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Crypto Crash: How to Minimize Your Crypto Losses
July 7, 2022 by Martin Luigi Lagustan
Bitcoin is currently seeing a decline this year because of the global recession and many other factors. As investors, you should be aware of how to manage your crypto currency losses, especially when it’s such a volatile market.
In this article, we’ll talk about the current state of crypto lenders and what it could mean for you and your cryptocurrency investments, how to calculate crypto profit and loss, and how to manage your losses.
Crypto lending industry at risk
Just like when buying a house and lot for sale and other real estate, the crypto industry also has lending companies that lend digital currencies to investors or crypto businesses for a particular fee. However, even the biggest crypto lending giants may be at risk right now.
Just recently, reports about the crypto lending and cryptocurrency exchanges world being at risk and turmoil broke news. What started as an ambition to compete with traditional banking, the biggest crypto lending companies are now suffering a huge financial loss because of their lack of regulations and undeniable appetite for risk.
Celsius Network, a cryptocurrency loan company located in Hoboken, New Jersey, just suspended withdrawals in the middle of June because they’re losing money. One of the reasons could be part of their interest rate schemes where they charge only 0.1% for loans but pay above 18% for deposits. Even before that, around May, they froze about 11.8 billion US dollars, all from savings accounts.
Even more recently, last July 6th of this year, Celsius Network repaid another 34.43 million US dollars of debt to prevent total collapse. As of writing, their liquidation has already dropped to only 2,722 US dollars.
Since the imminent downfall of this former blue-chip crypto lending company, other operators have also faced a similar situation, including CoinFlex and Babel Finance. These crypto lending platforms allow their clients to deposit their digital currencies to them. In turn, clients can either receive interest or borrow even more cryptocurrency by using their savings accounts as collateral (pretty much like the traditional central banks).
So, why did this happen and what does it mean for crypto investors like you?
This devastating drop began with the catastrophic decline of cryptocurrencies — even the biggest and most popular one, Bitcoin, which lost about 60% of its value in the last six months. Unfortunately, this is also not surprising because global inflation rates started to skyrocket when Russia decided to invade Ukraine just when world economies have just begun recovering because of the COVID-19 recession.
To avoid losing clients and even more money, the cryptocurrency lending companies were forced to provide financial guarantees or repay their debts.
One huge downside about crypto lending is you’re practically giving your money to someone else’s investments. This can be risky because if their bets or investments don’t work, they won’t be able to pay you back, so you’re left with nothing.
In case you haven’t noticed, this is pretty much how bank debit or savings accounts work. You give them your money for “safe keeping,” and they use that money to invest in various things. That’s how savings accounts receive interest. However, the big difference between traditional banks and crypto lending companies is regulation.
Banks are deeply regulated and safeguarded by laws and government support. Whereas cryptocurrencies are still “enjoying” their autonomy and lack of regulations. For this reason, some investment firms like Three Arrows Capital, a cryptocurrency hedge fund based in Singapore, have been forced to liquidate on June 27, 2022, because they couldn’t provide creditors with enough cash.
This utter lack of risk management, foresight, and regulations has forced these companies into bankruptcy, which can further scare away investors from using crypto. So, if you’re one of those people who are currently trying to manage your profit and loss in crypto to avoid putting up your house and lot for sale, keep reading.
How to calculate cryptocurrency profit and losses
Managing your investment portfolio by calculating your profits and losses is an effective way to minimize your crypto losses. According to Binance, one of the largest cryptocurrency exchange platforms in the world, “it’s a good habit to keep track of the crypto you’ve already bought.”
Keeping track of your purchases will help you manage your portfolio and see which crypto assets are currently performing poorly. At the same time, you can immediately assess and change your investment or trading strategies to maximize your overall profit. Here are three methods to calculate trading profit and loss:
Transaction-to-transaction is a profit and loss calculation method that is perfect for crypto traders that are proactively watching the crypto markets. To calculate your profits and losses using this method, you’ll need to compute the cost price, and value of each trade in your country’s currency.
After that, you need to compare the difference between the trade and the cost value (including trading fees) to determine the profit or loss.
Here’s how to compute cost value, trade value, and profit:
● The cost value is equal to the original cost of holdings, including trading fees, taxes, and other costs.
● The trade value is the value of your purchase at the time of selling.
● Your profit is your trade value minus the cost value.
If you have multiple crypto investments, you have to add all your profits from each trade and deduct all the fees you had to pay.
2. Profit or Loss Year-to-Date (YTD)
YTD refers to the amount of profit you gained through a particular investment since the first day of the year. This is one of the most common ways financial analysts and investors analyze the performance of investments and portfolios. Hence, the same goes for crypto trading.
YTD is an effective method to calculate the performance of long-term investors who buy and hold cryptocurrencies (also called HODL or Hold On for Dear Life). To use this method, you’ll be using exchange rates at the end of the year instead of rates at the time of the cryptocurrency transactions.
3. Open and closed positions
An “open position” in trading means a trade is still capable of generating a profit or at least sustaining a loss. Open positions could be short positions or long positions (in an asset).
On the other hand, a “closed position” would literally mean you’re ending your investment. A long position on closed positions would mean you’ll sell your assets to avoid losses in closing your account. For more information on how trading options work, check out this article on Investopedia.
In the crypto world, you can also track the performance of your investments by looking at your open and closed positions. For example, if you bought 1 ETH, that’s your open position. Once you sell that Etherium, that becomes your closed position.
With your open positions, classify them in different ways: short-term, long-term, speculative, and value positions. By categorizing your positions, you get a bird’s eye view of the performance of your investments based on these categories. Meanwhile, you can track your closed positions in a spreadsheet and sort them by profitability using the transaction-to-transaction method.
How to manage crypto losses
Calculating profit and loss is just one way of managing your crypto investments. In this part of the article, we’ll show you how to manage losses and avoid losing all your money.
Assess the situation
If you’re not a huge fan of reading, now is a good time to get into it because you need to expose yourself to trading news about any crypto you’ve invested in. More than that, you also have to be aware of any news that can affect the current crypto market and how people feel about it because prices aren’t the only thing that can drive a sentiment towards particular crypto.
Last December 2021, for example, CoinDesk reported what they now call the “Elon Effect” because of how Elon Musk influences the crypto market with just a few tweets. When Elon tweeted about investing in dogecoin, it increased prices and investment by 50%. When he tweeted about how Tesla would now be accepting DOGE for merch, it increased the price of the coin by about 43%.
Even the companies he represents, like Tesla, played a vital role in the prices of coins. By disclosing Tesla’s BTC purchases, when they said they’ll accept BTC as payment, and even when they said they’ll be selling portions of their BTC holdings. All of these things had an effect on BTC’s market.
Hence, it’s news like these that you should be aware of. That way, you can either invest more or pull out before the cryptocurrency market crashes. Just like buying a house and lot for sale, you have to be aware of current market trends and news to find out when is the right time to buy or sell a property.
Remember that volatility is part of any investment
Different investments have their own volatility. In the stock market, a stock with a price that fluctuates too often is considered highly volatile. Real estate is also considered to be a volatile investment because prices rely largely on market trends. Meanwhile, Money Market Mutual Funds have practically zero volatility because you can pull your money out any time you want and you have absolute liquidity.
Cryptocurrency, on the other hand, is a highly volatile asset because it doesn’t have cash flow. Unlike stocks, each stock has a stream of growing cash flow from the profits of the issuing company. Moreover, traders rely a lot on changes and market sentiment to increase prices, which means the crypto market can either skyrocket in one month or crash in the next.
Hence, treat crypto as a highly volatile investment.
There are different strategies for handling market volatility. One could be keeping your crypto investments, which means not putting all your eggs in one basket. So, for example, if you want to invest in crypto, you should also invest in lower-risk investments like cash equivalents, bonds, and markets outside your country.
While diversification doesn’t guarantee you’ll always have a profit, it can save you from a total loss, especially if one of your assets’ market crash.
Evaluate the future
Since crypto is volatile, you should be able to analyze how situations could play out for crypto in the future. Are there new developments in the country? How are the different governments looking at it? Are governments encouraging the adoption of crypto? Are there regulations about to be imposed?
Anything that might drive the market.
While some of the richest countries’ stand on crypto is yet to be seen, it’s clear that the future of crypto will eventually involve regulation because of a lot of factors. One factor involves the financial and environmental costs of mining cryptocurrencies.
To minimize your losses you should have other investments in mind, which leads us to the next item on our list.
Look for other investments
Cryptocurrencies have high profitability if you play them right. However, it’s still also a highly volatile and speculative investment, which is why a lot of investors and governments don’t feel comfortable putting a lot of money into it — so should you.
Luckily, there are a lot of other profitable and safe alternatives to cryptocurrency, including:
● Stocks - the stock market and the blockchain have a lot in common. One of them is the amount of analysis and continuous tracking of the company (or coin, for crypto) that you invested in. One huge advantage that stocks have over crypto is that blue-chip companies in the stock market are relatively safer investments.
● Index funds - a type of exchange-traded fund (ETF) or mutual fund that offers broad market exposure and low operating expenses. This type of investment has its own benchmark index, regardless of the current state of markets, which is why it is considered to be great for retirement accounts. Even Warren Buffett recommended this as a great way to save for the later years of your life.
● Real Estate Investment Trust (REIT) - a REIT is a company that owns, operates, and sometimes finances income-generating real estate. REITs pool in the capital of their investors and place their money on income-generating real estate. That way, you can earn dividends from real estate investments without having to buy or manage any property. So if you want a safer alternative to buying and selling a house and lot for sale, you can try REITs.
Read more: Crypto Investing for Beginners