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The crypto market is one of the most rewarding markets in the financial sector. However, like other markets, it is susceptible to a high volatility rate. These volatilities occur due to some factors in the market. Volatility can be, either way, seeing tokens witness a massive increase or decrease. Most of the time, a decline in volatility is mild, with tokens posting mainly single-digit losses. However, the volatility can be extreme on other occasions, seeing tokens post as high as double digits losses in the market. For example, the market has been experiencing high bouts of volatility, causing tokens to witness double-digit losses in the last few days. This article will be looking at the crypto market crash, why it happens, and what traders should do during a crash.
What is a crypto market crash?
A crypto market crash is defined as a decline in performance posted by several tokens in the market over a while. The consensus in the market is that a diverse amount of tokens make up the crypto market. One cannot generalize a crypto market if only a few coins see a declining run. To define a market crash, the more significant part of the token must be on a declining run. The entire market cap is taking a beating, moving from a positive green region into a negative red region. Presently, most tokens in the market are retracing for a comeback into the green region. However, a previous decline has seen the market lose about 1.30% over the last seven days.
Why Does Crypto Market Crash Happen?
A crypto market crash is not just an event that occurs randomly in the market. This is because certain factors trigger the upward and downward movements of tokens. However, these tokens only register surges when the elements are in their favor and vice versa. Some of these factors include panic in the general market. For example, the recent market decline started with some top tokens like Bitcoin before the entire market followed suit. The traders in the market already panicked as some of them would lose a lot of their investments. This caused others to follow suit, pushing the market into the red zone.
Other factors include sell-offs, hacks, disasters, regulations, etc. For example, the crypto market crash that occurred in March 2020 resulted from the fear caused by the coronavirus pandemic. After the pandemic in China became full-blown worldwide, most traders started selling off their assets. This, in turn, caused crypto prices to dip, with Bitcoin shedding as high as 50% of its price. However, the market soon corrected by August, making a new all-time high figure.
Steps To Take When A Crypto Market Crash Happens
The crypto market is one that was born into volatility. The market thrives on it; that is why traders can make massive income from it. However, as mentioned above, there are other times that the volatility is a reversal in fortune, causing a drastic dip. If and when this happens, you should be able to have some strategies that you can adopt to help yourself. Below are steps that you can adopt to help yourself during a crypto market crash;
Reassess Open Positions
A market crash presents a perfect opportunity for traders to look back at the opened positions in their portfolios. Although the market calls for reassessment most of the time, a crypto market crash will call for it the most. This way, traders would know how to deal with the loss in the market and how to move forward from the market condition. Reassessing open positions would also help traders adopt a new strategy. Although most traders prefer to stick to their known system, adjusting your portfolio to suit the falling market is advisable. This way, you will be able to minimize losses and maximize income.
Diversify
In a general market loss, there is a probability that some few tokens will be having a good time despite the market conditions. This is why traders should diversify their portfolios in the market. This way, the winning cryptos can help them hedge against the falling ones in the market. Diversifying doesn’t necessarily mean picking any token to trade. It means that traders should be able to pick tokens with potential that can help them during a crypto market crash. This is why researching tokens is essential before you purchase them. However, there are some times that some tokens would still follow the falling market, so traders must be smart when dealing.
Plan Stop Loss And Exit
A crypto market crash has provided a perfect opportunity for new traders to enter. This is because the mantra of the market is to buy low and wait for a surge and take profits when you want. However, sometimes this will not cut it as the tokens will continue to experience a massive fall in the market. A typical example is the fall of LUNA. When the token started to fall, some traders began stacking up an enormous amount of the token, but it was not enough to help it push for a rebound. The token went on to lose more than 90% of its value. In a situation like this, you should take your loss and exit the market to prevent further investment loss. More opportunities will present themselves for you to recover.
Calculate Your Risk
The crypto market is premised on taking massive risks. Although everyone has their strategy to trade tokens, some are riskier than others. Some traders prefer to take considerable risks to make enormous money, while others take the other route. A market crash presents a perfect opportunity for traders to access their portfolios and calculate their risk. This way, you will know if you can continue to take the risk or if you want to take your profit. However, it is advisable to keep your risks to a minimum in some instances. However, if you prefer to take full-on risks in the market, you should trade with only funds you can afford to lose.
Stick To The Plan
As mentioned above, the crypto market is fragile and can be pushed by some factors. However, in some cases of a market crash, traders are expected to stick to their original plan. This is because some of the factors that caused the market dip might cause a reversal. For example, a token might be running at a loss because of little investor power, but that might be subject to change drastically. This is why it is sometimes good to keep up with your first strategy and not attempt to change it. Although it might sometimes let you run at a loss, the market will surely bounce back to provide profits for you.
Don’t Get Emotional
Emotions are a few factors that affect how people approach their portfolios. This is because most people are attached to specific tokens based on sentiments. For example, some people believe that Bitcoin still has space to grow, while others think it cannot grow further than its all-time high. In some cases of market decline, some people prefer to sell other tokens in loss to purchase Bitcoin. In some cases, Bitcoin might be on its way to making a deeper decline which could cause losses. The natural thing to do is not act on impulse and only make a move after your token has dipped under your set loss stop.
Monitor The Market
During a market decline, one thing famous traders do is monitor the market fully during these periods. Keeping a close watch on the market will provide you with an essential perspective on specific declines. Sometimes, the declines might affect top coins, while smaller coins will post two-digit wins. In a crypto market crash situation, monitoring the market will help you adjust your portfolio to go back to making profits in the market. However, you should ensure that you do not get emotional and make impulsive decisions that could cause you to lose funds in a bear market.
Get Updated About The Market
During a crypto crash, there is a typical saying that you must try to grab all information as possible about the market. It is one thing to monitor the market, another thing you need to do is get updates. This way, you would have first-hand information that will shape your decisions and help you make profits. To do this, you will need to join communities and groups that can help you achieve your aim. You can also set updates and notifications on prices and movements of your tokens across your crypto apps. However, you need to use the updates to your advantage and not rush into making decisions.
Conclusion
A crypto market crash is never suitable for investors and market participants. This is why it is good to have strategies that you can adopt in periods like this. Besides having your strategy, you can choose to check out tips from websites that will help influence your decision. It would be best to trade with only cash that you can afford to lose. This is because the market is volatile, and investing with funds you can’t lose can be dire. It would help if you also remembered to research as you go along in your quest to make profits. Finally, all these are just advice you can take to shape your portfolio.