Coping with Cryptocurrency Losses and a Road to Recovery
The recent carnage across the crypto market led to abrupt double-digits losses; many assets losing 35–40% of their value in 24–48 hours. As a result, several people within the space, inexperienced, risk averse or otherwise, cashed out at a major loss or were forced to sell to cover margin calls in their trading portfolio.
Here are some strategies that I have adopted to deal with both temporary falls and permanent losses in this asset class. Some of these fall into the former category, and the latter for those who have lost all of their principal.
1) Accept the situation for what it is
I would break this down into three distinct categories here:
a) Crypto in your wallet that you own outright is down in value, but still active (and could recover): Assuming it is a major crypto that has a solid team behind it; robust utility; a limited supply, and has had a history of rebounding after major drops, then I would refer to this is a “temporary” loss. I use quotation marks here as this assume that the asset re-approaches/hits an all-time high (ATH) AND you continue holding the assets during this period; there is no guarantee that any given asset will return to their ATH.
b) You have permanently lost the funds due to margin calls, forcing you to liquidate your crypto assets to cover the losses.
c) It is an asset you still hold but it is now essentially worthless after a 100% drop. A recent, high-profile example of this is Terra (LUNA).
In regards the first scenario, there is still a opportunity for you to overcome losses and eventually obtain profits on your initial investment. For example, this would be the case for anyone who bought Bitcoin (BTC) at ~$20,000 in December 2017, to then have to wait another three years (give or take) to witness profits on that initial investment.
As per the second and third events, this is a bitter reality that needs to be acknowledged. The funds have (almost certainty) gone for good, and it is highly unlikely that you will be able to retrieve any of your principal investment.
2) Speak to a close friend, family member or counsellor about your grievances
This pertains to both financial and psychological wellbeing. Find someone that you can trust with discussing your situation; a person willing to hear you out, without judging you for your decisions.
There is at least one person or organisation in your life who cares about you; at the very least, prepared to offer you unconditional advice or guidance to help you overcome financial hardship. This could come in the form of free or paid services.
For the United States, I have come across this list for not-for-profit institution that may assist you:
— National Foundation for Credit Counseling
— Financial Counseling Association of America
— Cambridge Credit Counseling Corp.
For guidance with selecting a credit counsellor, this publication from the US Federal Trade Commission provides some recommendations here. Investopedia offers their insight into some of the best credit counselling services available (in the USA).
To clarify, please check their websites to see what services they provide for free and which ones require payment (if applicable). Moreover, read reviews about the quality of their services and any testimonials in favour of or against any providers. I strongly encourage this as I do not live in the USA, so I do not have experience with these entities, and am simply going off what I have read online.
For Australia, there are numerous government-funded sources available to residents, alongside paid consultations. Useful starting points are available here:
— National Debt Helpline
— Financial Counselling Australia
General information from the Australian Government pertaining to this matter is can be found here. State and territory governments within the country also would also have resources about this matter.
For the United Kingdom:
The state-funded National Health Service (NHS) has a dedicated section for counselling services: via the public system à https://www.nhs.uk/mental-health/talking-therapies-medicine-treatments/talking-therapies-and-counselling/counselling/
An overview of the numerous services available for people seeking counselling services is provided here.
3) Take time-out from the space
I took this recommendation from someone (do not remember from whom now) who had to overcome major losses from the stock market. In the end, I waited about 3–4 months before re-entering the crypto space, and decided to adopt dollar-cost averaging for a while as I gradually rebuilt by portfolio.
This is mostly for mental-health reasons. Spending vast amounts of time each week focused on cryptocurrencies (let alone any given activity) during a bull run can be mentally draining. Thus, for my overall wellbeing, I decided to put my participation in all of this on hiatus; an important decision when contemplating medium to long-term involvement in this space.
4) Rebuild at your pace
Once you fully recognise that the funds once had have dropped significantly or have disappeared outright, it is time to restart the building process. Prioritise having enough money to cover expenses, and paying off debt prior to reinvesting in this space.
As a side note, some people will mock my suggestion as being too risk-averse. Certain groups would say it would be best for crypto enthusiasts to continue investing after a massive loss to (at the very least) break even. I do not think this is wise whilst you are still weighed down (financially and/or mentally) by the loss. This is why I recommend stepping aside from this space and coming back into it when you are comfortable; a better long-term approach as opposed to continuously trying your luck and potentially quitting out of frustration and to stem the extra deficit.
5) Invest what you can genuinely afford to lose (in future)
I would consider this to be the golden rule when assigning funds to cryptocurrencies; a valuable lesson to adopt moving forward with any speculative investment. This is particularly important for people who have a small percentage of disposable income after miscellaneous expenses and other savings.
Two key questions to ask yourself:
— Will I have enough money to readily cover expenses if my investments go down to zero?
You should not be a position where you become heavily reliant on your crypto assets for financial independence, unless you have significant holdings and can comfortably rely on lending, staking or other types of interest. In reality, this applies to a small percentage of wallets, so it is imperative to have a backup plan and at least one form of reliable income, especially during these uncertain times around the world.
— How well could I mentally cope with the idea of losing this money?
Besides the financial impact, how will you cope psychologically with the loss? This leads me to my second point:
6) Do not invest in something that you do not understand
There are thousands of crypto assets out here, one heralded as a superior alternative of Bitcoin, Ethereum or another major altcoin by some obscure crypto commentator/influencer. However, the rational ones will thoroughly and objectively analyse these projects, consider use cases, teams behind the project, partnerships, etc.
Speaking from my personal experiences, I lost a significant amount of money from day-trading crypto during November and December 2017, having most of the funds evaporating in the space of 24 hours.
Whilst day trading can be a profitable strategy, this usually relies on having the experience, composure and expertise to properly deal with the extreme volatility and quick decision-making required to make this lucrative. The fundamental issue here is that I did not know what I was doing, and was simply riding the wave of beginners’ luck in the lead-up to the major crash just before Xmas 2017.
If you were to take the plunge and throw some money into crypto, then it should be a tiny amount that you can readily afford (and are willing) to lose.
7) Diversify, diversify, diversify
You would most likely know the old adage ‘Never put all of your eggs in one basket’. This is preached by many rational people who would refrain from going all in on a single stock, crypto or even asset class. Terra LUNA and UST are two fresh examples of how assets can nosedive in value in just a 24-to-48-hour period.
Notwithstanding the success stories disseminated on the Internet about certain individuals making massive fortunes from investing in a single company, the reality is there are many failed attempts to try and emulate this; in the latter, several people (perhaps the majority) would be embarrassed and reluctant to publicly share their story of an investment gone horribly wrong.
8) Have a clear plan to pay off your debts
This is notably the case for debts that attract higher interest rates. If you have a credit card or personal loan, aim to pay at least double or even triple the minimum repayments requested. Be conscious of your spending habits to help achieve these repayment goals.
In regards to mortgages, there are two broad schools-of-thought relating to this: Aspire to eliminate this debt ASAP vs assign funds to high-yield investments that outpace the mortgage percentage/monthly repayments and use part of that to cover your costs. To avoid going off topic, I will let you research and decide what method you would prefer to follow.
9) Boost your income
This could be as an additional job or a hobby that you can gradually monetise to boost your cash flow. Alternatively, seek another job that offers a higher wage/salary, which, will most likely be a more rewarding option by pushing your boundaries and increasing your productivity.
10) Set a budget
The additional income will only go so far without a clear strategy to effectively manage your money. Furthermore, when you are bouncing back from investment losses or the financial burden of several unexpected costs on short notice, having a clear budget is paramount. There are multiple resources out there to assist with budgeting for various expenses, or even to hit certain financial goals. One that comes to minds is provided by Ramsey Solutions, spearheaded by the American financial personality, Dave Ramsey.
Ironically, Ramsey dislikes cryptocurrency and similar high-risk investments. Nonetheless, I found his advice and set of financial tools useful overall, specifically when it came to paying off debts, budgeting and assigning money to different categories whilst finding my feet again.
11) Look at the bigger picture
Upon reflecting on previous losses, try to see things in perspective. Essentially, this involves adopting a humbler approach to the loss and telling yourself, “I am grateful for…”
— access to essential amenities (water, heating, electricity, Internet, etc.);
— a roof over my head and general safety;
— compassionate and caring friends, family, neighbours, etc;
— a reliable, legitimate and sufficient source of income;
— enough adequately nutritious food for sustenance.
I cannot comment for everyone here, and I acknowledge that not all of these apply to everyone on a consistent basis. However, the key messages here are to be humble and remain optimistic (or at least be hopeful) about the future, especially your personal circumstances. Having this empowerment to change your fate for the better will (to a varying degree) help you conquer the financial and mental pressures you face.
12) Think long-term and (re-)invest wisely
As you begin to improve your situation, focus on the assets that have stood the test of time; have a solid team spearheading the protocol; have forged an extensive number of meaningful partnerships (ideally with medium-to-large companies); a detailed, accurate and peer-review whitepaper; sufficient community engagement through social media; seeking ways to improve the protocol, etc.
13) Do Your Own Research (DYOR)
To be successful with investing, it is paramount to conduct comprehensive research about a given asset (class). This is not just as a one-off approach. Ultimately, it is imperative to remain in the loop as this space is highly dynamic and information gets old rather quickly in crypto. At the very least, you should keep on eye on major announcements; blockchain improvements/upgrades; collaboration and partnerships; macro trends such as global financial instability; network hacks, and much more.
Having an understanding of these variables will give you (at the very least) some insight into the medium-to-long term performance of an asset’s performance.
As part of DYOR, this involves critical thinking: Consider multiple points-of-view on a given topic, including those with contrarian news and individuals/companies that detest the cryptocurrencies. Additionally, never rely on just 1–2 people’s opinions and “research” on a given topic (myself included), regardless of how comprehensive and accurate it is. Any sensible crypto commentator will make it explicitly clear to DYOR prior to investing funds in a particular asset.
14) Maintaining a healthy lifestyle (as best as possible)
The stress associated with a major loss often leads us to neglecting our physical and mental health. It is important to address and implement the three key pillars of good health: a balanced diet, adequate amounts of physical activity and sufficient sleep.
Why am I covering these points in an article about recovering from crypto loses? Ultimately, you need to look after yourself to consistently function well at your work and to effectively deal with personal/family matters in general.
I speak from personal experience, reflecting on multiple occasions where counselling has played a pivotal role in overcoming different hardships at various points in my life. I recognise the value that these services play in assisting people dealing with a multitude of issues, to then lead a fulfilling life.
Making these mistakes in life about awry investments to poor decision-making in general can act as catalysts for positive change. Learn from previous errors and make calculated judgements to become wiser in dealing with future endeavours, particularly with financial management.
— The details contained within this article are predominantly my opinions interspersed with external information. None of this is financial advice. I am neither a financial advisor, nor a counsellor. Thus, I cannot speak for an individual circumstances (financial, psychological or otherwise).
— Please do your own due diligence, sufficient research and analysis before implementing anything I have covered here to see if this works for you.
P.S. I am aware that I have prioritised British English spelling here (as this is how most Australians are taught English) with occasional references to American English spelling where applicable. If this bothers you, consider the benefits of familiarising yourself with alternate forms of spelling across the Anglophone world.