The price of Bitcoin has plunged in the last week – down a whopping third or so over that time. But it’s not just the world’s largest cryptocurrency that’s being hammered. Ethereum fell sharply, down about 24 percent in just the past 24 hours, while the meme-based currency Dogecoin is down a similar amount.
The recent sell-off in digital currency markets follows on the heels of China’s decision to put further controls around cryptocurrencies. A Reuters report says that China has now banned financial institutions and payments companies from providing crypto-related services.
That seems to have rattled crypto markets, which had already been shaky in recent weeks. With crypto markets largely in free fall, what should virtual currency investors and traders be doing in the face of extreme volatility to manage risk?
5 things to do as cryptocurrencies plummet
Scared by the plunge or thrilled at the prospect of buying in cheaper? Either way, here are five things that you need to do right now.
1. Stay calm
Whether you decide to sell your cryptocurrency or see this dip as an opportunity to buy more, you need to act with a cool head. Making emotional decisions, especially when trading, rarely results in anything good happening. So before you rush into the market in a panic, you’ll want to reflect on why you’re trading crypto in the first place.
- Are you investing because you believe in the long-term opportunity?
- Or are you here to make a quick buck on short-term trading?
The answer to these questions can help guide you to the proper decision. In either case, you’ll want to act in accordance with your own goals. In other words, if you believe in the long-term opportunity, think with that mindset. If you’re here for a quick trade, think with that mindset.
2. Assess the situation
Is there news driving the trading price of Bitcoin and other cryptos? It’s possible that there’s fundamental news that’s shifted the market’s sentiment and it’s not just price action driving sentiment. In the latest plunge, it seems like actual developments may be hurting prices.
China’s new move to ban financial institutions from providing crypto-related services is a further clampdown, since the country had already banned crypto exchanges in 2017, though it hadn’t prohibited individuals from owning cryptocurrencies. So the latest move seems like a further significant blow to the burgeoning market, which had been enjoying significant capital inflows.
3. Remember that volatility is the name of the game
Cryptocurrency is volatile by nature. Because it generates no cash flow, traders have to rely on changes in sentiment to drive the price. That means the market can swing between rabid optimism, as it did in early 2021, to pessimistic despair, as it has in the last couple of weeks. The recent furor around the Coinbase IPO also helped drive positive sentiment to crypto.
So when you have an asset that’s driven by sentiment, you have to realize that the emotions of traders propel the market. That’s true in the case of stocks, too, but they also may have a real stream of growing cash flows from their issuing company to accelerate them higher.
This volatility is exactly what draws professional traders, who use high-powered algorithms to make sophisticated trades, something that “mom and pop” traders don’t typically have the advantage of utilizing. Traders like volatility since it gives them a chance to make money – that’s Wall Street’s game.
4. Evaluate the future
Is China’s move a harbinger of things to come? Maybe. India recently said that it would propose a law to ban cryptocurrencies. But now the world’s second-largest nation is reconsidering that position, say experts, with one alternative being to regulate cryptocurrency.
Whether other major countries follow suit remains to be seen, but it’s clear that cryptocurrencies face real threats in the form of regulation, including regulation that could literally put them out of business. As crypto gains traction, it risks becoming a victim of its own success.
It doesn’t help that crypto was just used as part of the ransom in the Colonial Pipeline attack in the U.S., with the perpetrators being paid a reported $90 million in crypto, according to CNBC.
So it’s not out of the question that the utopian dreams of crypto purveyors are simply legislated out of existence. Of course, the political implications are but one facet of their future. Crypto faces other significant hurdles, including the financial and environmental costs of “mining” them.
Another risk: cryptocurrency is mostly unusable as currency and it’s “being sold to people who have no intention of using it” as currency, as I recently discussed on Cheddar TV.
5. Determine how to act
After you’re done cooling down and have assessed the situation and what it means for the future, you’ll want to consider how to act.
- Are the risks really opportunities in disguise? If you see it that way, you may want to continue holding your position or use a dip in the price to invest more.
- Are the risks likely to persist or even grow worse? If so, you may want to take your losses now and stay out of the game for the future.
- Is the situation too murky? If it’s tough to see the way ahead, you may consider splitting the difference, selling some of your position today while still having potential upside tomorrow.
Whichever way you go, you’ll want an action plan that reflects your view on the potential risks and opportunities of cryptocurrencies. But it’s worth noting that some of the world’s smartest investors won’t touch cryptocurrencies and strongly caution you about them, too.
Bottom line
The plunge in crypto markets may have you feeling rattled, but use it as a wake-up call to re-assess why you’re involved in the market to begin with. What opportunities and risks does it present?
While Bitcoin, for one, has rallied back hard following previous major declines, there’s no guarantee that it does so again, especially if it’s facing serious existential questions as countries ban the use of it and potentially the ability to even own it. And that’s the kind of real risk that an investment can be destroyed by or profit from, if the reality is less severe than the expectation.
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