'Never invest more than you can afford to lose' and other tips to keep yourself safe from crypto crashes
“I thought crypto is profitable. This has really taken a toll on my mental health.” Mumbai-based student Ajay Mutke sums up the feeling among thousands of crypto investors following the dramatic crash in the value of cryptocurrencies in recent days. The 26-year-old who borrowed Rs 50,000 from his father for investing in crypto, says he has sustained losses of more than 60 per cent of his initial investment.
Crypto investors are anxious as the world’s largest cryptocurrency, Bitcoin, and other digital coins continue to plunge. The entire crypto market now has a market capitalisation of $1.2 trillion, less than half of the $2.9 trillion it was worth in November. The crypto plunge is likely to scare off some of the retail investors who poured money into crypto during its surge.
Ali Ittarwala too incurred major losses in the recent market wipe off. The 41-year-old says he has been panicking, as he continues to figure out ways to roll back his losses. “I woke up in the morning and suddenly my crypto portfolio was red,” he says, adding he had invested most of his savings in crypto-assets.
Drops in the crypto prices are usually touted as a buying opportunity, which juices the price back. However, it’s unclear if investors will “buy the dip” this time.
Ankita Bhatnagar, a 19-year-old medical student, who had recently invested in crypto on the advice of her friends, regrets her decision now. “What a waste of time,” she sighs, underling her frustration at losing all her pocket money.
In today’s column, we discuss strategies to invest safely in cryptocurrencies, so that you don’t invest more than you can afford to lose.Risks to consider before you invest
It is important to understand what you are getting into before investing in digital assets. Firstly, the Blockchain’s cryptographic nature should be comprehended by every investor.
Investors should understand how a transaction is recorded in a distributed database, and how different blockchains support different crypto coins. What’s important to understand is the technology that drives these coins.
For instance, in the recent case of the Luna stablecoin crash, while stablecoins promise to stay steady even if the crypto market fluctuates, due to technical anomalies, the price of Luna dropped by more than 99 per cent.
Don’t be shocked if you see the value of cryptos go up or down by a significant margin. In fact, they have been known to rise and fall by double-digit percentages within a span of hours. Volatility is what drives investors to bet big on crypto. This is caused by a range of factors including supply and demand of the coin, user sentiments, government regulation and sometimes even a tweet by tech entrepreneurs like Elon Musk.
Unfortunately, the world of crypto is awash with scams. Fake identities, apps, crypto wallets, and emails are all designed to lure victims to give out their private keys—the crypto equivalent of a passcode. Then, there are classic rug pull coins that take advantage of fads and run away with investors’ money. For instance, the recent case of the Squid Game token, prevented many holders from reselling their tokens, ultimately stealing millions of dollars.
While cryptos are being widely accepted, it is still a challenge to regulate them. Further, if a crypto exchange holds your assets there’s still a risk that you could lose all your capital.Investing safely
One thing is clear: cryptos are risky investments and could result in significant financial loss. So, designing a risk tolerance plan can help. Follow the golden rule, invest only what you can afford to lose. If you are not able to withstand the likely full loss of your crypto investment, that means you cannot afford the risk of investing the amount you are considering.
Invest only the money that won’t change or harm your lifestyle in any way. Try investing a small portion of your earnings. Here’s a mantra to follow: Give yourself a certain amount to invest every month, and when you run out, don’t invest more. This way even if you lose all your money, it does not jeopardise your financial stability.
Putting all your eggs in one basket is not the right strategy in the world of crypto. What’s better is to split your investable income into different coins and exchanges. This is because all the exchanges don’t have the same assets. For instance, if you’re looking to invest in different coins then choose maybe a stablecoin, a coin that works on proof of work consensus algorithms such as Bitcoin, Ethereum, etc, and an environmentally friendly coin. By spreading your investments across different digital assets, crypto investors can reduce the overall risk profile.
The key to effective crypto investment is utilising the ‘limiting order’ function. Use the algorithm to your advantage. Start limiting orders, so even if you are asleep and the price crashes, you could still protect yourself if the market moves against you.
Leverage only what you can afford. If buying any coin, go for small quantities, don’t fill up your wallet with big amounts of coins. That said, if you use too much leverage your trades won’t have enough time to breathe and you can lose your entire principal amount during a market crash.
Last but not the least, hold your coins, crypto is infamous for its volatility but investors have gained massive profits only after holding their coins. Long term investors should focus more on holding than buying.Last word
Emotions lean towards survival. Managing your emotions is the most important in the crypto world. Fear of loss and greed is any trader’s worst enemies. Every investment has some risk associated with it. Do not blindly follow what’s trending. It is necessary to do your own research and then determine what’s best suited.