the next morning the price of their holdings has done... nothing.
They wait another day, and another, and another. Nothing.
The price doesn't even need to drop - just by staying where it is and doing nothing the person who has over-exposed themselves by investing far too much of their money will start to feel nervous.
Inherently they know they took a huge risk but the original "plan" was that they would have had a chance to take their money back out, putting them back in safe waters with zero risk of losing the principal.
But now, as they're forced to endure an almost torturous wait for the market's next move their mental fortitude will slowly but surely be whittled away.
Any move downwards in price, even the small amounts by cryptocurrency standards, will be intolerable and cause them to get out - at a loss.
And of course, as these things go, the market will eventually move upwards without them.
Had they taken an approach that was more patient and better grounded they would've had a better chance of staying in the game and therefore profiting from the eventual move upwards.
It might not have been overnight - but to others this is how it will ultimately appear.
4. Acclimatise by accumulating
So what's a good approach that allows you to stay in the game?
Well the first thing you need to do is get rid of your FOMO - what's happened in the past is already past, and trying to overcompensate in the present is rarely going to yield a good result.
The next thing to get rid of is your impatience and your misguided expectations of getting rich overnight.
Here's the thing about cryptocurrency markets when you look at it as a whole rather than during the periods of heightened activity - the price doesn't really go anywhere for long periods of time, before moving a large amount in a short period of time.
Just look at the Bitcoin chart which can be used as a good barometer for the entire asset class.
If you look at a timeframe that spans 2 to 3 years you'll notice that the price doesn't exactly make huge, wild moves. Yes it'll fluctuate, and within that short time span the percentage moves can be quite large, but in comparison to the "big move up" that everyone is waiting for it's all relatively non-eventful.
Small problem - nobody knows when the next big move up will come. It could be tomorrow, next month, next year, or not for another 5 years.
And since nobody knows when that time will come the best time to buy is - believe it or not - always.
Once a week, once a fortnight, once a month - it doesn't really matter the schedule as long as you set it and stick to it.
Now if you're always buying it's going to be sensible for you to adjust the amount accordingly for each purchase - in order to avoid the situation described in tip #3.
Let's say you invest in total £6,000 a year in general on all types of investments - stocks, bonds and so forth. At 5% exposure this means you should only be buying £300 of cryptocurrency, which further splits down to £25 per month.
The thought of a 25% drop on your £25 purchase isn't as scary as it happening on a £300 purchase, and as you continue you to build your position over time you will acclimatise to the thought of your money being in the market - making it easier for you to weather any "winters" that may occur.
In fact, you may even hope for such a thing to happen - you've stopped thinking of the big drop as an end to the party, rather it's a great opportunity for you to keep building before things really take off.
5. Look at cycles instead of looking at price
It's totally understandable for someone new to feel like there "isn't much point" in having such a small amount invested. They may think of a "big 40% move" upwards in the price and calculate that it would actually only mean they made £120 on their £300 investment.
"Would've been better if I had £10,000 in there instead... " - they think to themselves.
Yet if the entire asset class collapses they wouldn't be losing a fortune - and this is the point.
When investing into cryptocurrency it's better to look at entire market cycles rather than the price.
The price will always fluctuate - you'll have some good days or weeks where you see over 50% gains but it's not uncommon for most, if not all, of those gains to be forfeited in the weeks that follow.
Some people may attempt to work this by timing when they get in and out - but I suspect their success will be limited.
You'll hear them when they get a lucky move that made them 50% in a week, but they'll never tell you about the dozen losses before it which puts them still negative overall.
Looking at price will always put a short-term lens on things, which can lead to impatience - something you definitely want to avoid as already mentioned.
The way you actually want to think of things is in cycles - this is the longer term pattern that the asset class appears to follow, and while some element of time is involved it's more about the market's overall behaviour that's going to drive your decision making.
The tip to acclimatise by accumulating is based on the concept of looking at cycles - the belief is that there'll be a period of relative calm that could last a few years before the big move up happens.
And when that big move up happens it isn't abnormal for the price of a cryptocurrency to multiply by around five to ten times, possibly more if you're looking from trough to peak.
This is where the riches are made - not in the daily or weekly events where you only see double digit percentage moves.
At such levels of return you then come to realise that a £300 investment could grow to between £1,500 and £3,000, equating to some healthy profits in the range of £1,200 and £2,700.
This would be equivalent to having between £17,000 to £39,000 invested into an index fund and growing by 7% for the year.
Suddenly that £300 doesn't seem so small anymore and put in this context it's much easier to get on board with this limited risk and exposure, yet still be able to capitalise on huge returns.
6. Embrace the volatility
A major psychological problem with investing - in any type of asset, not just cryptocurrencies - is the desire for things to simply go up in a straight line.
If you start a career - where you invest your time and energy - you're expecting that each job-move, be it internal and external, will lead to more pay.
If you buy a property you hope that its value will rise, so that when you decide to move in the future you'll be able to cash in on some of that profit.
If you invest in the stock market, you have an underlying hope that the market will continue to rise up so that you don't feel like you've missed out on a "better opportunity".
The list can go on and it's no different when investing into cryptocurrencies.
Nobody wants to see their investment drop by any amount, let alone something along the lines of 25%, 50%, maybe even 75%.
But the fact is that if you want any sort of return, you must accept some level of volatility that corresponds to it.
The stock markets rarely move more than a couple of percent in a day in any direction, and less than 10% on average in a year.
There is low volatility for low levels of return.
The same can be said for other things such as properties, bonds, savings accounts, and a career. It's all low volatility and they give correspondingly low returns that take many decades to yield a significant result.
Which - by the way - is what I advocate you to do for the majority of your wealth.
But with the small remainder, like 5%, you may want a potential of high levels of return.
That's the reason you're looking to get into cryptocurrencies in the first place - otherwise, just read the rest of my other blog posts where I talk about more traditional investing.
Back on topic.
If you want exceptionally high returns in a short period of time then you need to embrace the fact that heightened volatility is going to be part and parcel.
Nothing can rise by 1,000% in a few months if it cannot move by 25% in a day, and that move could potentially be downwards as well as upwards.
When the markets are volatile, introduce stability from within your own plan - this is what will allow you to steadily build your position and stay in the game over the long run.
7. Have an exit strategy
As bizarre as it may sound, the rising price of your cryptocurrency investments can become a problem if you don't have an exit strategy. This is because you'll become trapped, worrying that you're getting out too early when there could still be more profits to come.
But here's the thing - you're never going to be able to "time the top".
And since the fall back down from the peak is often as sudden and as relentless as the rise up, there is going to be little to no chance for you to make a controlled exit once you've "missed your window".
So you actually want to abandon the notion of extracting the absolute maximum from your holdings - since that requires perfectly timing the top - and instead establish some reasons on what would make you start liquidating.
Perhaps you want to buy a house, or you want to afford better education opportunities for your kids, or you have a particular number that gives you financial independence.
All of these things, whatever they may be, have some sort of price tag and when the value of your cryptocurrency investments start to approach the level that helps you achieve these goals you will want to start easing out of your position.
Easing out means you don't pick a single price to sell your entire holding - because this is what gives you decision paralysis in the form of "what if it keeps going up?".
Instead you decide on the price that helps you achieve the goal and then start planning your exit based on that.
For example if you have 10,000 XRP and you need £50,000 to put down a house deposit, you need the price of XRP to be at £5 (~$7).
Since £5 is a "single price" you could opt to spread your exits around this, starting a little early and ending a little late to get an average that's close to your target.
This might be you selling 15% of your XRP when the price reaches £4, then another 15% when it's at £4.50, and then you might sell 25% when it hits your target at £5.
If the price continues to rise you can continue this pattern until you've got the money you wanted, and if the price starts to drop off you will have at least locked in some of your profits so the "loss" isn't going to sting as much.
It's always easier to keep holding on to the remainder if you've already crystallised some of your gains.
To address the "what if it keeps going up, and up, and up?" question you can choose to keep holding on to a portion of your position for the longer term, something like 10% or 15%.
By doing this you can benefit from both worlds - you managed to achieve your financial goal with the help of cryptocurrency and you're still in the game to see how things play out.
The best part is that since you achieved your main goal, you're going to be able to weather any events in the market much easier. The price could rise all the way up to £100 per XRP or it could even fall down to zero - but since you had a well thought out exit strategy you don't really need to care all that much anymore.
My first proper foray into cryptocurrency was back in 2017 and I got in just before the big bull run. Since I was new I basically did the opposite of everything I've given in this article as a tip.
And it cost me.
Over the years as I licked my wounds and started to get more educated, I developed a method for myself to be involved without being over-exposed. And it's basically everything I've given as a tip in this article - there really isn't that much to it.
Cryptocurrencies don't have to be a gamble.
As time continues to march forward and the asset continues to play a part in the financial realm, I believe the need for investors to start thinking about introducing some part of it into their portfolios is growing - despite the risks and volatility.
At the end of the day, when volatility is in the nature of the asset you are the part of the equation that needs to bring discipline and control - with the three of these aspects in balance, success usually follows.