It is a commonly asked question: What should you do with your stocks when the crypto market goes down a lot? Your first choice, like most people, would be to sell your stocks immediately.
It’s human nature to feel great when something happens according to your choice. You are bound to feel incredible about the crypto market when your stock goes up in value.
But your belief in the crypto market crumbles when your investment goes down in value, and you just want to throw away everything, hide your money under the bed, and never get involved with the crypto market.
However, in reality, selling your stocks when the crypto market is down is not a very smart move. According to experts, it is a very ineffective step. Making investments while the crypto market is down in value makes more sense.
Here is a look at why you should invest in crypto when the crypto market is down.
Investing In Crypto Is A Long Game.
Making investments in the crypto market is a long-term probability, and proficient investors know that. Given enough time, your portfolio might recoup from these momentary drops because sometimes crypto market drops are nothing but a trivial stock market correction.
It was reported in the 2020 Morningstar says that since 1926, the crypto market has always been up to out of 80 overlapping 15 year periods.
Though it is not easy to predict the crypto market, the information stated above suggests that you may come out ahead after at most 15 years if you are investing in the crypto market.
However, you can sabotage your crypto investment plan by buying or selling stocks based on your emotions or gut reactions to short volatility, and this step can probably set you back.
You might have built your investment plan with very particular motives in mind, and based on your risk tolerance preferences and time horizon, your asset allocation might have been formulated. However, you can terminate this balance by selling your stocks impulsively.
Instead of ruining your crypto investments based on your emotions, you should consider formulating a plan in place that can help you make more investments when the crypto market is down. In doing so, you will buy stocks on sale with the hope that the crypto market drop is temporary, and you will be able to make any potential earning through this.
Therefore, whenever the crypto market goes down in value and your belief starts to tumble, your best move is to keep making more investments by staying relaxed and calm.
With that said, you should consider your needs with any decision regarding your crypto investments. You don’t necessarily have to buy anything just because the crypto market is down.
Just like selling stocks when the crypto market is down can throw you off your game, in the same way, buying stocks just because they are cheaper can derail your investment plan. The best idea is to take a deep breath, consider all your needs, do some research, and then decide.
In the video below by Tom Bilyeu, he has given his insightful opinion about the fall of crypto market and what’s should we expect from it in the future. This is going to be really helpful in understanding this phase of crypto market.
Predicting Crypto Market Movements
The purpose of predicting the crypto market movement is that you will somehow win against the crypto market by anticipating future trends and buying and selling your stocks according to the crypto market.
Though timing the crypto market movements is in itself a challenging responsibility. Therefore, predicting future crypto market movements does not work for most investors.
To understand that consider this example, beginning in late 2007, one of the most astonishing dips occurred in the history of stocks. As a result, the investors started to panic and sell their stocks because of this dip in the market.
However, on March 09, 2009, the crypto market bottomed at 676.53 and started making a recovery that became the biggest bull market in history. In 2013 four years later, the S&P 500 Index surpassed the value it reached in 2007, around 1565.15.
Although the more than 50% drop in the crypto market was quite scary, you would have subsequently lost your recovery and locked in your losses by panicking and selling your stocks.
On the other hand, if you had stayed calm and remained invested at first, you would have initially seen all the crypto values drop, but then you may also have seen the portfolio gains as the crypto market turned its course again.
The strategy of holding your stocks over the long term can be beneficial, and that fact is illustrated in the above example.
Analyze The Risks To Investing When Crypto Market Is Down
With that said, you must also remember that there are many peculiarities to the belief that the crypto market always trends upwards or manages to burst back instantly after a downfall in the values.
You can consider the instance of 1929 when the stock market crashed. As the Great Depression wrecked the economy, a continuous slide was seen in the share prices until 1932. Until November 1954, the stock market didn’t accomplish its pre cash high.
Moreover, in 1989, the Japanese stock market hit a peak, and as of early 2021, the crypto market still has not reached it. Back then, in three years, as an economic bubble in the country burst, the index lost half of its value.
However, for the first time since 1990, in February 2021, the Nikkei 225, the benchmark stock gauge in the country, did touch 30,000 levels.
In such situations, the stocks becoming overvalued and entering the bubble territory is also possible. Moreover, keeping an eye on economic growths such as assessing inflation patterns, job growth, and manufacturing tendencies are essential in investing in crypto.
For the economy, the stock market plays the role of a barometer as a whole, after all.
Corporations need to illustrate profit growths and earnings to make the stock prices higher. Both the U.S and global economies need to be continually broadening and enhancing for the growth of corporate earnings and revenue development.
Understanding Dollar-Cost Averaging
You should consider dollar-cost averaging to restrain your impulse from pulling out your investments when the market is low and instead make more investments in the crypto market. Here take a look at how dollar cost averaging works.
For instance, you invest a fixed amount of money in the stock market regularly, let’s say every month. Based on the existing cost of each share, you will be able to purchase a variable number of shares, while the amount will remain fixed that you regularly invest each month.
Let’s consider that you invest an amount of 100$ each month regularly. These $100 might buy ten shares of a mutual fund, each claiming $10 in January. Now let’s say that the crypto market drops in value in April and these $10 shares of a mutual fund are now worth $5 only.
However, you calmly continue to invest your $100 each month instead of panicking. During that month, 20 shares of a mutual fund are bought by those $100.
In June, you continue to invest $100, and each share now costs $25 when the crypto market rises again. Now four more mutual fund shares are bought by these $100.
With this method, you can buy more shares when the crypto market is down, with dollar-cost averaging helping you buy shares when they are low and limiting the number of shares you can buy when the market rises again.
This strategy helps you make beneficial investments by preventing you from buying shares when the prices are high.
Consider, for example, that each share’s value is $50 after ten years of regularly investing $100 each month. The average cost of each share is probably lower than the fund’s current price, even though some shares you bought are worth more than that.
Instead of dumping a large amount of your money in the crypto market and hoping that the market trends upwards, it is more advisable to make steady investments with time and get a more favorable return.
Tax-Loss Harvesting
The technique of tax-loss harvesting should be considered if you have already experienced losses in the crypto market. Tax loss harvesting is a method to equalize your gains in other investments by selling stocks that have already experienced a loss.
Consider that in January, you invested $10,000 in the crypto market. The value of the stock decreases over the year, and it is only worth $7500 by the end of the year. Now you can sell the stock and reinvest it in a similar mutual fund instead of panicking.
By doing so, you can benefit from successfully maintaining your investment portfolio that will grow in value with time, and for tax purposes, you can deduct the $2500 loss. The total amount against any capital gains you might have in this year or any future year can also be removed.
You can write off $3000 of capital losses each year from your ordinary income. Before using the excess to offset income, your losses against capital gains must be deducted. You can rollover losses beyond $3000 into subsequent years.
Using this method, you can alleviate the pain of capital losses during major crypto market downfalls. However, it is essential to reinvest the money raised through selling the stocks, or there are chances that you will miss the recovery.
However, keep in mind that recovery is not always guaranteed, as there are many risks with investing in the crypto market.
Wrap Up
Naturally, it is in our instincts to feel panicked and fidgety in such situations. However, during times like these, the best advice is not to give in to your emotions. A balanced investment strategy is to make investments when the crypto market is down to grow wealth over time.
You can accomplish your financial goals like getting prepared for retirement, sending your child to college, or getting yourself a new home by making long-term investments in the crypto market.
You can easily make an account with as little as $5 if you think you are ready to start investing in the crypto market. For people who like to take a hands-on approach, active investing accounts are beneficial.