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We’ve talked to investing experts and financial advisors who advise against sinking much of your portfolio into the asset class for this very reason. They work with clients to make sure volatile crypto investments aren’t getting in the way of other financial priorities, like saving an emergency fund and paying off high-interest debt.
“You have a high chance of losing it all, but a small chance of winning it big,” says Nate Nieri, a CFP with Modern Money Management in San Diego, California. “Don’t gamble an amount that would burden your family or prevent you from achieving your goals” if you lost it all, he says.
How does this latest crash compare to previous ones, or even to regular stock market drops—and what does it mean for investors?
What Does This Drop Mean for Crypto Investors?
For those who invest in crypto for the long-term using a buy-and-hold strategy, swings like this are to be expected. The dip of the past few weeks is nothing to be overly worried about, according to Humphrey Yang, the personal finance expert behind Humphrey Talks, who says he avoids checking his own investments during volatile market dips.
“I’ve been through the 2017 cycle, too,” Yang says, referencing the ‘crypto crash’ of 2017 that saw many major cryptocurrencies, including Bitcoin, lose major value. “I know that these things are super volatile, like some days they can go down 80%.”
Experts recommend keeping your cryptocurrency investments to under 5% of your portfolio. If you’ve done that, then don’t stress about the swings, because they’re going to keep happening, according to Bill Noble, Chief Technical Analyst at Token Metrics, a cryptocurrency analytics platform.
“Volatility is as old as the hills, and it’s not going anywhere,” Noble says. “It’s something you have to deal with.”
As long as your crypto investments don’t stand in the way of your other financial goals and you’ve only put in what you’re ultimately OK with losing, Yang recommends using the same strategy that works for all long-term investments: set it and forget it.
If this type of extreme drop bothers you, you may have too much riding on your crypto investments. You should only invest what you’re OK losing. But even if the drop is making you rethink your crypto allocations, the same advice still stands — don’t act rashly or upend your strategy too quickly. Reconsider what you might be more comfortable with going forward, such as allocating less to crypto in the future or diversifying through crypto-related stocks and blockchain funds rather than directly buying crypto (though you should still expect volatility when cryptocurrency markets fluctuate).
“Don’t check on it. That’s the best thing you can do. If you let your emotions get too much into it then you might sell at the wrong time, make the wrong decision,” says Yang.
What If You’re Interested in Crypto, But Haven’t Yet Invested?
Yang’s set it and forget it approach to crypto reflects his philosophy for investing in the traditional stock market, but some experts feel cryptocurrency is too different from traditional investments to draw any historical comparisons. That’s why A’Shira Nelson of Savvy Girl Money is staying well away.
Nelson primarily invests in low cost index funds because “I can see history on that,” she says. The newness of cryptocurrency and lack of trackable data make her wary of these crazy swings.
Potential investors looking to buy the dip should understand that fluctuations are par for the course, and be prepared for this kind of volatility going forward. Even if you invest now, with prices relatively low, be prepared for them to fall even more. Again, only put in what you’re comfortable with losing — after you’ve covered other financial priorities, like emergency savings and more traditional retirement funds.
What’s Behind the Latest Bitcoin Drop
Many investors see Bitcoin’s price swings as part of the game, but “volatility is tough for individual investors to deal with,” Noble says. Like Yang, he warns against selling too fast.
While this drop is reminiscent of 2017’s sell off, Bitcoin’s presence has grown a lot since then. New short-term investors who are selling their holdings in reaction to the drop may be influencing the continued dip in Bitcoin’s value, according to a recent report from Glassnode Insights, a blockchain analysis firm.
While fluctuations are expected, Noble says this swing is a bit out of the ordinary. “I thought the market was maturing and these things would be less frequent and severe. Boy was I wrong,” he says.
This particular drop was caused by a combination of factors that may have made this drop more severe, Noble theorizes, from excitement about low-quality coins, to negative remarks from Elon Musk, to China’s latest crack down on crypto services. The accumulated response made this sell off “all the more violent,” says Noble.
He likens the drop to the stock market crash of 1987, from which the markets took months to recover. But because crypto moves a lot faster today than equities did in the 1980s, Noble says we may see a quicker recovery.
“Don’t panic and puke,” Noble says. “If you keep your positions small, you can try to tolerate the volatility.”