Crypto-liquidation is the process of selling off your cryptocurrency holdings during a market crash. It’s similar to trading liquidation, which involves taking a loss on your position in order to reduce risk exposure, but with crypto, you’re effectively locking in losses while they are still small.
Bitcoin and other major cryptocurrencies have been seeing double-digit losses over the past week. The majority of investors have taken a loss on these positions, but what if you could save further pain and reduce risk exposure by selling off now?
If your investment thesis relies on Bitcoin or another cryptocurrency hitting certain price levels in the future — due to an upcoming main net launch, for example — then you should not consider liquidating your position anytime soon. If you bought in for speculative purposes, however, then there are probably much better gains you could make by going into a different trade.
That said, panic selling is rarely advantageous for investors and crypto-liquidation should only be considered once everything else has failed. The market tends to rebound after sharp declines like these, so if you have a position that can withstand some further downside you should try to ride out the storm.
On the other hand, if you’re in a highly leveraged short play and your risk tolerance is relatively low (this applies to both longs and shorts) then liquidating now may be the best thing for your overall portfolio health.
Remember that liquidating doesn’t necessarily mean you have to sell your entire position. You could also use a technique called dollar-cost averaging or DCA, which involves selling smaller amounts at predetermined intervals and then re-investing the proceeds into fresh units of the asset.
When Liquidation of Your Crypto Assets is Necessary
Liquidating your cryptocurrency holdings in the present environment isn’t an easy decision when you invest with The News Spy. It’s similar to closing out of a profitable trade at an inopportune time, which is often referred to as “selling into strength”. To do so means missing out on additional gains, but it can also be the right decision if you see a major reversal coming.
In other words, crypto-liquidation is often the right move if you missed out on the initial rally or if you think that another round of selling will push prices to new lows. If you see an altcoin’s price has dropped 90% from its all-time high and it still seems over-valued then taking a loss may be the right approach.
As mentioned above, you don’t necessarily have to sell all your holdings. Instead, you can dollar-cost average or DCA down by selling off portions of your position every week over a period of several months. This is one way to reduce risk and lock in profits at the same time if the price action reverses.
Even if you decide to dollar-cost average your holdings, however, note that there’s a risk that price could fall into an even deeper abyss. And under these conditions, you might have to liquidate the entire position. That said, do not panic sell and instead, take some time to think about your next move.
If you choose to sell off your position at current prices and the price recovers shortly thereafter then you can always buy back in. But there’s no guarantee it will rebound anytime soon, which is why patience at this point may pay off.
The key is not to be emotional or impulsive when it comes to liquidating your cryptocurrency holdings. Take a deep breath and ask yourself if you are selling your position because of short-term market factors or fundamental developments. Of course, the answer may be both in some cases.
If you have a long-term investment strategy for cryptocurrency and think you will hold it without liquidation for at least three to six months then take your time and wait for the price action to improve, otherwise, you may want to liquidate the position.
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