Cryptocurrencies are volatile. One day, prices take off to the moon, while the next day, they crash and burn. The crypto marketplace has been brutal these past few months. We asked Ben Simpson, Founder and CEO of Collective Shift, for his suggestions on managing a crypto portfolio during these turbulent times. His company, Collective Shift, provides crypto investors and traders access to a suite of tools, daily insights, opportunity alerts, and a thriving community. Simpson and his team of crypto experts suggested several portfolio strategies for taming this bear market. These are summarized below.
Understand Your Investment Philosophy/Risk
During these trying times, you need to maintain a clear head and make informed, educated decisions. This applies whether you are thinking of selling your crypto or whether you want to buy the dip.
Recognize that you must avoid emotional decisions that are couched in either a sense of FOMO or FUD. FOMO (Fear Of Missing Out) is a sense of anxiety where investors feel that they are excluded from successful opportunities that others are experiencing, and therefore they feel they must act. FUD (Fear, Uncertainty, and Doubt) refers to negative thoughts or statements regarding a cryptocurrency or the market. Rather than act on an emotionally triggered FOMO or FUD event, you need to step back and ask yourself are you a short-term trader seeking to earn a quick gain? Or are you investing in crypto because of its long-term potential? Recognizing what type of crypto investor you are will help guide you in making investment allocations and decisions.
Investors should consider holding at least a portion of their portfolio in a stable digital asset, like stablecoins. Stablecoins dampen the volatile price valuations that cryptocurrencies experience. To stabilize its value, a stablecoin links or “pegs” its value to an underlying non-volatile asset, such as a fiat (government-backed) security or a commodity, like gold.
Stablecoins can help you ride out certain dips during a bear market while also allowing you to lock in gains during a bull market. Therefore, they offer you the flexibility to be fearful when others are greedy and to be greedy when others are fearful.
Concentrate on Long-Term Goals
Since achieving an all-time high of $69,000 last November, Bitcoin has lost almost 60% of its value, falling below $30,000. But Bitcoin’s price history has demonstrated time and again that it is a viable long-term investment. Since 2016, Bitcoin’s price has appreciated by over 900%, and it currently has a market capitalization of almost $596 billion.
Rather than look at the recent price movements, focus on the long-term trends. For example, from Bitcoin’s twelve-year price history reproduced above, there have been three extended bear markets in 2013, 2018, and now recently in 2021. However, in both the first and second bear markets, Bitcoin made a strong recovery while achieving all-time highs in 2018 and 2021, respectively.
Therefore, you should wait for a bull market recovery, provided that you do not need your cash for other financial obligations. Sometimes it’s ok to step away from crypto for a while. Prices recover in one direction or the other.
Consider Buying the Dip
If you have excess cash, consider being a bit greedy when there is fear in the market. The present market conditions may offer an opportunity to pick up more of your favorite crypto at a low price. Perhaps there are coins or tokens on your wish list that were too expensive before but now might present a buying opportunity.
Dollar-Cost Averaging (DCA)
One way to buy the dip is to utilize Dollar-Cost Averaging, often referred to in the crypto Twitter world as DCAing. DCAing involves investing a fixed amount at regular time intervals.
Take Bitcoin, for example. To invest in Bitcoin, you do not need a lump sum of $36,200 to purchase an entire coin. Instead, you can purchase a portion of a Bitcoin. Much like the US Dollar that is divisible into 100 pennies, a single Bitcoin is divisible into 100,000,000 units or “satoshis.” Bitcoiners refer to purchasing satoshis as stacking sats.
One advantage of DCAing is that it reduces the risk of always buying at the top of the market. Indeed, right now, you would be buying near the bottom of the market. Another advantage is that it does not require a large initial investment.
Consider Tax-Loss Harvesting
If you are considering liquidating crypto assets, you might ask your tax advisor whether it would make sense for you to pursue a tax-loss harvesting event.
For example, let’s assume you purchased a single Bitcoin (BTC) for $50,000. However, in the present bear market, the value of your 1.0 BTC is now $29,504. Although you still own 1.0 BTC, you are now holding an unrealized loss of $20,496.
You can sell your 1.0 BTC and realize this loss to offset the taxable profits you may have earned from other investments. This is known as tax-loss harvesting.
According to IRS rules, investors must wait 30 days from the date of selling security to repurchase that same security. If you repurchase that same security before the 30-day period is up, the transaction is considered a “wash sale.” This loss is not able to be used to offset a gain.
However, the wash sale rule does not currently apply to cryptocurrencies. So, in the situation above, if you still want to hold some BTC in your portfolio, you can buy back the same amount of BTC immediately after you sell your BTC.
Yes, the crypto market is starting to look like a crypto winter. However, avoid emotional decisions and stay the course. Keep your focus on the long term and maybe shift a bit of your portfolio into stablecoins. And if you have a bit of extra cash, start buying the dip by way of DCAing.