2021 was an excellent year for the cryptocurrency market, especially November. The global crypto market cap reached the $3 trillion mark for the first time, as several cryptocurrencies, including Bitcoin and Ethereum, reached their all-time high during this month. Such an upward trend in the market is known as a bullish run.
But after a great bull market comes the bearish trend. And that’s what happened after the November 2021 hike. Almost every cryptocurrency witnessed a declining January 2022. Crypto prices have changed drastically in January 2022.
The cryptocurrency market crashed after November 2021, leading to a meltdown of over a trillion dollars in market capitalization value.
When the market is performing well, almost every investor can easily create profits. But it does not mean that the person is a genius investor. Instead, the trait of a successful and genius investor is that he or she can withstand bearish markets.
When the crypto market crashes, the liquidation kicks in, and the prices of a coin start declining. However, this very situation also creates significant opportunities for investors.
Why Crypto Crash or Liquidation is an Investment Opportunity?
Crypto crash means that the price of a token is constantly declining below the average price. When most newbies and even amateur investors start panicking and selling the assets they have held for years, it leads to liquidation and further lowers the costs.
The investor’s aim behind the panic selling is to get at least some profit before the coin’s price goes further down below the initial investment price.
The cryptocurrency market is highly volatile, changing hundreds of dollars within a single day. Hence, a crypto crash can cost you a fortune. However, it is also a reliable opportunity.
The thing is that most crypto crashes are not infinite. If you go through the charts of cryptocurrencies, most of them arise for a better future after a crash. Hence, you can generate more significant profits if you detect a crash and seize the right opportunity when the amount is low.
With that being said, capitalizing on crypto crashes or liquidation is not as easy as it may sound. It is like a double-edged sword that can swing both ways. Hence, it would be best to consider several factors to ensure you make the right decision. Here are some of these factors that you can consider.
Conduct Thorough Research on the Cryptocurrency
When you see the price of a cryptocurrency going down, it might seem that it is the right time to buy. However, it should not be like that. Even if a crypto’s price is declining, you need to put in thorough research before investing in it.
You need to understand how the coin has performed previously and analyze whether the crypto can rise again. Although many cryptos bounce back after a crash, you cannot place your bets blindly.
The best way to select the right crypto to invest in during a liquidation phase is to look at the coin’s history. If the coin has gone through a similar situation in the past and has come back strongly, go ahead and invest in it.
You should never go for cryptos you don’t understand and want to purchase them for the short term and sell them when they are making small profits. Instead, it would be best to go for profit-making cryptos you can hold on to for a longer term.
You can also go for loss-bearing coins that have proven themselves in the past by outperforming liquidation. Conducting research will enable you to go for only the most elementary investment that can get you huge profits when the crypto crash ends.
Understand the Potential of the Cryptocurrency
Determining whether a coin will rise back after liquidation can be challenging. While looking at the charts and historical performance is one way to identify the crypto’s comeback, you need more conclusive evidence before placing your investment.
But how would you get a confirmation? The answer is by looking at the potential and use cases of the coin and the blockchain network it represents. Cryptos with the best use cases can survive a crash easily.
“Generally, the projects that you see surviving the best are the ones that have huge, really loyal followings and the ones that have really important use cases.” – Bankman Fried.
Bear and bull markets are inevitable in trading. The key to making profits during a crypto crash is to know which coin will outsmart liquidation by studying its potential use cases and demand.
Take, for example, coins like Bitcoin and Ethereum. Bitcoin is the most popular digital currency with the largest crypto market capitalization. It has always been in demand right from the existence of crypto trading. Hence, it is evident that the BTC coin will rise after any crypto crash.
Similarly, Ethereum is an enterprise blockchain with multiple use cases like DApps and smart contracts. Moreover, many other blockchain networks are built upon Ethereum, making it promising crypto to invest in during a crash. Solana and Cardano are other such cryptocurrencies with potential use cases and should be an excellent option for buying.
The crux of the story is that you should always consider any cryptocurrency’s use cases, demand, popularity, and potential before placing your bets.
Build a Trading Strategy
The cryptocurrency market is volatile, and it will keep swinging all ways. If you keep changing your investment decisions, you might end up getting no profits. Having a crypto trading strategy and sticking to it comes in handy here.
Amateur and expert traders use several strategies. You can understand and follow those strategies to your advantage. But the best way to create a winning strategy is to conduct research and develop something beneficial to you.
Your trading strategy should have precise guidelines for entering and exiting any trade.
Once you have a strategy in place, the most significant task is to stick to it. Based on the fluctuating markets, you will always get gut feelings to deviate from your plan. While following your gut feelings can be fruitful sometimes, sticking to your goals will be more beneficial in the long run.
The strategy must also have a budget and regular investment guidelines. It is advisable to use only what you can keep in the trade. If you invest more than your budget, you might have to exit the trade at the wrong time, leading to losses.
Similarly, it will also help if you invest at regular intervals instead of putting all your money at once. It will allow you to average your investments to avoid heavy losses while increasing the chances of profits.
Performing crypto technical analysis will also help create a better winning strategy. It refers to studying the charts and other financial data of a cryptocurrency. You can get a lot of insights through technical analysis that you can incorporate into your plan.
Technical analysis will also enable you to determine when an asset is at its lowest price and peak. You can create entering and exiting guidelines based on this understanding.
Create a Balanced Portfolio
Creating a balanced portfolio is the golden rule you should always follow regardless of the market. You need to invest in different coins with different use cases and potential in the cryptocurrency market.
Unlike national stocks, crypto is a global trading market that fluctuates based on several factors. Hence, creating a balanced portfolio is vital.
The tokenomics of a cryptocurrency depends on multiple factors like the coin’s demand, use cases, popularity, liquidation, etc. Hence, there is no certainty that just because one coin is performing well for a few years will continue to do that in the future.
Creating a balanced portfolio is even more critical during a crypto crash and liquidation. As already established, crashes are like double-edged swords. Having a balanced portfolio lowers the chances of losses, as if one coin continues declining, the other might jump high, giving you profits.
Why Do Crypto Crashes?
The cryptocurrency market is currently crashing. We have already seen a massive dip in January 2022, and the coins haven’t recovered much in February. There are several reasons behind such crashes and liquidations.
The price of crypto is affected by many factors, such as interest, demand, inflation, etc. If people feel that a cryptocurrency is high in popularity and are confident about the investment, the price rises further. But if the hype around a blockchain project and its native token are low, it can lead to crashes.
Government interruptions like regulations and taxes can also influence the price of cryptocurrencies. Consider the example of the crypto transaction ban by the Chinese government. In September 2021, the People’s Bank of China announced all cryptocurrency transactions as illegal.
Soon after China’s crypto ban, there was a minor crash in the market. However, the crash was not long-lived as the market soon recovered and surpassed the $3 trillion crypto market capitalization.
Similarly, the reason behind 2022’s early crypto crash is the wait behind the US government’s regulatory actions. Due to the uncertain regulatory concerns, people stopped investing in cryptocurrencies, leading to crashes and liquidation. In fact, crypto experts believe that the ‘crypto winter’ will decline the prices further.
An Example of Earlier Crypto Crashes
Cryptocurrency crashes are nothing new. Those investing in cryptos for years would have already witnessed such events. One of the examples of a significant cryptocurrency crash in the past is that of 2018. For instance, Bitcoin was trading at a whopping high of $20,000 in December 2017, but due to the crash, it was around $3,500 in December 2018.
Despite a low of $3,500 at the end of 2018, BTC rose back to $10,000, $28,000, and $50,000 in December 2019, 2020, and 2021, respectively.
History shows that major and minor crypto crashes are inevitable in the market and nothing to worry about. Instead of panicking and selling off your crypto assets, you should focus on learning the dips and seizing crashes as a buying opportunity.
Conclusion
Cryptocurrency crashes and liquidations bring in significant panic amongst investors, especially newbies. However, experts consider them as a way to generate higher incomes. Follow the tips mentioned in this article and invest wisely during a crypto crash to gain large profits.