How to Winter Without Panic
Crypto Winter: Here’s what a crypto trader should do to avoid hysterical behavior and survive the potential crypto winter of 2022 Viktor Kochetov, the CEO of Kyrrex.
Every time the crypto markets enter their bearish or bullish phase, experts switch into their “Oracle mode”. They start making fancy predictions.
For example, when the crypto markets were on their uptrend in October-November 2021 and BTC was fluctuating around $60,000-$65,000, these experts envisioned a price of $100,000+ in 2022. The uplegs of the market are reversing this trend, and BTC’s current price at $20,000-$25,000 triggers dire forecasts of $5,000-$10,000.
These fluctuations in actual and forecast prices signal one thing: the immaturity of the crypto market. Being a relatively young financial instrument, cryptocurrency markets panic at the earliest signs of price declines. Likewise, slight growth triggers massive demand, which drives up prices. How to deal with this situation.
Crypto Winter: Think and act long-term
The first thing to remember when trading crypto is that it is a currency, not a financial asset like stocks and bonds. It falls under the foreign exchange (FOREX) trading category just like trading the exchange rates between the USD and the EUR. This type of trading inherently carries additional risks arising from a variety of factors affecting exchange rates. These factors range from the economics of the countries that issue currencies, to the prices in the commodity markets, to the situation in the global financial markets.
Cryptocurrencies are more complex than fiat currencies as there is no single issuing body. The decentralized nature of crypto markets makes them more difficult to forecast. However, that doesn’t mean that trading crypto shouldn’t be completely outside of the average trader’s picture. Instead, it’s important to consider the risks associated with this type of investment.
The most conservative approach that limits losses from trading crypto is opting for a long-term strategy. Specifically, a trader would allocate a small portion of the portfolio to cryptocurrencies and hold that position for a longer period of time. The method eliminates the risk of excessive losses during the decline phase by eliminating the need to sell and close positions in a bear market.
Set buy and sell limits
There is one major downside to using a long-term approach. Since it allows to significantly minimize the risks, it also limits the return of such an investment. As an alternative to the ultra-conservative approach, there is the option of using limits. These make it possible to invest more in crypto and avoid risks. Setting a buy limit requires setting the return target, which would trigger an automatic sale of the cryptocurrency when its price reaches that specific level. Sell limits work in reverse. A trader sets the sell limit if the sale is at a certain price.
The use of buy and sell limits is a common practice among day traders seeking short-term returns. This practice is very effective in limiting losses and rarely prevents significant returns.
Diversify your portfolio
Portfolio diversification lowers the overall risk of the portfolio. This applies equally to traditional stock markets and crypto markets. It works best when different types of assets are included in the portfolio. For the crypto space, this means investing in the mainstream cryptocurrencies like BTC and ETH, as well as the lesser-known coins and tokens. The weighting of these components should correspond to their level of risk. The higher risk coins and tokens should represent smaller portions of the portfolio.
Setting realistic expectations is a good idea when investing in crypto. It is necessary to understand that this is a highly volatile instrument with frequently changing prices. Crypto price predictions remain limited to the current small amount of historical data. Limiting risk through diversification, setting limits, and investing for the long term are the best tools available. A similar crypto winter could be observed between March and July 2021, when the BTC price fell from $57,000 to $31,000. Crypto markets quickly recovered with the new BTC high of $64,400 in November 2021. At Kyrrex, we see that diversification is very effective in hedging against sharp falls in a single asset class.
Crypto Winter Is Coming, But Is It?
Without being overly optimistic, the crypto winter appears to be drawing to a close as early as 2022. The global economy has recovered from the initial shock associated with Russia’s war against Ukraine. Central banks have got inflation under control and there are signs of recovery on the stock markets. Cryptocurrencies appear to be following a similar pattern. It can be a good time to add crypto to your portfolio ahead of another bull market period. Sticking with the above approaches is a good idea to test the waters, generate returns and avoid significant losses.
About the author
Viktor Kochetov is the CEO of Kyrrex. Viktor’s knowledge of traditional markets is accompanied by blockchain and cryptocurrency experience gained as a consultant on a number of innovative projects. In 2018 he launched Kyrrex, a crypto-fiat ecosystem that has grown into a wide range of products and services. Today, the main product is Kyrrex Crypto Exchange, where various cryptocurrency transactions are conducted. The Kyrrex fiat ecosystem is based in Malta.
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