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 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 market 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 development of stronger strategies to protect wealth.

The 2018 crash and false diversification

After the historic rally at the end of 2017 that pushed Bitcoin to $20,000, the market entered 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 virtually disappeared.

The decline was not caused by a specific event but by a combination of factors: the end of the speculative cycle, the banning of 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 widespread declines. 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 involves exposure to uncorrelated asset classes outside the crypto ecosystem.

New risks: the case of crypto casinos

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

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

Additionally, 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, although innovative, is riddled with services where trust can quickly break down.

Terra/LUNA: when mathematics are not enough

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

The UST model depended on a theoretical arbitrage mechanism that proved insufficient during a massive trust crisis. Moreover, 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 often 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 reliable exchanges in the sector.

In November 2022, investigative journalism revealed that Alameda Research, FTX’s sister quantitative fund, held over $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 accusations, direct fraud. Sam Bankman-Fried, founder of FTX and a prominent figure in the sector, had used customer funds to cover Alameda Research losses. When customers rushed to withdraw their funds, FTX could not fulfill and filed for bankruptcy.

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

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 and kept chaotic accounting records), the illusion of institutional backing (had raised hundreds of millions from prestigious venture capital funds), and most importantly, the validity of the mantra “not your keys, not your coins.” Holding cryptocurrencies on exchanges for long periods exposes to unnecessary risks.

Practical strategies to protect your assets

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

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

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

Setting limits and periodically rebalancing helps prevent uncontrolled exposure during rallies and maintain discipline during downturns.

Equally important is having a pre-decided plan of action in bear markets, which prevents emotional decisions during crises.

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

Conclusion

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

The 2018 crash taught that correlation among crypto assets is very high during crises. Terra/LUNA demonstrated that even seemingly 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: true diversification beyond crypto, self-custody when possible, skepticism toward extraordinary promises, emotional discipline, and ongoing education.

There is no strategy that completely eliminates risk, but understanding past lessons allows for building more robust defenses against future collapses.