How to protect your cryptocurrencies from market downturns

Source: CritpoTendencia
Original Title: How to Protect Your Cryptocurrencies from Market Crashes
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The cryptocurrency market has been characterized since its inception by extreme volatility that can generate both opportunities and devastating losses.

Throughout its short but intense history, we have witnessed brutal crashes that have wiped out billions of dollars in capitalization and left millions of investors with significant losses. However, each crisis offers valuable lessons that, while they do not guarantee immunity from future collapses, do allow for the construction of more robust strategies to protect wealth.

The 2018 Crash and the Myth of Diversification

After the historic rally at the end of 2017 that took Bitcoin up to $20,000, the market entered a downward spiral in 2018 that lasted the entire year. Bitcoin fell to $3,000, losing over 80% of its value, while many altcoins virtually disappeared.

The drop was not caused by a specific event, but by a combination of factors: the end of the speculative cycle, the crypto ad ban by Google and Facebook, and increasing regulatory pressure.

The most important lesson from 2018 is that diversification within the crypto universe does not offer real protection during widespread declines. Practically all digital assets fell in parallel, following Bitcoin’s trend.

Investors who thought they were diversified by holding ten different altcoins discovered that, in reality, all their assets were correlated. True diversification means having exposure to uncorrelated asset classes outside of the crypto ecosystem.

New Risks: The Case of Crypto Casinos

The growth of the blockchain ecosystem has given rise to new applications that go beyond simple value exchange and storage. A notable example is the proliferation of gambling platforms that operate exclusively with cryptocurrencies.

These crypto casinos perfectly illustrate several risks faced by investors. First, the volatility of the asset being used: winning in a crypto casino during a bear market can mean ending up with less real value than when you started.

Additionally, many of these platforms operate without clear regulation, increasing the risk of fraud or sudden disappearance. Custody risk is also ever-present: depositing funds in a crypto casino means trusting that the platform will keep those assets safe and available. This reality reminds us that the crypto ecosystem, while innovative, is filled with services where trust can break down quickly.

Terra/LUNA: When Math Is Not Enough

In May 2022, the Terra ecosystem collapsed in a matter of days, wiping out over $40 billion in value. UST, its algorithmic stablecoin supposedly pegged to the dollar, lost its peg and triggered a death spiral that dragged LUNA, the protocol’s native token, from over $80 to practically zero.

The UST model relied on a theoretical arbitrage mechanism that proved insufficient in the face of a massive crisis of confidence. In addition, the Anchor protocol offered 20% annual yields on UST deposits, an unsustainable promise that attracted capital but also created a single point of systemic failure.

The lesson from Terra is twofold: first, not all stablecoins offer the same security; stablecoins backed by real assets like USDC or USDT are structurally more robust than algorithmic ones.

Second, any promise of extraordinary guaranteed returns should be viewed with extreme caution. In finance, there are no free lunches, and abnormally high yields usually hide extraordinary risks.

FTX: The Betrayal No One Expected

Just six months after the Terra disaster, the crypto world suffered another devastating blow: the fall of FTX, one of the largest and seemingly most trustworthy exchanges in the sector.

In November 2022, a journalistic investigation revealed that Alameda Research, FTX’s sister quantitative fund, had more than $14 billion in FTT tokens, the exchange’s native asset, on its balance sheet.

This revelation uncovered a web of mismanagement, conflicts of interest, and, according to subsequent allegations, outright fraud. Sam Bankman-Fried, founder of FTX and a prominent figure in the sector, had used client funds to cover Alameda Research’s losses. When clients rushed to withdraw their funds, FTX could not meet the demand and declared bankruptcy.

Investors lost billions, and Bankman-Fried himself was sentenced in 2024 to 25 years in prison on multiple counts of fraud.

The FTX case offers multiple critical lessons: the counterparty risk when depositing cryptocurrencies on an exchange, the importance of corporate governance (FTX had only two members on its board of directors and kept chaotic accounting records), the illusion of institutional backing (it had raised hundreds of millions from prestigious venture capital funds) and, above all, the ongoing relevance of the mantra “not your keys, not your coins.” Keeping cryptocurrencies on exchanges for long periods exposes you to unnecessary risks.

Practical Strategies to Protect Your Assets

Learning from these historical lessons, investors can implement concrete strategies to better protect their wealth. Real diversification is fundamental: including traditional assets like stocks, bonds, and real estate in the portfolio reduces exposure to crypto risk.

A portfolio that is 100% cryptocurrencies is completely exposed to the sector’s violent cycles. Self-custody for the long term, using hardware wallets to store cryptocurrencies that are not planned to be actively traded, eliminates the counterparty risk associated with exchanges. This requires responsibility in handling private keys, but it is the only real way to own cryptocurrencies.

Skepticism toward extraordinary promises is essential: guaranteed 20% annual yields, tokens that “can only go up,” or platforms that seem too good to be true usually hide structural problems or outright fraud.

Setting limits and periodically rebalancing helps prevent exposure from growing uncontrollably during rallies and maintains discipline during downturns.

Equally important is having a pre-decided action plan for bear markets, which avoids emotional decisions during crises.

Finally, ongoing education is essential: truly understanding the projects you invest in, following reliable information sources, and maintaining a critical attitude are essential in an ecosystem where innovation coexists with fraud.

Conclusion

Cryptocurrency market crashes are not occasional anomalies, but rather recurring features of a young, speculative, and constantly evolving sector.

The 2018 crash taught us that the correlation between crypto assets is very high during crises. Terra/LUNA showed that even seemingly sophisticated mechanisms can collapse if their foundations are weak.

FTX reminded us that blind trust in centralized platforms, regardless of their apparent prestige, is dangerous. Protecting assets in this environment requires a multidimensional approach: real diversification beyond crypto, self-custody when possible, skepticism toward extraordinary promises, emotional discipline, and constant education.

There is no strategy that completely eliminates risk, but understanding the lessons of the past allows for building stronger defenses against future crashes.