Doug Milnes began investing in cryptocurrencies in January of this year because he thought they would develop into a brand-new asset class for investors.
His current reaction to it is one of profound unease.
The marketing executive from Summit, New Jersey, claims that his investments, which include a variety of cryptocurrencies like Ethereum, have decreased by about 60% since he first purchased them. Previously making up 2 percent of his portfolio, it now makes up approximately 0.8 percent, leaving him torn between whether to hang on, sell, or buy the dip.
Crypto has experienced several booms and busts over the years, so it’s difficult to determine whether this time is any different, according to Milnes. “I’m not sure if my emotions are impairing my judgement. It’s challenging to have faith in your next move.
Milnes is not the only person attempting to make sense of the charts’ precipitous decline; it has undoubtedly been a terrifying year for cryptocurrency. According to the tracker CoinMarketCap, the market capitalization of all crypto assets has increased from approximately $3 trillion in November 2021 to roughly $900 billion as of June 29.
Bitcoin, the most popular cryptocurrency, dropped from a peak of over $67,000 to its present level of slightly under $20,000.
According to Christine Benz, director of personal finance at financial research firm Morningstar, “some people built up their portfolios in the euphoria of the last few years, without much thought about a wider plan.” Recent losses, she continues, are an excellent reason to reflect on your risk tolerance and your tolerance for different kinds of losses.
“It’s worth thinking through now if you didn’t go through that process on the front end,” Benz added.
Of course, crypto is far from the only aircraft experiencing severe turbulence in 2022. The Nasdaq (.IXIC) is down more than 28 percent year to date, and the S&P 500 (.SPX) is down more than 19 percent. As of Wednesday, the stock markets had officially entered bear territory.
Skeptics compare any actions taken right away to “locking the barn door after the horse has bolted” because of the special features of crypto, according to Peter Pavilion, president of Master Plan Advisory in East Norwich, New York. A horse is a real object with a real value, in contrast to cryptocurrency, which, as John Paulson famously put it, is a finite quantity of nothing.
Whatever your personal opinion about cryptocurrency, having a plan in place can help you handle extreme market movements and prevent you from acting in haste. Expert advice in the form of:
REEVALUATE YOUR TOLERANCE FOR RISK
Do not take on additional risk if this year’s crypto crash has made you understand that you are ill-prepared to withstand such fluctuations.
After all, just because there have been significant losses, it does not always follow that there won’t be any more. “Maybe you’re not a good choice for holding that asset class,” said Benz. “If you find yourself too rattled.” There’s nothing wrong with that,
You can write off a set amount starting on April 15 if you lost money in cryptocurrency transactions, which may sound like a chilly consolation.
Kevin Lum, founder and CEO of Foundry Financial in Los Angeles, said: “For clients who have a big position in crypto, we propose taking this time to tax loss harvest.”
Losses operate in the same way as they would for stocks, according to Lum. You may deduct up to $3,000 from your ordinary income if your losses are greater than your capital gains for the year. Losses over $3,000 may be carried over until death in order to balance off future gains.
STRICTLY LIMIT PORTFOLIO ALLOCATION
As with any more speculative investment, it is advisable to limit it to a single “bucket” that won’t overwhelm the rest of your portfolio, or a fixed proportion of your total holdings.
Setting an upper boundary is a good structure, according to Benz. Give all of your speculative assets, including cryptocurrency, precious metals, microcap firms, and everything else, a 5 percent or 10 percent position in your portfolio.
For instance, even though Doug Milnes’ cryptocurrency holdings have taken a beating, it is not as though he has staked his entire future on them.