Most people who invest in cryptocurrency understand that it's a somewhat volatile and risky investment. Even so, it can feel devastating if and when you experience a massive loss. How are you supposed to cope with such a big downturn?
And how should it reshape your investment strategy in the future?
Objectively Analyze the Situation
First, try to objectively analyze the situation as best you can. While the shock of the loss might feel devastating at this moment, it's important to see this as a learning opportunity.
Study the following, at minimum, to build better takeaways you can use in your future investment endeavors:
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Your original investment decision. Why and how did you originally invest in this cryptocurrency? Did you closely adhere to a carefully crafted strategy, investing an amount of money you were comfortable losing? Or was this more of a reckless, impulsive decision based on encouragement from less than reputable sources of financial information?
Losses are sometimes acceptable, and even expected, in the context of a broadly useful investment strategy. It's also possible that you made a mistake with your initial investment.
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The reason for the drop. Why did the value of your chosen cryptocurrency drop? This can help you in a few different ways. First, it can help you learn from these events so you can better apply those lessons to your future investment choices.
Second, this may contextualize your losses; if this is only a temporary downswing, there's no reason to be upset about it.
Third, it can help you feel more comfortable with your own status as an investor; if nobody saw this drop coming, there's nothing you could have done to prevent experiencing this loss.
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Potential actions you could have taken. Is there anything you could have done to minimize your losses? Should you have invested less initially? Should you have sold when the downturn first started?
Should you have practiced better portfolio diversification so the loss wouldn't sting as much?
- The current state of your position. Finally, take a look at the current state of your position. How many cryptocurrencies are you currently holding, and what is this cryptocurrency poised to do in the future? Do you believe in the long-term value of this asset? Do you think it's worth holding?
Get the Support You Need
Dealing with a massive monetary loss can be extremely stressful, so it's important to get the support you need.
- Therapy/counseling. A psychotherapist could be exactly what you need to navigate this stressful and confusing time. Together with your therapist, you can explore your emotional responses to this event, underlying issues that may be complicating these losses, and healthy practices that can put you in a better state of mind.
- Family bonds and friendships. It's also important to reach out to family members and friends for extra support. If you're not comfortable doing so, you don't have to disclose your losses specifically to them; just ask them to hang out because you need the extra support.
- Financial support. If you're struggling financially, there may be resources that can help you. Consider talking to a credit counselor, a financial advisor, or someone close to you that you trust with financial issues about your options.
Practice Healthy Coping Strategies
From moment to moment, you may feel things like stress, shame, and anger toward your loss. It's important to proactively manage these emotions in a healthy way if you want to preserve your mental health and the health of your relationships.
- Focus on the present moment. It's tempting to beat yourself up for foolish decisions you made in the past or fret about what your future is going to look like. But when you feel overwhelmed, it's important to focus exclusively on the present moment.
- Practice relaxation strategies. Do what you can to relax. Take a warm bath, practice deep breathing, use mindfulness meditation, or journal to soothe your racing mind.
- Distract yourself. Focus on a hobby or activity you love so you can spend less time worrying.
- Take care of yourself. Even little efforts of self-care, like cleaning the house, can boost your mood and confidence.
Avoid Logical Fallacies
It's also important to avoid certain logical fallacies during this time, as these can drive you to make irrational and negatively consequential decisions.
For example, the gambler’s fallacy can lead you to believe that this downturn won't be repeated in the near future, prompting you to invest more in what could be a failing asset.
Investing more could be the right choice, but you need to make it for the right reasons.
The sunk cost fallacy is also important to avoid. This fallacy makes people more likely to invest in something they've already heavily invested in as a way to make up for their existing losses.
Capitalize on Your Losses
Nobody actively seeks a capital loss, but losses can work in your favor in some contexts. Notably, you can claim a cryptocurrency loss on your taxes, potentially giving you a tax advantage.
If you had $10,000 in gains from selling a stock, but you lost $10,000 on a cryptocurrency investment, you can negate your gains and minimize the taxes you pay, accordingly.
Remember the Purpose of Cryptocurrency
It can also be helpful to remember the true purpose of cryptocurrency. These days, people often treat crypto as if it's an equity investment akin to company stocks. But in reality, it's designed to be used as a currency.
In this context, valuation changes are less important; you can still use your crypto as a form of payment.
Focus on What’s Next
Finally, spend some time focusing on what comes next. What are the next steps you want to take and how are you going to take them?
Options include:
- Cutting your losses. If you're bearish about the future of this cryptocurrency, consider cutting your losses and selling the rest of your position.
- Doubling down. If you're bullish about the future of this cryptocurrency, you may want to double down, investing even more in this asset. Do so with caution.
- Rebalancing. If you're feeling frustrated with your loss and skittish about your future as an investor, you can also take this time to rebalance your portfolio. Increase or decrease your holdings in various assets to more accurately align with your current risk profile and investment goals.
No matter what, experiencing a major loss in the crypto market is stressful and devastating. But with the right coping strategies and a healthy mindset, you can bounce back from this loss and come back stronger than ever.