A lot of people have lost a lot of wealth in the crypto markets since the end of 2021. Some are simply licking their wounds due to the prolonged crypto winter and some have seen their investments in various crypto tokens virtually evaporate as crypto exchanges have gone bankrupt, thus taking token values down to pennies on the dollar. And of course there is the issue of potential fraud for investors with losses to think about. No matter the cause of your losses, coping with crypto investment losses can be difficult but coping effectively is absolutely necessary.
Stages of Grief after Loss in the Crypto Investment World
Bloomberg recently published an interesting article about the FTX mess and people’s financial losses. They use the five stages of grief that people commonly go through as a somewhat-accurate way of looking at this issue. The five states of grief are as follows:
We agree that there can be stages of dealing with financial loss although we remind ourselves and our readers that losing money is not the same as losing a loved one. Losing money is part of investing and investors need to have a plan, a mechanism for coping with crypto investment losses, losses in the stock market, real estate losses, and any other investment losses. Nevertheless, the Bloomberg article is an interesting read as they poke fun at pension funds and venture capitalists who are denying that they could have had any idea that FTX was in trouble. They note the self-righteous anger that many have expressed about the lack of regulation and requirements for the sorts of financial audits and transparency required of companies listed on the Nasdaq and NYSE. Our focus is on the practical things that an investor needs to do when they lose money.
Do Not Double Down on a Losing Bet
At Profitable Investing Tips we have preached for years that markets like the stock market, commodity futures markets, foreign currency markets, options markets, and now the crypto markets are not casinos even though when using an app like Robinhood that sometimes seems to be the case. When a bull market rally takes any asset up, the old saying is that a rising tide raises all ships. Stocks that really are not all that valuable go up along with the blue chips that are actually making more money and have increasing intrinsic value. This was true back in the days of the dot com bubble, the runup to the Financial Crisis, and as far back as the 1929 to 1932 crash that ushered in the Great Depression. When a market crashes there are reasons and until the reasons are resolved by intervention or simply with time, further investment in a falling asset is simply throwing good money after bad. Eventually markets hit bottom and those assets that have value and attract positive market sentiment will head back up when conditions warrant or when the market sees a turning point. The problem with doubling down on a losing investment where you lost three-fourths of its value (like Bitcoin in the last 13 months) is that you need to quadruple that investment’s value to make up the difference. That is unrealistic unless you have a plan.
What to Do with a Devalued Investment
Months ago we wrote about bear markets as keys to future wealth. When a bear market takes all stocks down with it the Warren Buffets of the world look at why a given stock has fallen in price. If the company has financial reserves to weather a recession and the wherewithal to make more money when the economy improves, these folks tend to wait until the market bottoms out and then buy great investments at substantial discounts to their long term value. This is an argument you hear from long-term Bitcoin enthusiasts who say they are waiting for the price to fall even more before buying. The key to situations where people make money by purchasing when prices are low is that they are buying stocks, property, or whatever that has been devalued by the market but actually has long term value based on earnings potential or some other factor. Figuring this part out in the crypto realm can be difficult.
Factors for Deciding about an Investment in Crypto
A real issue of concern today at a time when perhaps crypto has lost its way is that so many of the promises about cryptocurrencies have not worked out. Crypto has turned out not to be a hedge against inflation, an asset that trades independently from other investments like stocks, or a safe haven in times of social unrest and war. Where we find ourselves looking for value is in the uses of cryptocurrencies aside from speculation. We are thinking about DeFi, the Metaverse, and the blockchain itself. If that is the route you plan to take in trying to recoup your crypto losses you need to be looking at Ethereum which works in blockchain gaming, DeFi with smart contracts, and more, or folks like ImmutableX, Polygon and Flow who are moving into the blockchain gaming niche.
Profiting as a Crypto Asset Loses Ground
Options traders routinely make money as markets slide downward. One possibility for making money as your crypto assets lose ground might be to trade options on Ether or Bitcoin futures which trade on the CME. If you already have the skills needed to profitably trade options, this could be a viable route. If you have little or no knowledge of how options or futures work, this would be an even worse idea than doubling down on your losses.
Coping with Crypto Investment Losses – SlideShare Version