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Cryptocurrencies were all the rage earlier this year, with the prices of several coins surging to record highs and crypto exchange Coinbase making its public offering. Crypto enthusiast and Tesla CEO Elon Musk tweeted rocket and moon emoji, boosting the rallying cry "to the moon!" And investors big and small jumped into the market.
But after the spot price of bitcoin, the most popular coin, approached $65,000 in April, values have entered a turbulent stage. By early June, bitcoin prices had dropped by nearly 50%. Though the market has recovered somewhat, it's likely that many of those new crypto investors felt the whiplash.
“It is very interesting that every time that bitcoin goes up, it gains all the hype, people get excited,” says Kiana Danial, author of “Cryptocurrency Investing For Dummies.” But Danial adds that the last person who buys when the price is at the top “is the person who’s going to panic when the price inevitably drops.”
So, what do you do when your digital assets like bitcoin crash? We asked several cryptocurrency experts to get their thoughts.
Remember that bitcoin and other cryptos are volatile
For those who have been investing in cryptocurrencies for years, dramatic gains and losses are nothing new. For example, bitcoin recorded a previous record high of nearly $20,000 in December 2017, but by December 2018 was trading below $3,500.
As bitcoin gains adoption, "the up moves and down moves can be breathtaking. Taking the long-term view puts these moves in perspective,” says Greg King, founder and CEO of Osprey Funds, an investment firm specializing in digital assets.
“For example, even though bitcoin was down 50% in April through May of this year, it is up 25% from those lows and still up 100% from Thanksgiving last year.” (Note: These comments were made on June 17, 2021. Who knows where the bitcoin price is by the time you read this.)
For seasoned bitcoin investors, the lower prices were welcome. “Then, you would actually see the drop of value in bitcoin as an opportunity to purchase,” Danial says.
» Learn more: But what is cryptocurrency?
Understand your risk appetite before investing
When crypto is crashing, someone who's been intrigued from the sideline might think this is the time to get in and "buy low." But King recommends asking yourself two questions before deciding to invest in bitcoin or other cryptos.
“Consider whether an 80% to 90% down move in your crypto holdings would cause you to lose sleep at night or sell,” he says. “If the answer to either of those is yes, don’t invest.”
“Any asset has ups and downs — cryptocurrency has more ups and downs because of the amount of hype and FOMO involved," Danial adds, alluding to a fear of missing out, "and the fact that people actually don’t know what it is. They buy it because they heard somebody talk about it … they are taking unmeasured risks.
“Ask yourself what amount of money you can actually afford to lose, because any investment has inherent risk,” she says. “If you are selecting your assets wisely and you have concrete reasons why you're investing in it, you shouldn't be swayed when the markets drop, and you will stay the course.”
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Examine what’s driving the selloff
One factor that can drive investor pessimism and may lead to crypto crashing is government actions by regulators around the world.
As interest in cryptocurrency has grown, public officials are reckoning with what the technology might mean for monetary policy, security and the environment.
China has been particularly aggressive. On Sept. 24, 2021 for example, prices dropped after the Chinese government declared cryptocurrency transactions illegal, and said overseas exchanges are not allowed to do business with people in China.
Developments like what happened in China are a reminder that cryptocurrency remains a relatively new technology whose full effects on the worldwide economy are not yet clear. Crypto prices are volatile, and unanticipated events can send prices downward.
Single investments should flavor, not dominate, your portfolio
Crypto experts suggest refraining from “all in” moves when deciding to invest. “Avoid buying large amounts of cryptocurrency all in one shot,” says Jake Yocom-Piatt, co-founder of Decred, a cryptocurrency with a $1.5 billion market share. “If you buy a whole bunch at once and the price drops, psychologically that’s very difficult for people.”
Instead, he suggests considering a common strategy from investing in stock markets: dollar-cost averaging. “Buy a small amount every month and then just keep doing it, as the price goes up or the price goes down, as opposed to buying it all in this one single crystalized cost which you’re going to have to deal with psychologically for the foreseeable future.”
Personal finance experts often say that any single asset, be it a specific coin or company's stock or something else, should only be the sprinkling atop the parfait of an otherwise vanilla portfolio of stocks, bonds and mutual funds that mean to help you achieve your long-term financial goals.
“If crypto is the only asset you are investing in, you are probably taking on way too much risk,” Danial says.
The author owned bitcoin at the time of publication. NerdWallet is not recommending or advising readers to buy or sell bitcoin or any other cryptocurrency.