Buckle Up: How Investors Can Deal With Crypto Turbulence

When Doug Milnes started buying cryptocurrencies in January of this year, he felt like it could become an entirely new asset class for investors.

Right now what it is making him feel is extremely unsettled.

The marketing executive from Summit, New Jersey, says his holdings, including a number of different cryptocurrencies like ethereum, are down around 60% from where he bought. What was 2% of his portfolio is now around 0.8% - making him wring his hands about whether to hold on, head for the exits, or buy the dip.

"Crypto has gone through a number of booms and busts over time, and it's hard to know if this time is different," Milnes says. "I don't know if my feelings are clouding my judgment. It's hard to feel confident about what to do next."

It has certainly been a harrowing year for crypto, and Milnes is not alone in trying to make sense of the plummeting charts. Total market capitalization of crypto assets has gone from almost $3 trillion in November 2021 to roughly $900 billion as of June 29, according to the tracker CoinMarketCap.

Meanwhile, bitcoin - the dominant cryptocurrency - fell from a high of more than $67,000 to its current level just below $20,000.

"Some people set up their portfolios in the euphoria of the last few years, without much thought about a bigger plan," said Christine Benz, director of personal finance for investment research firm Morningstar. Recent losses, she adds, are a good impetus to ask yourself some questions, including how much risk can you take and what kind of losses can you withstand?

"If you didn't go through that process on the front end, it's worth thinking through now," Benz said.

Of course, crypto is hardly alone in flying through heavy 2022 turbulence. The stock markets officially dipped into bear territory earlier in June - the S&P 500 is down more than 19% year-to-date as of Wednesday, and the Nasdaq is down more than 28% over that time frame.

The unique nature of crypto has skeptics likening any moves now to "closing the barn door after the horse has bolted," said Peter Palion, president of Master Plan Advisory in East Norwich, New York. "Except on further thought, a horse is a real thing with a real value, and crypto - as John Paulson famously said - is a limited supply of nothing."

No matter what your personal stance on crypto, the key to handling extreme market moves is having a plan in place, so you do not act out of pure panic. A few tips from the experts:

REEVALUATE YOUR RISK TOLERANCE

If this year's crypto swoon has made you realize you are not equipped to handle such swings, then do not assume even more risk.

After all, just because there have been heavy losses, that does not rule out more losses to come. "If you find yourself unduly rattled, maybe you're not a good candidate for holding that asset class," said Benz. "There's no shame in that."

WRITE OFF LOSSES

It may seem like cold comfort, but if you have lost value in crypto transactions, you can write off a certain amount come April 15.

"For clients who have a large position in crypto we recommend using this time to tax loss harvest," said Kevin Lum, founder and CEO of Foundry Financial in Los Angeles.

Losses function the same as they would for equities, Lum said. If your losses exceed your total capital gains for the year, you can deduct up to $3,000 against your ordinary income. "Losses beyond $3,000 can be carried forward until death to offset future gains."

LIMIT PORTFOLIO ALLOCATION

As with any more speculative investment, it is wise to keep it to a certain percentage of your holdings - a particular "bucket" that will not swamp the rest of your portfolio.

"A good framework is to set an upper threshold," said Benz. "Think of all your speculative assets in totality, and give them a 5% or 10% position in your portfolio - whether crypto, or precious metals, or microcap companies, or anything else."

For example, even though Doug Milnes' crypto portfolio has been savaged, it is not like he bet his entire future on it.

"There is a lot of uncertainty about what to do next, but at least I'm not worried about my retirement," he said. "My advice to other crypto investors would be, don't put all your eggs in one basket."