If you are reading this, then chances are that you are most likely caught up in the crypto bubble and now want to know what your options are.
What is a crypto bubble?
A crypto bubble is a situation where all or a significant portion of the market is speculating on a future price increase, which rarely occurs and can cause massive losses if existing holders have not yet sold. In other words, when it comes to crypto, it is a case of too much optimism. Those who get in early usually make huge gains, while those who catch the wave later often lose big. This results in a situation where some people who bought at the beginning of the bubble won’t get their money back, and those who are still holding coins might be underwater by now.
During a speculative bubble, no one can say whether it will crash and burn or continue rising. This is referred to as the greater fool theory. Therefore, the greater fool theory states that most investors are looking for overvalued assets because they think that if everyone is out of it, there must be a hidden asset out there that is worth something. Hence, everyone looks to buy low because no one is willing to sell their own inflated and overvalued assets.
Ways to Cut your Losses if Caught in a Crypto Bubble
1. Understand the Bubble
The first step is to understand that you are caught in a crypto bubble that happens to many investors and that you do not have to hold on for the ride. Many people get caught in bubbles not because they lack good investment skills but because they do not know how to react and what alternatives they have.
2. Figure out your Risk Tolerance and Expectations
The next thing you have to do is assess your true risk tolerance levels and financial objectives. You should also figure out your expectations of future price increases and whether or not you are willing to take such an investment risk at the current time in your life.
3. Consider your Alternatives
This is a crucial step because you have to get out at a reasonable price to see that the trend is likely to end, even if it means taking a loss. And if you bought at the top of the bubble, then the only way to recoup those losses is by selling before the price falls.
4. Sell or Hold?
If crypto was an investment or speculation in which you were not looking for profits but simply trying to replicate your fiat holdings in crypto, then it is better that you sell and cut your losses before things get worse. On the other hand, if you were betting on an increase in value, you probably should continue holding. Otherwise, you are speculating and hoping for a reversal in value.
5. Evaluate the Current Industry Situation
It is also worth looking at the other aspects of the market and how they might affect the price of your coins. For example, if there is a massive upcoming fork and most people will dump their coins to get some of the new ones, this might lead to a decline in price, which could be a reason for selling rather than holding on to your cryptocurrency.
6. Consider the State of your Portfolio
This is another factor that should be taken into consideration. If you are holding a large amount of crypto and just got into this crypto thing recently, then you might want to sell off any coins that have lost value over the last few months so that you don’t make a loss on an asset that is declining.
Conversely, if you are holding dozens of different coins and each coin has increased in value over the last months. It is a good time for you to buy back at low prices to get your profits from these early rising coins and average out gains across all your holdings.
7. Consider your Exit Strategy
The point is that withdrawing from crypto is never easy, and many people suffer losses because they do not carefully consider how to exit from the market. When exiting at a market top, you usually lose more than 10% of your investment and sometimes even close to 50% of your total value. And since a crypto bubble can last for years, you need to be careful not to lose too much money if you are exiting too early.
8. Do not put all your eggs in one basket
Finally, if you are in crypto, another important consideration is that it is always a good idea to spread your holdings across several coins. If you own one coin, then you risk losing everything if the coin moves down dramatically or even disappears from the market altogether.
In conclusion, it is essential to understand that a crypto bubble is not something you need to stay in and risk losing your money. Instead, it would help if you looked at the situation as one where you will make a loss and then find it worthwhile to exit while minimizing the loss. The key points are identifying the bubbles and considering how you will exit when necessary.