I felt it important to revisit the How To Crypto Report from earlier this year called Don’t Panic with there more uncertainty than ever in not only the cryptocurrency market, but all global markets.
This week we’ve seen a big drop in most markets and the cryptocurrency market was not immune from this. If you have been following along with the weekly How To Crypto Report blogs then you know I have given advice to prepare for conditions like this, such as identifying your trading strategy, how to set a stop loss, and also even the long term accumulation strategy of recurring buys to dollar cost average your buys while you work on learning to trade. If you have not read any of the past blogs, I suggest you click the How To Crypto tab on the blog page and dig in.
Below, we will look at what is the cause for this week’s panic selling, implications both long and short term, and a few things you can do when extreme volatility hits the market before you let panic set in.
This week’s market drama is brought to you by a Chinese company called Evergrande Group which is on the brink of default of its $300 billion dollar debt. The domino effects of this could impact all markets and sectors and much of the global economies are intertwined. This spillover could have the same effects we saw back in the 2000s when Lehman Brothers and others defaulted on large amounts of debt leading to the 2008 global financial crisis.
Markets operate off of fear and greed and this is a high point of fear for investors. When investors are fearful, as a whole you can see a big selloff of investors looking to lock in profits and prevent loss from large scale crashes. This week has been just that. As of now, China has stepped in with a multibillion dollar bailout and the market has somewhat stabilized. But fears are still present and could lead to more volatility. Cryptocurrency should and will be detached from regular financial markets, but as of now, it has not decoupled. If we ever do see a wide scale crash in all markets, my personal opinion is that cryptocurrency would rise and recover faster than others due to the amount of growing use and adoption of cryptocurrency along with more widespread distrust of traditional financial markets and inflation concerns.
If you have been following my education for any amount of time, I talk often about the volatility of the cryptocurrency market. It is not a bad thing. It is something that should be embraced. When the markets stabilize, your ability to benefit financially will become exponentially harder. With that being said, many people let panic set in since they look at prices dropping as a loss. They compare what the value of their holdings were at the top of the market cycle to what they are when the market is dipping and view it as if they have lost their money. Once a drop has happened, there is only so much you can do after the fact and the first thing is DO NOT PANIC.
Now, it is only natural to have those feelings creep in, but when you allow that panic to control your action that is when you can actually do even more damage. Now is a time to revisit your investing and trading strategy and see if you need to make any changes. Based on what you are holding, do you believe in the long term side of what you are holding? Do you believe it will recover from current price levels? If you do, then you can find opportunity in your despair since you now have the opportunity to accumulate more. Buying the dip as many call it can sound like a mindless activity but it can be a very effective strategy. Buying during dips can lower your average cost basis for a particular cryptocurrency which can allow you to be back into profit as the price recovers.
There is always a chance that the market can dip more after you buy so you need to always prepare for that. I always keep money in dollars or stablecoin in preparation to buy more if it dips more. The worst thing you can do is to sell when the market has already dropped tremendously and then the price rebounds back up like we saw this week. This strategy should only be used on cryptocurrencies that you have belief in that they have long term viability. We will look at that next.
You may be wondering, “how do I know if a cryptocurrency has long term viability?” This really exposes a problem with many people investing in cryptocurrency. Many jump in blindly and do not even know why they are buying a cryptocurrency.
Many jump in out of FOMO, or fear of missing out. They are buying based on someone else telling them they should buy, like a friend, family, or even the media. They do not understand the fundamental reasons why cryptocurrency is important or even understand why we need alternatives from our current government and bank-run financial systems. And quite frankly, for them, it does not matter as long as the market keeps going up. But we all know, markets are cyclical. They do not just go up.
They have no real understanding of why they bought in the first place so they do not have the belief that the price will recover. This is where you need to separate yourself from most people. Take the time to learn about each cryptocurrency you are holding. What does it do? What makes it different from others out there. What is the supply and what will the demand be for it as the market and adoption grow? Take the time to go into the Newscrypto School videos and also past How To blogs that talk about how to research a cryptocurrency project. One example I personally experienced this week is when the market crashed, Polygon fell from $2 to under $0.75.
This is a project I have researched extensively and have been following the development of what was happening. I know big things are coming to this project as it solves a big problem in the cryptocurrency space. Backed by my belief, I increased my position on it between $0.75 and $0.85. At the time of writing this just 3 days later, Polygon is sitting at $2.40. Without belief, it is hard to make decisions like that when market prices are crashing and people let the panic control them. If you want long term success in these markets, you have to dedicate the time to educate yourself. So jump into the Newscrypto school and make sure to follow this blog as well.
Last but not least, we also have to learn how to practice profit protection and risk management that may have been lacking during past market crashes. Everytime the market takes a big dip, I hear the same people say over and over again that they should have either taken some profit or set stop losses to protect profits. As I mentioned before, markets are cyclical.
They do not go up or down forever. But there are smaller cycles and bigger cycles. 2018-early 2020 was a long term bear market where prices were continually in a down trend. After March 2020, we saw the bull market kick in and the entire market has been in an uptrend since. Even in bull markets, there are periods where we see these smaller cycles involving dips.
You cannot change the past but understanding how these cycles work, you can learn to take profit along the way or set a stop loss. Taking profit is as simple as selling a portion of what you are holding to either remove from the market or to hold in stablecoins or dollars in preparation for the next dip. Another strategy is to learn to use stop losses. A stop loss is a sell order that executes if the price drops to the level you have set. Setting it too close to the current price could trigger it on a smaller dip and you could miss the chance to buy back in lower. Setting a stop loss is usually more effective if you set it at least 5-10% below market prices and also take into account support and resistance lines.
Setting a stop below a key level of support is a strategy many use because if we fall and stay below that level of support, there is a good chance we could see prices fall down to the next level of support below. You can use the Moon Lines tool in the Newscrypto platform to help you identify support and resistance levels. As prices go up you can either manually move your stop loss up or some exchanges allow you to set a trailing stop which moves up in relation to the market and only executes when price drops within a small time frame below level set.
Just remember, the more you educate yourself and the more you set and believe in your trading and/or investing strategy, the easier it is to control your emotions when the market becomes volatile. Emotional trading and investing can be dangerous because many times to win long term in this market, you have to trade against your emotions. Buying when there is panic setting in and sometimes selling when the FOMO is telling you to buy more because it will go up forever.
Will you always be right? No, there are times where I sold and it kept going up for an extended period. There are times I bought the dip and it continued to dip much more. Just remember, there will always be more opportunities to trade and make profits. You cannot win them all, but if you manage your risk and win most of your trades, then you can be a successful trader and investor.
Now if your strategy is a long term hold and accumulate regardless of what price is currently, then you may not feel the need to try to trade the swings in the market prices. Just remember this is your strategy and remind yourself when the market becomes volatile. Make sure your actions match your strategy that you have decided on.
Content written by Blockchain Wayne and NWC Team