How to Handle a Bitcoin Crash

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  • Making the most of a Bitcoin crash can be a life-changing opportunity
  • Not every Bitcoin crash is worth buying into however
  • How can you assess a Bitcoin crash to see whether you should be buying into it or not?

Warren Buffett is famous for saying ‘buy when there’s blood in the streets’, while other similar sayings exist about buying into fear and selling into hype. As we saw in March 2020, a Bitcoin crash can present life-changing opportunities – if they are handled right. When the next inevitable Bitcoin crash occurs, consider these factors before deciding when, or if, you should jump in.

Have Fundamentals Changed?

The first thing to do after a Bitcoin crash is to find out the reason behind it – primarily, was it caused by a change in its fundamental proposition? This would be the equivalent of a critical bug in the code, a hack of the Bitcoin blockchain, or some other massive issue that puts its very existence under threat. 99% of the time however the problem will be either short term or even fictional (see FUD) and the price will soon return to where it was, providing the conditions below are met.

If you are sure that whatever has caused the crash represents the death of Bitcoin then you should stay out of the markets, otherwise we move onto the next consideration.

Where is Bitcoin in its Market Cycle?

If Bitcoin is in the early or middle stages of a bull market (e.g. June 2020-today) then the price has a good chance of recovering relatively quickly. If however it is between the very tail end of a bull market and the last third of a bear market (e.g. December 2017-March 2020), then the recovery could take longer.

Whether you buy in situations such as these depends on whether you are prepared to weather a potential storm and how long you are prepared to wait to get your money back.

Is the Dip Over?

This is a more technical calculation to make, and one that won’t often become clear until after the fact. Judging the bottom of a Bitcoin crash while it is ongoing is a very difficult skill that even experienced traders mistime, but bottoms are typically characterized by long wicks where the body of the candle is shorter than the wick and is located in the upper portion of the candle:

bottoming candle

Seeing a candle like this isn’t a guarantee that the bottom is in, but it can be a good indicator that buyers have outstripped sellers after the crash.

Learn to Love a Bitcoin Crash!

Bitcoin crashes are a great opportunity to buy more bitcoin, but only when the conditions above are right. You will rarely, if ever, catch the bottom of a Bitcoin crash (the odds are the same as selling the top), and there is every chance that the price could continue further down after you buy, but following the guide above will ensure that you have more of a chance than others in making the most out of a Bitcoin crash.