There’s mania everywhere in crypto. Bitcoin is down. Ethereum is down. S**t coins are down. People are starting to panic.
Everyone says that during volatility you should stick with the plan and not make any changes. While I agree with this, many either never even had a plan or they had a bad plan so now may be a great time to reflect, adjust, and make a new plan.
Let’s talk about 5 moves to consider making during this extreme volatility.
1. Reconsider Your Positions
It’s never fun to sell any investment at a loss, but this may be a good time for you to do just that. Maybe you got blinded by the mania happening in crypto. We all love the idea of turning little money into a lot of money in a short period of time. However, that rarely happens. Most times it’s actually the opposite. People get greedy. They over leverage themselves, invest in small projects, and end up losing a lot of money.
If this was you, take a look at your current positions. Do you actually think they have any merit? If not, this would be a great time to finally move out of them and allocate to better investments for the long term. Speculating carries a lot of risk and rarely pans out.
Stop speculating and start investing!
2. Tax Loss Harvest
All the CFP’s out there have been shouting this from the rooftops. Tax loss harvesting is a really great tool. Here’s how it works, let’s say you bought 1 Bitcoin at $60,000 and it’s worth $20,000 today. You can sell your Bitcoin for a $40,000 loss, buy it back immediately, and take that loss to offset other gains you have. Once you finish offsetting all other gains, you can even offset $3,000 of your ordinary income and carry the rest forward to future years.
This is a great tool to help you save some money on taxes without having to give up your position. Remember, you cannot do this with stocks since the wash sale rule applies (with stocks you have to wait 30 days before you can buy back your investment).
Quick note on this: Ensure the fees for selling & buying back are less than the tax savings you will have. If not, you really aren’t saving money.
3. Get Your Coins Off The Exchanges
Celsius last week announced that people can no longer move crypto around or off their exchange. This is scary and might only be the start of similar stories happening. Knowing this, now is the time to be smart and take cold storage of your crypto. Do not risk your money by leaving it on exchanges who may have taken risks you do not know about. Who knows what will happen if the custodian you are holding your crypto at goes under, but it won’t be good that is for sure. There is no FDIC insurance there like there is at banks.
4. Check The Size Of Your Positions/Allocation
Too many investors in crypto have become over concentrated in the past few years. Some even have their entire net worth in crypto. THIS IS RISKY. A general rule of thumb is to not have more than 5-20% of your net worth in one single investment. Take a look at your investments, which positions are way above that range? Now create a plan for how much you want in each investment and create a rebalancing plan to ensure you stay close to those allocations over time. This is so important and something most DIYers do not do enough.
5. Stick With The Plan
If you don’t have a plan, make one first. But after that, stick to your plan.
I see it all too often where people have a plan to dollar cost average in and then anytime the market goes down they stop. Then anytime the market goes up, they start again. This is the opposite of what makes sense. You would rather buy while it’s going down at lower prices than when it’s going up at higher prices.
Don’t let short term noise stop them from sticking to the plan. Here’s what you need to do:
- Figure out the investments you want to own
- Figure out how much you will contribute to each regularly
- Let the automation do its job so you continually buy
- Go out and live your life!
Timing the market does not work well! Your job is to keep buying through the ups and the downs.
I know many of these are tricky when you are feeling uneasy about the markets, but stick to the plan!
Disclaimer: none of this is advice, it is just for informational purposes. Talk with your financial planner before implementing any of these strategies.