Crashes are just part of the game when investing in crypto. Whether you’re a seasoned trader watching the eth/btc trading pair or a newbie trying to understand the ins and outs of the market, there’s no way you can escape these market crashes. You just have to learn why they occur, and the steps to take to protect both your finances and your mental health. First, it’s important to clarify that not every price decline represents a true crash, just as not all crashes are equally severe.
A crypto crash is a sudden decline in the market value of cryptocurrencies within a short timeframe (hours or days), intensified by the 24/7 nature of the market and the lack of traditional circuit breakers common in stock exchanges. As opposed to standard corrections, crypto crashes are characterized by:
- Mass liquidation of leveraged positions;
- System-wide asset price collapses;
- Sharp increase in volatility indexes;
- Spike in Google search trends for “crypto crash”.
As for the psychological experience of a crypto crash, investors feel fear, uncertainty, and pressure to act irrationally.
Different Types Of Crypto Crashes
Crypto crashes vary in magnitude, as well as in mechanics, investor response requirements, and recovery potential, which means that in order to ensure you are neither under-preparing nor overreacting, it’s imperative to recognize the type of crash:
- Flash Crashes: These can last from minutes to a few hours and are generally triggered by API glitches, liquidation cascades, or abrupt sell orders. For example, on May 19, 2021, Bitcoin fell by more than 30% in just a few hours after the China regulatory scare and mass liquidations, but within two weeks it recovered 50% of the loss. In this type of crash, the advice is to do nothing initially, since there’s often a self-correction, and panic selling could lead to missing the rebound.
- Extended Bear Market Legs: The causes of this type of crash include broader macroeconomic conditions and a loss of institutional confidence, and it can last months to years. For example, the 2018 bear market lasted about 38 months, and the impact on altcoins such as Ethereum was significant, as the asset dropped 94% from its all-time high. The recommended strategy for this type of crypto crash is to reassess asset fundamentals: while HODLing may be appropriate for high-quality positions, it’s important to reduce exposure to riskier altcoins.
- Black Swan Events: Unforeseen, catastrophic failures in major exchanges and protocols can cause this type of crypto crash, with the FTX Collapse and the Terra/LUNA crash being good examples. Supposed fundamentals are unrecoverable, meaning investors should exit their exposure to the compromised ecosystem and prioritize self-custody over centralized platforms.
- DeFi-Specific Crashes: These happen due to unsustainable yield farming, smart contract bugs, liquidity draining, or oracle manipulation. The recommended strategy is to revoke smart contract permissions as soon as possible using tools such as revoke.cash, and not rely on DeFi protocols that promise APYs without an audit history or transparency.
Crash-Resistant Investing: Essential Practices to Consider
Emotional discipline isn’t enough to mitigate losses in a crypto crash. You need structured portfolio management. You need to apply effective strategies that will help ensure you are well-equipped for what lies ahead. Let’s explore them below in detail:
- Position Sizing and Allocation Framework. As a general rule, no single crypto asset should surpass 5-10% of your overall investment portfolio, which is critical, particularly if altcoins drop 90% or more during market drawdowns. A simplified framework would involve allocating 50% to established assets such as BTC and ETH, 30% to fundamentally sound altcoins such as SOL, and 20% to speculative tokens or experimental categories to balance conviction with risk.
- Stop-Loss Orders. Stop losses enable automation of selling when prices drop to predefined levels, decreasing emotional decision-making and capping downside losses. The general rule is to set stop-losses at 10-15% below the entry for a conservative approach, 20-25% for a moderate approach, and 30-35% for an aggressive approach.
- Rebalance Toward Stability. During crypto market crashes, it’s imperative to shift toward capital-preserving assets. This means reallocating into Bitcoin and Ethereum, as they have the strongest institutional adoption and deepest liquidity, and as a result, they are the first to recover and fall less during downturns.
- Diversify Intelligently. Ever heard that “diversification is the golden rule of crypto?” There’s a reason this is repeatedly mentioned in the crypto space: it can be a life-saving strategy during turbulent market times. But it’s not about owning 20 altcoins: true diversification means spreading risk across sectors, asset classes, and chains. You want to make sure that you don’t make common diversification errors, such as incorporating 10 assets of the same category (meme coins or all DeFi), or overexposure to uncorrelated assets that are equally risky.
- Build A Safety Net. A crash-resistant portfolio is one that allows you to avoid forced selling by incorporating liquidity buffers. These buffers include two primary categories: emergency cash reserves and strategic allocation of stablecoins. As a general rule, you should maintain 3 to 6 months of living expenses in traditional fiat accounts because it will help safeguard against external stressors, and in case an unforeseen expense arises, it will help avoid the need to liquidate crypto holdings at a loss. An essential capital allocation principle (which has actually become a mantra in the crypto world) is to never invest capital that you may need within 12-24 months, including emergency medical expenses, rent or mortgage funds, credit card debt, and retirement savings.
Concluding Remarks
Surviving a crypto crash may seem impossible, but it’s not, as long as you rely on structure rather than instinct (unfortunately, it’s a common mistake investors make). You need to pause, check the facts, secure your accounts, and take action only after documenting everything. Once you know what type of crash you’re dealing with, it’s imperative to follow pre-established rules on how much risk you can take, where you can exit, and how to rebalance, with every downturn becoming relevant data to refine your strategy (rather than a reason to act out of strong emotions). Remember: crashes will never stop coming in the crypto world, but disciplined investors view them as part of the cycle, and not the end of it.
