3 Strategies to Improve Your Liquidity and Ride Out the Crypto Downturn

For the average crypto investor, that presents a problem. Although the right move is undoubtedly to ride out the crash and wait for prices to recover, not everyone has the luxury of shrugging off losses like these. For some, the crash is creating a liquidity crisis — leaving them with bills to pay and nothing but devalued assets to sell. And when you need money now, knowing that your investments should recover within six months is cold comfort.

For people in that situation, there are a few good strategies that should help get them back on firmer financial footing. Each comes with its own strengths and weaknesses, but all offer a path to get from here to brighter financial days ahead. Here’s an overview of the three best ways for crypto investors to respond to the current situation if they need to improve their liquidity right now.

Look For a Break-Even Exit

The first — and simplest — way to improve liquidity amidst the crypto crash is to sell off crypto assets to raise cash. But panic selling is always a bad idea, and will almost always leave you worse off in the long run. Instead, you should go back through your crypto purchases to see what your entry prices were when you bought in.

It’s important to remember that Bitcoin — the bellwether cryptocurrency — dipped to its current value as recently as July of 2021. That means most investors likely purchased some of their assets at a time when it was worth roughly what it is now. If that applies to you, you should total up the amount of crypto you purchased at a similar price point, and use that as a starting place to divest.

With some luck, you’ll be able to sell off enough of your portfolio to meet your current liquidity needs. And if you’re careful, you’ll be doing it without taking any real loss at all.

Important:

If you’re planning to sell off crypto assets at a break-even point, make sure to take gas fees into account. You’ll want to consider what you paid in fees when you bought the assets as well as what you’ll pay now. Since cryptocurrencies like Ethereum went through a massive spike in gas fees not long ago, the difference could affect your decision of which assets to sell.

Take the Opportunity to Tax-Loss Harvest

Sometimes, a market correction — or even a crash — can have a silver lining. In this case, the present conditions might be giving you a golden opportunity to execute a tax-loss harvesting strategy that could wipe out your capital gains tax for the rest of the year. To exploit it, you’ll just need to figure a few things out first.

If you want to figure out the optimum tax loss for your situation, the first thing you should do is calculate your total capital gains for the year to date. If you end up with an amount that’s over the capital gains allowance, you now know how much of a loss you can afford. It may also be helpful to look at an average of your previous years’ returns to make a gains forecast for the rest of the year.

Because you can write off investment losses to offset your gains, you will be able to determine an amount of crypto you can sell off to realize enough losses to wipe out your tax bill. Doing this is the equivalent of loaning yourself the money you’d have otherwise had to pay in capital gains taxes for the year. Depending on your situation, you may be able to raise enough money this way to buy the time you need to wait for a market recovery.

Note:

It’s important to remember that you can deduct losses for up to four years from when they occur. So, if your immediate needs amount to more than your estimated capital gains for the year, don’t fret. You can safely take losses equivalent to up to four times your average yearly capital gains tax and spread the deduction over the following three years.

Reallocate Assets Into Dividend-Producing Crypto

If you’re in a position that you can hold out for a short while for a cash infusion, you may wish to reallocate a portion of your underperforming assets into dividend-producing crypto vehicles. Today, there are countless DeFi projects aimed at providing investors with passive income, and they could be just what you need to right your financial ship.

One example of this in action is Axion. It’s a staking ecosystem designed with income investors in mind. You can swap your underperforming crypto for the platform’s tokens and then stake them in exchange for reliable returns. If you combine this strategy with some break-even selling, you might even be able to create all of the ongoing income you need to wait out the market correction no matter how long it takes.

What makes this an excellent strategy is that it can provide a valuable hedge against market volatility. This is because projects like Axion contain unique tokenomics designed to create stability. And because you’ll end up with a minimum dividend that’s a percentage of your total stake, whatever price fluctuations affect the token won’t matter much to your personal bottom line.

But there are other options to choose from, too. Depending on your income needs, you can create a dividend-producing portfolio using a mix of the available options to maintain diversification. You can also agree to different staking periods to give you the ability to shift your holdings back into traditional cryptocurrencies if the market begins to recover sooner than you expect.

The Takeaway

If you’re a crypto investor worried that the recent price crash may threaten your ability to make ends meet, you should take some comfort in knowing that you have options. Of course, nobody wants to be in a position that forces them to take losses. But depending on the nature of your holdings, you may not have to do that at all if you’re careful.

And even if some losses are inevitable, you can always find ways to turn those to your advantage. The point is — all is not lost. By plotting a careful strategy to meet your immediate needs, you may even end up in a better long-term position financially. If nothing else, you’ll get through the difficult but necessary process of rebalancing your portfolio to reflect your risk tolerance. And that’s the best way to avoid ever having to end up in this unenviable position ever again.