Can crypto market crash anytime soon? How to prepare for the worst

Anyone who’s spent any significant amount of time observing the crypto space will know that it’s an asset class prone to extreme volatility.

Aside from stablecoins like Tether and USDC, cryptos are subject to extreme fluctuations as the movement of institutional investors weighs heavily on market performance.

Because of the disproportionate impact that institutional investors (companies with huge amounts of crypto) have on the price of any given token, it’s the retail investors (average individual investors) who often feel the brunt of selloff.

So, if you are a retail investor, it’s crucial that you factor in inevitable market crashes.

Can the market fall further?

Even right at this moment, the crypto market is in the midst of a downslide which has been occurring since November last year. During that month, several cryptos including Bitcoin and Ethereum – the two largest cryptos by market capitalisation – hit all-time highs. Since then, however, the market has been on a steady decline with many tokens, like Bitcoin and Ethereum, losing nearly half their value

What’s worse, many analysts believe the market has even further to fall, with the ongoing conflict in Eastern Europe as well as a pending executive order from the White House, which is expected to address regulation of crypto assets in the US. Additionally, rising inflation and looming expectations of rising interest rates are also strong factors that could well prompt further selloffs in the near future.

So what should you do?

The first and foremost rule that every investor should abide by is to not put in more money that you can afford to lose.

Even the most gung-ho crypto supporters advise that you should invest a maximum of five percent of your portfolio in digital assets.

You might be wowed by a particular coin seeing massive returns but don’t let it cloud your judgement. The fact is those coins aren’t the norm and many will go down in the short term.

Invest for the long term

While volatility is a prominent feature of the crypto market, there are many tokens that see outstanding growth in the long term. Take Bitcoin, for example, which five years ago (in March 2017) was valued at US$1,200. At the time of writing, Bitcoin is valued at around US$38,400. That’s an increase of over 3,000 percent. This is a better return than the S&P 500, the ASX 200, property and gold.

Also look for cryptos on a blockchain that provides a good use case. Ethereum is a good example as it provides a multitude of applications besides hosting NFTs. With the emerging metaverse revolution, it might be wise to research blockchains associated with that space.

In any event, look for long-term gains to give you a better chance of seeing a higher return.

Practice good finance

It’s amazing how doing the fundamental things properly can beef up your overall financial health. One of the basic principles that many people don’t adhere to is to pay yourself first. This means, as soon as you receive your pay cheque, put money into an account for yourself before you pay for anything else. It doesn’t have to be a lot either. Many financial advisers suggest that as soon as you get paid, you must put ten percent away for savings and ten percent away for investments. If you do that over time, the difference it makes is extraordinary.

Putting ten percent of your income away for a rainy day is a basic tenet of financial wisdom and can make a massive difference when it comes to deciding what assets to invest in. Financial experts advise to put away six months’ worth of expenses for a rainy day. You never know when the rug might be pulled out from under you, necessitating an emergency fund.

Finally, don’t get into unnecessary debt. If you have a credit card debt, a personal loan or a car loan, pay it off as quickly as is humanly possible. Make this a priority before you start investing or saving.

Bottom line

The crypto space is still relatively new, so it’s difficult to predict where it will go in the short term. In its 13-year existence, however, the market has shown that it can give way to extreme and rapid selloffs. But also, it has shown its potential as a long-term investment. The trick is to utilise smart tactics to make crypto work for you.

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