“Never Invest More Than You Can Afford to Lose” and Other Tips to Protect Yourself From Crypto Crashes

“I thought crypto was profitable. It really had an impact on my mental health. Mumbai-based student Ajay Mutke sums up the sentiment felt by thousands of crypto investors following the dramatic collapse in the value of cryptocurrencies in recent days. The 26-year-old who borrowed Rs 50,000 from his father to invest in crypto, says he suffered losses of over 60% of his initial investment.

Crypto investors are worried because the largest cryptocurrency in the world, Bitcoin and other digital coins continue to plunge. The entire crypto market now has a market cap of $1.2 trillion, less than half of the $2.9 trillion it was worth in November. The crypto plunge is likely to scare off some of the retail investors who poured money into crypto during its rise.

Ali Ittarwala also suffered significant losses in the recent market crash. The 41-year-old says he panicked as he continues to find ways to cut his losses. “I woke up in the morning and suddenly my crypto wallet was red,” he says, adding that he had invested most of his savings in cryptoassets.

Crypto price dips are usually presented as a buying opportunity, which drives the price higher. However, it is unclear whether investors will “buy the dip” this time.

Ankita Bhatnagar, a 19-year-old medical student, who had recently invested in crypto on the advice of her friends, now regrets her decision. “What a waste of time,” she sighs, emphasizing her frustration at losing all her pocket money.

In today’s column, we discuss strategies for investing in cryptocurrencies safely, so that you don’t invest more than you can afford to lose.

Risks to consider before investing

It is important to understand what you are getting into before investing in digital assets. First of all, the cryptographic nature of Blockchain should be understood by every investor.

Investors need to understand how a transaction is recorded in a distributed database and how different blockchains support different cryptocurrencies. What is important to understand is the technology that drives these parts.

For example, in the recent case of Luna stable crash, While stablecoins promise to remain stable even if the crypto market fluctuates, due to technical anomalies, Luna’s price has fallen over 99%.

Do not be shocked if you see the value of cryptos increase or decrease significantly. In fact, they have been known to rise and fall by double digit percentages within hours. Volatility is what drives investors to bet big on crypto. This is due to a range of factors including supply and demand for the coin, user sentiments, government regulations and sometimes even a tweet from tech entrepreneurs like Elon Musk.

Unfortunately, the world of crypto is flooded with scams. Fake identities, apps, crypto wallets, and emails are all designed to trick victims into giving up their private keys, the cryptographic equivalent of a password. Then there are the classic coins that take advantage of fads and run away with investors’ money. For example, the recent case of the Squid Game tokenprevented many holders from reselling their tokens, ultimately robbing them of millions of dollars.

While cryptos are widely accepted, it is still difficult to regulate them. Also, if a crypto exchange holds your assets, there is always a risk that you will lose all your capital.

Invest safely

One thing is clear: cryptos are risky investments and could lead to significant financial losses. So designing a risk tolerance plan can help. Follow the rule of thumb, only invest what you can afford to lose. If you are unable to bear the probable total loss of your crypto investment, it means that you cannot afford to take the risk of investing the amount you are considering.

Only invest money that will not change or harm your lifestyle in any way. Try to invest a small portion of your earnings. Here’s a mantra to follow: give yourself a certain amount to invest each month, and when you’ve run out, don’t invest more. This way, even if you lose all your money, it doesn’t jeopardize your financial stability.

Putting all your eggs in one basket is not the right strategy in the crypto world. What is better is to divide your investable income into different coins and exchanges. This is because not all exchanges have the same assets. For example, if you are looking to invest in different coins, maybe choose a stablecoin, a coin that runs on proof-of-work consensus algorithms such as Bitcoin, Ethereum, etc., and a eco coin. By spreading your investments across different digital assets, crypto investors can reduce the overall risk profile.

The key to effective crypto investing is to use the “limit order” feature. Use the algorithm to your advantage. Start limiting orders, so even if you sleep and the price crashes, you can still protect yourself if the market moves against you.

Only leverage what you can afford. If you buy coins, go for small amounts, don’t fill your wallet with large amounts of coins. That said, if you use too much leverage, your trades won’t have enough time to breathe and you can lose all of your capital in a stock market crash.

Last but not least, hold onto your coins, crypto is infamous for its volatility, but investors have only made massive profits after holding their coins. Long-term investors should focus more on holding than buying.

Last word

Emotions lean towards survival. Managing your emotions is the most important thing in the crypto world. Fear of loss and greed are every trader’s worst enemies. Every investment has some risk associated with it. Don’t blindly follow trends. It is necessary to do your own research and then determine what is best for you.

About Joan Dow

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