Crypto Is Crashing. What Should You Do?

Cryptocurrency prices have dropped dramatically in the past three months. Here are four ways to survive the slump.

The year is not off to a good start for the cryptocurrency industry. Bitcoin (BTC), the leading cryptocurrency by market cap, has lost over 50% of its price since its all-time high in November. Ethereum (ETH) also lost over 50%, and the crypto market cap as a whole has dropped from almost $3 trillion to $1.6 trillion at time of writing, according to CoinMarketCap data.

If you're a crypto investor, these dramatic price drops can be nerve-wracking, especially when they're accompanied by doom-and-gloom headlines. But even if this is the start of a prolonged period of low prices, that doesn't mean it's game over for crypto. Here are four things you should do.

1. Don't panic

The desire to panic-sell -- or panic-buy because you think crypto is "on sale" -- is understandable. Nobody wants to see the value of their investments halve, and it is tempting to cut your losses and look for other opportunities. But if you do this, you could be locking in what you've lost. The market could pick up again next week, and if you've sold your crypto, you won't benefit. It is true this is a relatively new and untested market, but so far, the market has always come back.

Now, as to panic buying, you may think now is a good time to buy the dip. But don't rush into that decision. Look at what's going on in the market, and make sure you do your due diligence on each crypto. Sometimes the rush to get a bargain causes people to skip the normal research they'd do on a particular coin or token. Most of all, only invest money you can afford to lose. Prices may go down more, and you don't want to be left shorthanded if they do.

2. Look at the bigger picture

There's a lot of commentary about why crypto is crashing. Most observers put it down to a combination of a hawkish Federal Reserve pulling back on economic stimulus measures, uncertainty over increased regulation, and concern over rising tensions between Ukraine and Russia.

The question is, how much do these factors impact your long-term view of your cryptocurrency investments? The Fed's moves mean the wider economic climate may be risk-averse for the near term, and we may not see the huge leaps we saw in 2021. But if your original investment thesis holds, then you should hold on as well.

Regulation is also a big issue, especially in the short term. Governments around the world may impose stricter rules on how cryptocurrencies can operate, and some countries could follow China's lead and ban crypto altogether. In the long term, this could build investor confidence and push some of the bad actors out of the space. But it could also cause additional short-term pain.

3. Know that volatility is normal

Whether it's the stock market or the crypto market, there will always be downturns; more so with cryptocurrency, as it is a volatile and high-risk investment. The flip side of these significant drops is the incredible gains that certain cryptocurrencies have produced.

But the high level of risk is why it is important to make sure it only represents a small part of your portfolio, and that you only invest money you can afford to lose. Bitcoin has halved in value several times since it launched -- but it's also gained in value almost every year since its inception. Look at the price charts for Bitcoin and the crypto industry to help put this latest drop into perspective.

4. Make a plan

Now that you've fully evaluated what's going on in the market, you're in a better position to decide what to do next. Bear in mind a buy-and-hold investment strategy is often the best way to build long-term wealth.

However, it might be that you've lost confidence in crypto and don't feel it is a good long-term bet. Or perhaps this latest price drop has caused you a lot of sleepless nights and made you aware volatile crypto investments are not for you. If this is the case, you might want to think about the best way to exit your positions. But this is not a decision to take lightly -- and it's usually best not to sell while prices are at the lowest they've been in six months. Instead, consider waiting for them to recover and then sell. You might want to talk to a financial advisor about the best way to do this.

On the other hand, you might decide you're still confident about cryptocurrencies long term and hope Bitcoin will eventually go to $1 million (as Ark Invest's Cathie Wood recently suggested). You may even decide to invest more money into crypto. What's key is that you're making an informed decision, and you're not rushing into anything.

Crypto crashes happen

The first time you experience a crypto crash, it can be bewildering. Take heart from the fact these price slumps have happened before, and keep your eyes on the long-term potential. We could still be in for a rough ride, but -- with a lot of ifs -- blockchain technology could still transform the way we use money.