The Crypto market has come a long way since 2009. From just Bitcoin, the market has expanded to thousands of cryptocurrencies traded on hundreds of platforms worldwide. So naturally, like every market sector, it witnesses its highs and lows. When these highs come, profits are generally the order of the day for most investors. However, the lows – the worst of which are called crashes – can create losses on a galactic scale. This piece will boost investor morale with ways to make money from a crypto crash.
A case in point is this year’s crypto crash which has made a lot of people wary of investing. Investing at such times would usually seem like pure folly to many.
However, there are ways you could make gains out of investing even during and right after a crypto crash. That’s what we will be discussing today. But first, let’s understand crypto crashes and why they happen.
What Is a Crypto Crash?
Like any other market crash, a crypto crash is an example of crowd psychology merging with economic factors to create catastrophic results. The first thing anyone must understand about cryptocurrencies is their volatility compared to other classes of market assets. Their prices are constantly rising and falling, which is only natural for the crypto market. However, a crash is a function of how much value disappears and how much time it takes.
When the price of a crypto asset falls by about 10% within a few days or less, we say that asset has crashed. Now imagine that happening on a market-wide scale. That’s the sort of thing that happened recently in the crypto market, leading to a total market cap loss of about $1 trillion. So now, having understood what a crypto crash is, why does it happen?
Why Do Crypto Crashes Happen?
As I have stated before, crypto crashes owe their occurrences to economic and crowd-psychological factors. So, what are these, and how do they cause a crypto crash?
Crowd psychology manifests in opinions about a currency, and public sentiment is a powerful determiner of crypto trends. When public sentiment changes in favor of a cryptocurrency, enthusiasm for buying goes up. As such, its value rises. Conversely, a negative drift in public sentiment can cause people to avoid a cryptocurrency like a plague. The result is a drop in market value.
Of course, public sentiment doesn’t just change. When it does, it does so in response to one factor or the other. These factors include corporate moves, government policy, economic inflation, etc. However, a particularly powerful determiner of public sentiment has become very evident in the activities of crypto influencers.
Crypto Influencers and Public Sentiment
Crypto influencers can raise or lower public faith in crypto projects and market trends in ways that seem almost hypnotic. Case in point: Elon Musk and the crypto market. Elon Musk and his influence on the market is something almost every crypto investor knows about. With a single tweet, Elon can cause the price of any cryptocurrency to rise or fall.
A spectacular case happened in 2021. Elon had previously been making tweets expressing concern over Bitcoin’s effect on the environment. Eventually, he announced that Tesla would stop accepting Bitcoin for vehicle purchases.
The result? In the first five minutes after the announcement, Bitcoin’s price slumped by about 5%. Apparently, Elon’s statement caused a significant change to public perceptions about Bitcoin’s market standing. This event shows two things: the power of public figures to affect public perceptions and the ability of public opinion to, in turn, affect the crypto market.
Apart from crypto influencers, another class of people can cause a crash.
“Whales” are investors who hold a substantial percentage of the crypto investments in the market. These individuals have the power to manipulate crypto prices through their actions efficiently, and the recent crash illustrates this beautifully.
Investigations into the May crash have revealed that seven whale investors caused the whole thing. Apparently, these investors lost faith in the UST and began to sell their holdings in large amounts. A failure by the Luna Foundation Guard to rectify the concerns that prompted these investors to sell off led to further chaos. Soon, the market dissolved into panic selling by other holders, which led to a global crypto meltdown.
Of course, this is not the first time something of this nature has happened. However, it has never been on such a scale as this year. In any case, now that we understand some of the factors that can cause a crypto crash, how can you make profits from one?
How Can You Make Money From a Crypto Crash
Crash periods in any market generally carry a bad rep. This sentiment isn’t necessarily unjustified, as crash periods generally mean massive losses. However, crashes, dips, and losses are facets of the crypto market that investors must get used to. As an investor, you must be able to seek out profitable opportunities, especially when they present themselves in unrecognizable forms.
Even in this recent crash (and any other, really), there are ways you can still make a profit. So, without further ado, let us get to it.
1. Trading Short
Trading short on crypto is a way for you to take advantage of future dips to make an excellent profit. So, how does it work?
To trade short, you borrow a crypto coin at its current price and sell it at said price. At a later date, you buy some of that coin and pay off your debt.
Say you borrow one Ethereum at $15,000, then sell it at that price. However, you don’t repay your debt immediately. Instead, you wait for the prices to drop. When it does, say, to $10,000, you buy an Ethereum at that price and pay your creditor. By doing this, you make a profit of $5000.
Of course, this is not the same as pump-and-dump schemes where a group of investors causes the price to rise, then sell when it does. Nevertheless, it is a brilliant and far less scorched-earth way to profit from dips and crashes.
Fair warning, though: short trading is an advanced tack, and you shouldn’t undertake it if you don’t have much experience as an investor. For one, it requires you to be skilled at observing and predicting market trends. If you happen to misread the signs, you might have your crypto creditor on your neck long before a dip happens. And what if the market goes bullish for an extended time with no significant drops?
However, if you can do it just right, there not only do you gain more, but you will also require limited capital.
How to Enter a Short Position
So, you’re interested in making money from a crypto crash by doing some short trading? Here’s how you can go about it.
Step 1: Identify a Trend
As an investor, you already know how a few social factors can affect the volatile crypto market. Get on top of these. Monitor trends in pop culture, economics, government, etc., that affect crypto markets. Then, carefully analyze them and Identify any trends favorable to your shorting strategy.
Step 2: Set Up a Margin Trading Account
Margin trading accounts allow you to borrow cryptocurrencies from a broker for trading. Most crypto brokers and platforms have margin trading capabilities you can access by opening a margin account.
Step 3: Take Steps to Minimize Losses
You can do this by using your chosen platform’s stop-loss and take-profit functions. Closely analyzing market trends will help you here as well.
Step 4: Open Position
Having set everything in order and determined your exit/entry points, you are ready to open your short trading position.
2. Buying the Dip
Buying the dip is another promising way to make money from a crypto crash. It’s one of the oldest tactics in the book. Its underlying assumption is that dips and crashes are temporary flukes that eventually subside.
Buying a dip means obtaining more of an asset when it witnesses a dip or crash. The idea is that the value will eventually rise again, and when it does, you can sell and make a profit. A lot of investors have this as a long-term strategy. They wait for significant market dips, then buy large amounts of crypto. By doing so, they accumulate sizable reserves of crypto, which they then sell at a suitable time.
To be sure, this is a viable strategy that can generate massive returns on your investment – but only if done right. Buying the dip is much easier in theory than in practice.
Buying a Dip in Practice
To effectively pull it off, you must master the art of reading and timing the market – a notoriously challenging skill to master. It would help if you learned to determine reasonably when the market has bottomed out. Otherwise, buying the dip may amount to gambling minus any justifiable analysis.
Furthermore, you should tread cautiously when buying a dip, especially the current one. Your approach to buying dips should depend on the nature of the dip. As now may be too soon to determine the market’s direction accurately, any investment you make should be small.
If you are intent on a short-term investment, you will likely face disappointment. However, if you wish to brave the risk, you can time the occasional significant spikes and dips, then buy and sell accordingly. Your profits may be small (as may be your losses), but you still stand a chance to accumulate good profits.
Tips for Buying a Dip
The following things are intertwined as you will need all of them working in tandem.
- Be intelligent and informed. You must intelligently analyze the market and know which indicators to watch out for.
- Be patient. Not every spike or dip is worth your attention. Buying at the first indication of a dip is a bad move that will likely cost you.
- Timing is of the essence. You must determine the best time to buy when you spot a dip. Whether to buy immediately or wait for the price to drop further is a decision you will get better at making as you gain further experience.
Overall, buying dips is a strategy that requires skill and finesse. If you do not have the necessary experience to do it well, you should probably hold off on investing for a bit.
3. Identifying Juicy Opportunities
You can make money from a crypto crash by looking for good investment opportunities. No matter the scale of the crypto crash, it remains the case that some assets may not be affected too much. One positive thing about a complex and multi-asset market is that different assets may respond differently to a crash. Usually, these are assets that are not exactly significant players in the market.
Take the recent crash, for example. While it was a general slump in the crypto market, a few assets still performed well. In fact, some even outperformed Bitcoin. Among these stars of the crash were lesser-known assets like:
- Maker (-2.1%)
- Helium (-1.0%)
- Celsius (+2.5%)
- Polygon (11.2%)
Identifying and dealing with assets like this is an excellent way to make money from a crypto crash. Word to the wise, though: you must keep in mind that these are relatively minor projects. In most cases, they may be early-stage, so you must be keen to find out as much as possible about them before investing. In addition, you must never assume they will necessarily hold up in the long term. They may only be viable for the short term.
4. HODLing On for Dear Life
This long-term strategy may be your best bet, especially if you’re not experienced with any of the options above. If you can hold for long periods, say, some years, you can buy the dip and then HODL until the market rights itself. If you follow this tack, you must resist the urge to sell too soon – no matter the market fluctuations.
Crypto crashes can be a doozy for investors. Apart from sending billions of dollars in investments down the drain, it can also make investors wary of the market. Of course, this is for a good reason. We should always be careful about entering a market that’s currently rolling on the floor.
However, as we have seen, the casting down still leaves room for a potential lifting up. If you know your way, you can still make money from a crypto crash. In this post, I have explained some of how you can do that. First, however, it would be best if you take heed: all crashes are not equal. The market is inherently uncertain, and you never fully know what might be on the horizon.
Furthermore, the strategy that helps you make big bucks in one crash may be ill-advised when applied to another. As such, I advise constant vigilance. Be smart, be patient, and be observant. Learn the conditions of any crash you’re trying to navigate, and learn what works best. If the more active ones seem too risky for the circumstances, then you can always HODL, can’t you?