How to deal with a crypto crash

(REUTERS) – When Mr Doug Milnes started buying cryptocurrencies in January this year, he felt like they could become an entirely new asset class for investors.

Right now what it is making him feel is extremely unsettled.

The marketing executive from Summit, New Jersey, says his holdings, including a number of different cryptocurrencies such as Ethereum, are down around 60 per cent from where he bought. What was 2 per cent of his portfolio is now around 0.8 per cent – making him wring his hands about whether to hold on, head for the exits or buy the dip.

“Crypto has gone through a number of booms and busts over time, and it’s hard to know if this time is different,” he said. “I don’t know if my feelings are clouding my judgment. It’s hard to feel confident about what to do next.”

It has certainly been a harrowing year so far for crypto, and investors like him are not alone in trying to make sense of the plummeting charts. The total market capitalisation of crypto assets has gone from almost US$3 trillion (S$4.2 trillion) last November to roughly US$900 billion as at end-June.

Meanwhile, Bitcoin – the dominant cryptocurrency – has fallen from a high of more than US$67,000 to its current level just below US$20,000.

“Some people set up their portfolios in the euphoria of the past few years, without much thought about a bigger plan,” said Ms Christine Benz, director of personal finance at investment research firm Morningstar.

Recent losses, she added, are a good impetus to ask yourself some questions, including how much risk can you take and what kind of losses can you withstand?

“If you didn’t go through that process on the front end, it’s worth thinking through now,” she said.

Of course, crypto is hardly alone in flying through heavy turbulence this year. The stock markets officially dipped into bear territory earlier in June – the S&P 500 is down over 20 per cent year-to-date and the Nasdaq is down more than 28 per cent over that timeframe.

The unique nature of crypto has sceptics likening any moves now to “closing the barn door after the horse has bolted”, said Mr Peter Palion, president of Master Plan Advisory in New York. “Except on further thought, a horse is a real thing with a real value, and crypto – as (billionaire investor) John Paulson famously said – is a limited supply of nothing.”

No matter what your personal stance on crypto, the key to handling extreme market moves is having a plan in place, so you do not act out of pure panic. A few tips from the experts:

Your risk tolerance

If this year’s crypto swoon has made you realise you are not equipped to handle such swings, then do not assume even more risk. After all, just because there have been heavy losses already, that does not rule out more losses to come. “If you find yourself unduly rattled, maybe you’re not a good candidate for holding that asset class,” said Ms Benz. “There’s no shame in that.”

Limit portfolio allocation

As with any more-speculative investment, it is wise to keep it to a certain percentage of your holdings – a particular “bucket” that will not swamp the rest of your portfolio.

A good framework is to set an upper threshold, said Ms Benz.

“Think of all your speculative assets in totality, and give them a 5 or 10 per cent position in your portfolio – whether crypto, or precious metals, or microcap companies, or anything else,” she added. For example, even though Mr Milnes’ crypto portfolio has been savaged, it is not like he bet his entire future on it.

“There is a lot of uncertainty about what to do next, but at least I’m not worried about my retirement,” he said.

“My advice to other crypto investors would be: Don’t put all your eggs in one basket.”

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