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January was a bad month for the crypto market, and one expert says investors should expect more “nasty downturns” in the future.
That’s just part of the deal, along with the “massive gains” many investors could also see if the crypto market soars again like it did throughout much of last year, according to Wendy O, a crypto investor and popular TikToker who recently shared her thoughts with TIME in an interview.
“Anytime you have a really volatile, upward movement, you should also be prepared for a very volatile, downward movement,” says O, who began teaching herself how to invest in and trade crypto in 2017.
The price of Bitcoin — the first and most established cryptocurrency — plunged suddenly at the end of January, sinking 50% from its November high of $69,000, amid a broad investor retreat from risky assets. Ethereum also hit a six-month low, falling below $2,200. It was the lowest both of the two biggest cryptos had been since July 2021. Bitcoin and Ethereum prices have climbed back up some since, though Bitcoin remains below $40,000 and Ethereum below $3,000.
If you’re invested in crypto, you’re in for a wild ride. Cryptocurrencies are notoriously volatile investments, and you’ll need to be able to tolerate it as “any new technology is going to go through growing pains,” says Doug Boneparth, CFP and president of Bone Fide Wealth in New York. Here are tips on how to handle volatility in the crypto market.
How Investors Should Deal With Crypto Volatility
Know Why You Invested In the First Place
The biggest problem O sees in the crypto market is investors dumping all their money into crypto without a real understanding of it. “We have a lot of people that are investing very irresponsibly and only looking at the market in one direction. They think they’re going to get rich,” she says.
If you catch yourself feeling anxious about the crypto market, take a step back and ask yourself why you’re investing in crypto in the first place. If you can’t articulate that, then chances are you probably shouldn’t be investing in it, says O.
“Crypto moves a little bit differently than traditional markets and that’s OK. But you still have to be willing to educate yourself. It’s important to understand the basics of investing, but it’s also important to understand what these markets are.”
Many experts say investors should look at cryptocurrencies as volatile, highly speculative assets, and recommend keeping any crypto holdings to less than 5% of your total portfolio. You should also have other financial bases covered before buying into crypto, such as a solid emergency fund, conventional retirement savings, and no high-interest debt.
“It’s important for every single person to kind of take a step back and analyze,” says O. “Ask yourself, ‘Am I comfortable with this? Does this make sense? Does it make sense if I lose everything? Are my bills paid? Do I have food on the table? Is my rent paid or my kids taken care of?’”
Set Clear Goals
As with any investment, you should set clear goals and only put in what you’re OK with losing. Experts recommend sticking to a long-term investment plan, rather than approaching crypto with hopes of getting rich quickly. That means ignoring the short-term ups and downs, focusing instead on long-term investment growth.
To avoid acting on emotion during big swings, O recommends making a game plan for different scenarios before they happen. For example, have a plan in place to either buy or sell more of a given asset based on future price points it might fall below or go above.
“I think it’s important to look at a situation and to anticipate or plan for a positive scenario and for a negative scenario,” she says. “You need to be able to switch your bias if the market changes. If you think and talk in absolutes, you’re probably going to end up losing money.”
Diversify Your Portfolio
Don’t rely on crypto investments for your retirement or overall financial strategy. Make sure the majority of your investment portfolio is made up of stable assets projected for long-term growth, like low-cost index funds. If you do incorporate crypto into your portfolio, experts recommend sticking with the two most established coins: Bitcoin and Ethereum.
Don’t Give Into FOMO or Hype
There are more than 15,000 different cryptocurrencies, and it can get “very noisy” and “confusing,” according to Boneparth. “It can create a very confusing environment to figure out what’s what and who is who, especially when you have a lot of people really pumping it or being very zealous about it,” he says.
That’s why tuning out the noise, as well as educating yourself on crypto, are both essential when investing in the space. Stay the course, and don’t let the hype of certain crypto investments result in fear-of-missing-out (FOMO). Maintain a healthy dose of skepticism with anything related to crypto — especially influencers’ advice — and watch out for strangers writing to you directly about get-rich-quick crypto schemes.
Consider Dollar-Cost Averaging
If you’re in it for the long haul, consider applying the cost-averaging strategy to your crypto investments. Dollar-cost averaging is when you make consistent investments over time, rather than investing lump sums all at once.
O says to stick to Bitcoin if you pursue this strategy, unless you’re OK with more risk. “For Bitcoin, I like the dollar cost averaging strategy because I like Bitcoin long-term. It is one of the more stable [crypto] investments that a person can make. When we’re talking about dollar-cost averaging with altcoin, I think that that carries a lot more risk to it,” she says.
This strategy can be a good way to avoid trying to “time the market,” which studies have shown is very unlikely to be a winning strategy for investors. A steady dollar-cost averaging approach can also help investors stomach risk when there are big swings in the crypto market. The idea is that by building wealth over time, you can neutralize short-term volatility in the market.