How to protect your cryptocurrencies from market downturns

Source: CritpoTendencia Original Title: How to protect your cryptocurrencies from market crashes Original Link: The cryptocurrency market has been characterized since its inception by extreme volatility, which 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 not guaranteeing immunity from future collapses, do allow for the construction of more solid strategies to protect your wealth.

The 2018 crash and the myth of diversification

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

The decline was not caused by a single event but by a combination of factors: the end of the speculative cycle, the ban on crypto advertising 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 broad market crashes. Virtually 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 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 exchange and value storage. A notable example is the proliferation of gaming platforms that operate exclusively with cryptocurrencies.

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

In addition, many of these platforms operate without clear regulation, increasing the risk of fraud or sudden disappearance. Custody risk also remains 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 plagued with services where trust can be quickly broken.

Terra/LUNA: when math is not enough

In May 2022, the Terra ecosystem collapsed in a matter of days, wiping out more than $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 virtually 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.

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

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

FTX: the betrayal no one expected

Barely six months after the Terra disaster, the crypto world suffered another devastating blow: the collapse of FTX, one of the sector’s largest and apparently most reliable exchanges.

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 charges, outright fraud. Sam Bankman-Fried, founder of FTX and a prominent industry figure, had used customer funds to cover Alameda Research’s losses. When customers rushed to withdraw their funds, FTX could not meet the demand and filed for bankruptcy.

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

The FTX case offers multiple critical lessons: 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 validity 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 key: including traditional assets like stocks, bonds, and real estate in the portfolio reduces crypto risk exposure.

A portfolio 100% in cryptocurrencies is completely exposed to the sector’s violent cycles. Self-custody for the long term, using hardware wallets to store cryptocurrencies not intended for active trading, 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 towards extraordinary promises is essential: guaranteed 20% annual returns, tokens that “can only go up,” or platforms that seem too good to be true often hide structural problems or outright fraud.

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

Equally important is having a pre-planned strategy for bear markets, which prevents emotional decisions during crises.

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

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

The 2018 crash taught that correlation between crypto assets is very high during crises. Terra/LUNA showed that even apparently sophisticated mechanisms can collapse if their fundamentals 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 towards extraordinary promises, emotional discipline, and constant education.

There is no strategy that completely eliminates risk, but understanding the lessons of the past allows you to build stronger defenses against future collapses.