No one can foresee market-shaking events like those of the last few weeks. However, even in such situations it is possible to keep capital losses to a minimum - or even to make profits - and to stay calm accordingly.
In this article, we'll give you the 3 best tips to protect your portfolio from the next crypto crash - plus, you'll also learn how to get a regular passive income on your cryptocurrencies regardless of the market situation!
Tip #1: Build a diversified portfolio
The first tip may sound a bit trivial, but a large part of crypto investors do not follow it: Never put all your eggs in one basket!
It is always important to have a mix of asset classes in your portfolio that have little to no correlation with each other. This way, you minimize your risk, as the different assets move independently of each other – for example, if the crypto market falls, this happens decoupled from the gold market, or the stock market, which can stay the same or even rise.
So your overall portfolio value doesn't decrease as much as if you were only invested in cryptocurrencies – diversification has a kind of cushioning, dampening effect on your portfolio should individual sectors start to weaken.
Of course, not only should you look for low correlation, but your investment should first and foremost be chosen wisely and offer a long-term prospect of appreciation.
With a good portfolio strategy, it is therefore possible to spread your risk and to enter into very promising, but also high-risk investments such as cryptocurrencies with a clear mind.
The following is a list of the different asset classes that can be invested in:
- Stocks & ETFs (almost a must)
- Precious metals
- Real estate
- Cash and cash equivalents (call money, savings deposits)
- Alternative tangible assets (art, jewelry, classic cars, etc.)
Important: For a diversified investment portfolio, it is not a must to have all possible asset classes in the portfolio - two or three are usually quite sufficient to build a diversified and safe portfolio. For example, a well-diversified portfolio could consist of stocks & ETFs (50%), real estate (30%) and cryptocurrencies (20%). Quite a few other combinations are also possible. However, the most important thing, as mentioned above, is to understand what you are investing in and what the implications – both positive and negative – may be. Then nothing stands in the way of healthy diversification.
Now the only question is which services and platforms you can use to invest in the different asset classes.
Depending on the investment, there are of course different ways and providers, but platforms such as eToro have combined several asset classes on one platform. For stocks, it's also worth taking a look at Interactive Brokers or the German company TradeRepublic. It will also soon be possible to buy stocks, commodities and indices on Cake DeFi, a platform dedicated to 'decentralized finance', through which you can receive a passive income on your cryptocurrencies.
Tip #2: HODL or buy in the event of a price setback
Hardly anything is worse than selling an investment solely because the price has fallen since you bought it.
If the facts change – meaning if you have a specific reason, for example, because it becomes apparent that something is wrong with an individual stock (Wirecard), then you should change your mind or sell, even if this means accepting a loss.
However, if the facts do not change, and only the price has developed into the negative - for example, also due to a previous strong increase - this is completely normal market behavior and you should not change your opinion, so continue to hold or even buy the weakness.
Think about it: If you have invested before, really understood the investment and believed in it for the long term, why should you change your mind because of a temporary price setback? That would make no sense and is also fundamentally contrary to what financial experts advise. Consequently, it would be wise to take a different point of view and rather see price setbacks of solid assets as an opportunity to further increase one's own position.
Even if intuition should speak against it, try not to panic, and hold for the long term. Or as it is called in crypto slang: just keep HODLing.
Tip #3: Cash flow is king! That's how you keep earning.
Here's a question for you: Who is the biggest and most famous star investor you can think of right now?
And, have you thought of Warren Buffet? There's a reason the self-made billionaire is so popular in the investment scene, as he has generated incredible returns over decades.
Did you know that Warren Buffett doesn't invest in anything that doesn't generate cash flow? Cash flow represents any form of income -- be it dividends, or rental income -- that is recurring because of a one-time investment.
This is also the reason why Warren Buffett is such a strong critic of gold or cryptocurrencies like Bitcoin, because they do not generate cash flow on a regular basis and therefore cannot be easily valued according to Buffett's method, or are even practically worthless as an investment in Warren Buffett's eyes.
Now, with gold or Bitcoin, Buffet has got it pretty wrong here, because these assets have risen consistently in the last years and decades.
Still, he has a valid point: It's difficult to value something that doesn't generate cash flow. It's even harder then, in times of falling prices, to stay calm and just keep holding (tip #2).
Cake DeFi solves this problem by offering you up to 8% cashflow on your cryptocurrencies with its virtually risk-free lending product and even up to 100% cashflow with its other curated products. Thus, you will receive your earnings every week, regardless of which direction the market is moving!
Conclusion: This is how you protect your portfolio from the red
Probably the most important rule and our No. 1 tip is to diversify your portfolio well. If you implement this point properly, you will be able to weather even difficult market situations and get off lightly.
If it does come to a major setback, then the motto is: If there is no specific reason for you to change your mind, then it is advisable first of all to make well-considered decisions and possibly even do nothing and simply wait. Setbacks are normal in any market and are part of the game. Therefore, they should not cause you any concern.
If you do get anxious, it's probably because your investments don't give you cash flow and are therefore difficult to value. Cake DeFi solves this problem for you by offering you up to 100% cash flow on your cryptocurrencies such as Bitcoin, Ethereum or Tether. Why not give it a try and secure your $20 USD signup bonus right now!