Extreme volatility in the crypto market always strikes unexpectedly. While it’s rare for BTC or ETH to plummet more than 20% in a single day, when it does happen, it’s the ultimate test of your risk management system. What do seemingly stable arbitrage strategies experience in such market conditions? Based on practical experience, I’ve outlined a set of response strategies that I hope can help you get through critical moments.

**When a crash occurs, what’s the first thing to do**

As the market begins to decline, don’t let panic emotions take over. All you need to do is one thing—open the protocol interface and keep a close eye on the health factor or collateral ratio. These determine how much safety buffer you still have.

Suppose the initial collateral ratio is 60%, with a liquidation threshold set at 80%. This means the collateral value can drop by about 33% before liquidation is triggered. Quickly calculate the current price level to understand how much further it can fall. This calculation can save your life.

Short-term panic-driven drops often rebound. If there’s still more than 20% space before reaching the liquidation line, staying calm is crucial. Rushing to repay or blindly adding collateral might cause you to be liquidated just before dawn.

**When danger approaches, activate your contingency plan**

If the decline continues and the collateral ratio rises above 70%, it’s time to act. Usually, there are three options, prioritized as follows:

First is adding collateral. If you still have idle assets of the same kind, depositing them into the protocol can quickly lower the collateral ratio. This is the most stable and straightforward move.

Second is partial repayment. Use some stablecoins or other assets to repay part of the loan. Although this reduces leverage returns, it significantly lowers risk exposure. In extreme market conditions, survival is more important than profit.

Third is reducing your position by selling collateral. This is a last resort. Selling during a sharp decline means exiting at the worst possible price, but if liquidation pressure is imminent, you have no choice but to grit your teeth and accept it.

**Details determine life or death**

Many underestimate the craziness of the market. A 20% single-day drop is already extreme, but if there are multiple shocks within that range, psychological defenses will break down repeatedly. Setting alert thresholds in advance is very necessary.

For example, you can set two trigger points: one at a 65% collateral ratio for the first warning, and another at 75% to activate the second contingency plan. This way, you won’t be caught off guard by sudden crashes.

Another often overlooked point—liquidation often occurs faster than theoretical calculations suggest. During a sharp decline, liquidity becomes tight. When you want to add collateral or repay, network congestion may cause delays, which can be fatal. Therefore, acting one step ahead always pays off.

**Mental resilience is the ultimate weapon**

DeFi risks are never just about numbers; they are also psychological. Watching your numbers plunge and the liquidation line inch closer can create a suffocating feeling that destroys rational judgment. But after experiencing this a few times, you’ll realize that the most profitable moves are often not aggressive operations, but those that keep a clear head and cut losses in extreme conditions.

Protocol risks, smart contract risks, oracle risks, and so on all objectively exist, but among controllable risks, the biggest is often ourselves. Lock in profits when it’s time, accept losses when necessary, and exit when it’s time to run. Only by surviving can you wait for the next opportunity.