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How To Minimize Your Crypto Losses During a Market Crash

4 mins
Updated by Sane Lebrun
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Since peaking in nose-bleed territory last December, the entire cryptocurrency asset class has suffered the sort of sustained and universal meltdown that few could have foreseen. Most major cryptocurrencies are down at least 70 percent from their 2017 peak, with Bitcoin, Ether and XRP down 81 percent, 91 percent and 92 percent respectively. Realized crypto losses have been swift and harsh.
Amid these circumstances, many investors have understandably chosen to exit the market — particularly those who bought in during the record-breaking bull run only to suffer immense losses a few weeks later after the turn of the year. For the investors who have decided to retain a cryptocurrency portfolio despite the carnage, the following tips may be helpful in stemming the bleeding pending when a market recovery begins. [Disclaimer: The contents of this article are not intended as financial advice, and should not be taken as such. BeInCrypto and the author are not responsible for any financial gains or losses made after reading this article. Readers are always encouraged to do their own research before investing in cryptocurrency and consult with a trained financial professional, as the market is particularly volatile.]

Convert Crypto Holdings to Stablecoins

This is the closest thing to fiat that the entire cryptosphere has to offer in terms of stability. Despite the bad press that Tether (USDT) has received over the past few months, USDT and other stablecoins still offer a level of assurance that most cryptos can only aspire to in the current market. [bctt tweet=”Stablecoins represent an instantaneous solution to protect your crypto funds during a market crash” username=”beincrypto”] In addition to keeping your holdings at a steady level, stablecoins also offer a quick and easy way back into the market, should you so desire. Tether

Write Off Crypto Losses Against Your Taxes

Under American law, cryptocurrencies are classified as commodities, which means that all profits made from crypto trading are subject to a capital gains tax. In bearish times like these, any losses you record on your crypto portfolio can be written off against your income tax under IRS regulations. In order to qualify for such a tax refund, it is important that you register the details of every crypto trade you made during the financial year of the IRS form 8949. While this may not always be practical due to the volume of trades you may have executed in the course of the year, you can use one of a growing number of crypto accounting software packages to help you do this. After recording details of all crypto trades on the form and totaling your net losses at the bottom, it is possible to claim up to $3,000 off your income tax for the financial year. Bitcoin calculator

Stop Loss Orders

While this is more relevant to traders than regular hodlers, it is still worth mentioning that many exchanges offer users the ability to execute automatic loss-reducing sell orders. How this works is that the user puts in a specific price level that represents the lowest they are willing to accept for their holdings. Once the asset price dips below that level, the holdings are automatically sold, which offers users a measure of protection. For example, if an ETH holder is not willing to accept a price lower than $90 for their holdings, as soon as the ETH price breaches that price floor, the stop loss order automatically triggers a sale, giving the user the fiat or BTC equivalent of their ETH holdings. A major drawback of this approach, however, is the fact that it generally requires user funds to be held in their exchange wallets, which can represent a significant security risk, especially for large holdings.

Go Back to Bitcoin

If the stablecoin option does not appeal to you, there is always the option of coming home to the market leader, which is a better option than you might realize. For one thing, crypto market movements largely track bitcoin price movements, which means that if a recovery will start from anywhere, it will likely be bitcoin. During the USDT exodus a few months back, a large number of investors actually converted their holdings into BTC, which is a sign of how well regarded it is as a store of value. Despite its current slump, it has been noted that this is actually by far the smallest of the five major drawdowns recorded in its 10-year history. This could indicate that bitcoin is starting to level off when examined from a wider historical perspective, and that potentially is good news for investors looking for a coin that can hold its value in the future. swing trading

Above All, Don’t Panic

One of the easiest ways to lose money in a bear market is to lose your nerve and join the firesale mob. As with conventional asset trading, crypto holding requires a measure of strategy. First of all, it is always helpful to look at your holdings from the wider angle of an extended time period in order to determine exactly how badly they are performing and whether you should even sell in the first place. Take the current market situation for example, with cryptos reporting anything from 70 percent to 90 percent drawdowns from their all-time high valuations. It might be easy to see it as an apocalypse and a reason to hit the ‘sell’ button. However, XRP –despite  the 92 percent drawdown from January – is still up on its valuation from 12 months ago. Many bitcoin investors only started to sell a portion of their holdings after it broke $4,000 – despite falling from $20,000 to around $6,000 where it hovered for much of 2018. Some investors use one year as their reference period while others use three years or even five years. The takeaway is that, with the exception of wide-eyed teenagers who expect to hit Lambo Land overnight, no crypto investor should look at their portfolio through the lens of market panic. At best, panic will rob you of an opportunity to keep hold of a performing asset and at worst it will make you contribute to firesale conditions that ultimately help only the wisest investors. How do you minimize your losses during market crashes? Let us know in the comments below!


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David Hundeyin
David is a journalist, writer and broadcaster whose work has appeared on CNN, The Africa Report, The New Yorker Magazine and The Washington Post. His work as a satirist on 'The...