A crypto bear market can cause a great deal of distress for investors. Also, it’s a scary situation for newcomers to the crypto realm. Sudden declines in market value can cause some to sell quickly while others hold, hoping for a turn in the market. Many lose faith in their investments during this period. However, some savvy investors understand how to turn a profit during a bear market. Furthermore, crypto bear markets provide an ideal opportunity to get away from the charts and learn about the trends and technologies that could spearhead the next crypto bull market.
In this article, we’re going to explore some of the best ways to navigate a crypto bear market. We’ll break down the concept of bull and bear markets. Plus, we’ll explore some of the best investment strategies to implement during a bear market. Furthermore, we look at some of the best tools to help you make a profit in all market conditions.
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What is a Bear Market?
A bull market is when a particular market or asset class, such as stocks or crypto, experiences a prolonged upward trend. When someone says, “I’m bullish about Bitcoin”, they usually mean that they expect the price of Bitcoin to perform well. Conversely, a bear market is when a market experiences a continuing downtrend. When investors are “bearish”, it means that they have a pessimistic outlook on an asset or market and expect it to fall in value.
Some investors categorize a bear market as having fallen in value by 20% from recent highs. Sometimes, bearish patterns are short-lived and occur intermittently during bull cycles. However, a long-term bear market indicates a shift in sentiment toward fear, uncertainty, and doubt. Often, bear markets have a cascading effect. When the price of Bitcoin falls, the rest of the crypto market tends to follow suit.
Also, stock market crashes and global events can cause a crypto crash and be a catalyst for a long-term crypto bear market or trend reversal. Typically, investors look to the S&P 500 and the Nasdaq indices to determine overall market sentiment. In addition, crypto analysts compare several on-chain metrics to historical data to determine the probability of a bear market.
How to Invest During a Crypto Bear Market
You may wonder why or how one would go about investing during a bear market. Indeed, the worst time to invest is when asset prices are going down, right? Well, it just so happens that savvy investors can turn a handsome profit in all market conditions, including during a crypto bear market. Below, we take a look at some of the most popular strategies for navigating a crypto bear market.
Dollar-Cost Averaging (DCA)
Dollar-cost averaging (DCA) is one of the most common “all-weather” investment strategies. Instead of riding the waves of volatility throughout every market cycle, the DCA strategy entails “buying the dip” every few days, weeks, months, etc. Many investors have an allowance each week or month that they can afford to invest. Whenever the crypto markets take a short-term bearish turn, DCA investors buy the dip. Furthermore, some investors see this as a discount on assets they had already planned to purchase.
The idea with DCA is to distribute capital allocation periodically rather than investing it all at once. This way, investors can average a lower entry price for assets than a one-time investment. Also, DCA investing during a crypto bear market helps to hedge against further price depreciation.
Let’s say Bob earns $4,000 per month. After paying rent, bills, and living expenses, Bob has $400 of disposable income that he is willing to invest. Bob could split his capital into $100 for each week and aim to buy the dip whenever the price of Bitcoin falls by a certain percentage. Moreover, this approach presents Bob with more opportunities to “buy low” than if he invested the full $400 at once.
Technical analysis (TA) is the process of studying market action and predicting the future price of an asset based on historical data, trends, and indicators. Also, TA allows investors to forecast “the bottom” of a bear market and invest when there is a high probability of a trend reversal. Similarly, TA can help investors to forecast where “the top” of a bull market could be.
Applications like TradingView use trading indicators such as the relative strength index (RSI) indicator, moving averages, and trading volumes to determine whether or not an asset is oversold and due to a bullish reversal. No single indicator can provide a clear picture of how the markets are going to move. However, a strong understanding of technical analysis allows investors to combine data from multiple indicators. This helps them to remove emotions from trades and invest based on probabilistic outcomes.
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Short selling is an investment strategy that involves speculating on the price of an asset falling. This advanced trading strategy involves profiting from negative price action and can be an effective tool for turning a profit during a crypto bear market. However, short selling is a high-risk strategy. Many trading websites and crypto exchanges require users to complete a test to prove that they understand the risks.
Despite the risks, short selling can also be a useful way of hedging against a long position (when you speculate on the price of an asset going up). By doing this, investors can turn a small profit regardless of market conditions and offset risk. Typically, short selling involves borrowing capital to buy crypto or other assets before a price decline. Investors can sell their assets on the open market before the drop, repurchase them at a reduced price, and repay the loan. Anything left over is profit.
During a crypto bear market, many investors look to diversify their portfolios. When the entire crypto market is down, it can be extremely difficult to predict which of the thousands of cryptocurrencies will perform well and for how long they’re going to rally. In this situation, investing a small amount into multiple high-quality assets could increase your chances of picking a top performer.
Investors may look to stocks or tokenized commodities such as gold to diversify. If you are investing in a handful of new assets at once, consider reducing your overall allocation and making smaller investments. Also, be sure to conduct thorough research and practice due diligence when investing in speculative assets.
Investing into stablecoins to gain yields in decentralized finance (DeFi) allows investors to put idle assets to work, even during a crypto bear market. If you’re not confident investing in volatile assets during a bear market, you can earn interest by locking up assets that are price-pegged to fiat currencies such as the US dollar.
Some centralized exchanges offer staking features for stablecoins and other crypto assets. In addition, DeFi protocols offer competitive yields for providing stablecoins as liquidity. Interacting with DeFi protocols is often riskier than using a reputable exchange. However, the rewards are generally much higher when interacting with DeFi protocols.
Think Long Term
Seeing the value of your investments decline can be disheartening. However, a long-term investment strategy can help you to get through the crypto winter without too much heartache. Investing in high-quality projects that provide genuine utility often pays off in the long term. Also, looking at the bigger picture could help you to maintain perspective during a crypto bear market.
When a project expands its user base, creates new products, and announces new integrations, price movements become less important. If you believe that a crypto asset has a high chance of gaining value in the future and others do as well, thinking about the future could help you keep sight of what’s important and why you chose to invest in a particular asset.
Invest in Your Education
Perhaps the most overlooked investment anyone can make during a crypto bear market is in their education. Market downturns are the perfect time to take a step back from the charts and study the technology that powers your favorite crypto projects. Also, learning about blockchain technology puts you in a better position when it comes to investing in new projects.
Blockchain is one of the most in-demand skills sector-wide. The use of blockchain is becoming increasingly prominent in industries such as supply chain management, the energy sector, insurance, art, and music. Also, many governments and central banks are seeking blockchain developers to help create central bank digital currencies (CBDCs). Plus, major corporations, including Microsoft and Coca-Cola, use blockchain technology to optimize operations.
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How to Invest During a Crypto Bear Market – Summary
The crypto winter is often seen as a bad time to invest. Naturally, nobody wants to invest when asset prices are plummeting. However, understanding how to navigate a crypto bear market could put you at an unfair advantage when it comes to the next bull market. Also, understanding how to read market cycles and implement effective trading strategies to meet different market conditions could help you hedge against downside risk.
Despite the many ways to approach a crypto bear market, nobody truly knows when the price of an asset is going to fall and when it will rise. Accordingly, you should never invest more than you can afford to lose. In addition, ensure that you carry out comprehensive research on any project you want to invest in.
Crypto bear markets can be volatile. While many like to capitalize on corrections and buy the dip, the markets move in such a way that short-term rallies can present short-lived relief during extended periods of decline. Also, newer investors have a tendency to panic when the markets suddenly drop. For this reason, many investors take profits throughout the bear market to ensure they don’t lose their minds when the bear market inevitably comes. Moreover, a trading strategy that requires you to take profits at specific times during a bull market could help minimize net losses and increase your overall profits.
Don’t forget to follow us on Twitter @MoralisAcademy! We’d love to hear your thoughts about the best ways to navigate a crypto bear market. Also, let us know which projects you’re watching for the forthcoming bull market!