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How To React During A Crypto Market Sell-Off

The word "volatile" comes to mind when thinking of cryptocurrency. While rumours, sentiment, and fundamental events are part of the market, crypto values surge and then seem to plummet almost as quickly.

Posted: 11th July 2022 by Finance Monthly
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The cryptocurrency markets have gone through multiple cycles of rising and decreasing since their start in 2009, even within the larger ongoing trends known as bull and bear markets

While each market fall has been followed by a comeback and strong increase so far, moments of decline may be stressful and difficult to navigate for both experienced traders and new investors. So, in this review, we will guide you on what is the correct way to react to a crypto market sell-off.

Assess the situation first

It's possible that fundamental news, rather than price action or rumour, has impacted market mood. There have been a few moves that may be the reason behind the expanding market, which was receiving large capital inflows. So, to get a comprehensive picture of what is going on, you must first assess the entire issue.

Sometimes the game turns out to be a lot bigger than you anticipated. As an example, China's decision to prohibit financial institutions from providing crypto-related services in 2021 was extremely detrimental to everyone. The move was a follow-up to the country's 2017 ban on cryptocurrency exchanges. However, individuals in China were not forbidden from owning cryptocurrency. The Federal Reserve then chose to limit liquidity in the US banking system late in 2021, and several cryptos have been on a steep decline far into 2022.

Read the news to find out where the negativity comes from

Not long ago, cryptocurrency was a niche issue, thus locating relevant content was easy because there was such a small pool to choose from. People now chat about it at lunch, publish their wallet balance on the refrigerator, and print hundreds of NFTs.

Evaluate the sell-off as it grows and news starts to circulate about it. Before you jump into the market in a hurry, consider why you're trading cryptocurrency in the first place. Begin by reading the news and keeping up with current events. Here are a few things that can help you to evaluate why the market is falling:

  • Examine the reasons for the sell-off.
  • For news, keep an eye on the leading crypto specialists and channels.
  • Participate in the crypto community's social media channels.
  • Discuss the circumstance with them, as well as the reasons for it.

Hedge your portfolio

A hedge is a strategy for reducing the risks associated with an investment. It is an instrument or method that increases in value when the value of your portfolio decreases. As a result, the hedging profit covers part or all of the portfolio's losses.

Following are the methods in which you can hedge your crypto coins during a market plunge:

  • The basic, and by far the most expensive, a hedge is a long-put position. Typically, they use an option with a strike price of 5 to 10% below the current market price. These options will be less expensive, but they will not safeguard the portfolio from the first 5% to 10% of the index's loss.
  • Buying a put option and selling a call option is what a collar is all about. Part of the cost of a put option can be offset by selling a call option. The downside is that the potential for profit is limited. The call option will lose money if the index rises above the strike price of the option. Gains in the portfolio will make up for this.
  • A fence is a result of combining a collar with a put spread. Buying a put with a strike price close under the existing market level and selling both a put with a lower strike price and a call with a considerably higher strike price constitutes this strategy. As a result, this low-cost structure protects some of the downsides while also allowing for some gain.

Speculate on the short side

It is a low-cost technique to protect equities from a potential short-term fall. Selling and then repurchasing stocks might have a considerable impact on the stock price. There are lots of ways to cryptocurrency short selling. As a result, we've listed some of the famous methods below:

  • Margin trading: The margin trading platform is one of the simplest ways to short Bitcoin. It allows investors to "borrow" money from a broker in order to conduct a transaction. Furthermore, it is legal as many exchanges and brokerages permit it.
  • Futures: A buyer agrees to acquire security with a contract that defines when and at what price the security will be sold in a futures trade.
  • Call & put option: Traders can also short Bitcoin using call and put options. If you want to short the currency, you would place a put order, most likely with the help of an escrow provider. This indicates you want to be able to sell the currency at the current rate, even if the rate declines later.

Speculating on a negative price move can be difficult but also very rewarding should you time your entry well. I recommend using a derivative exchange to short sell crypto since they don’t limit you to an expiration time such as futures and options platforms.

Add to your blue-chip investments

It is the best option to invest in quality and expansive coins. Due to their decreased price, you can buy them at a rather cheap rate during a market plunge. It is a worldwide strategy among crypto traders. You can basically sell them when the sell-off will be over. This will earn you quite a remarkable profit if this technique is done right.

Sell early to reinvest at a lower price

It is maybe the most well-known proverb regarding profiting from the crypto market sell-off. This method can be difficult to implement because prices have a significant influence on emotions and psychology, making them difficult to anticipate.

Selling crypto coins at a high price and buying them back cheap is a technique in which you sell them while they still have worth. It needs to happen just before the market takes a plunge. After that, you must repurchase them at a lower price. It should happen right at the end of the sell-off period. You have to rely on trusted indicators that will predict when the market is going into the sell-off phase.

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