Most new crypto investors were not prepared for their first bear market and therefore saw most of their digital assets depreciate by more than 70% from their November 2021 highs.
During bear markets, investors might be able to accumulate holdings while lowering the risk of their portfolios by selling short. However, most investors fail to perform such feats during bear markets.
While a bear market can be a strong learning experience for seasoned investors, it can be especially challenging for novices who do not have much experience dealing with market volatility.
About Bear Market
A bear market in cryptocurrency, also known as a crypto winter, is characterized by a prolonged period of time during which market confidence is low and prices are decreasing. There is no set time period for a crypto winter, but most people agree that a bear market in cryptocurrency lasts at least three months.
The bear market is a time when investors are discouraged by the decline of asset prices. As a result, they sell off their holdings, which further depresses prices. This causes severe damage to an economy that might otherwise recover quickly from any temporary setback.
How can investors survive a crypto bear market?
Investment advisors recommend a number of strategies that traders can use to minimize losses and take advantage of opportunities as they arise. These include the following:
Buy the dip
When the cryptocurrency market is bearish, investors often buy low and sell high, a strategy known as “buying the dip.” When prices return to their previous highs, those who buy at the dip gain the rewards.
This is not a strategy unique to the crypto market either. A famous stock-trading icon, Warren Buffett, said, “When there’s blood in the streets, you buy.”
Dollar-cost Average
Likewise, you can invest in a cryptocurrency all at once – a so-called “single trade.” But it is safer to spread your investment over time using dollar-cost averaging (DCA). This strategy involving the use of several smaller positions over the course of a bear market is called “trading in parts.”
Investors can use this approach to participate in initial coin offerings (ICOs), buy altcoins, or invest in stable coins like USDC and USDT. Over time, the average price of a digital asset will even out, and investors have a good chance of making money when the bull market returns.
Diversify
During market downturns, some segments of the market may decline more than others. A diversified portfolio can help investors minimize losses and take advantage of gains in growing markets.
Cryptocurrencies with different utility characteristics will experience different price movements over time. For example, while some tokens such as BTC and ETH have seen their prices drop by 40% over the last 90 days, LUNA and AVAX have risen modestly.
Stay Calm
Managing your emotions during a bear market is not as easy as it sounds. In fact, trading professionals often describe it as being the hardest part of their job. Make a long-term trading strategy, never invest more than you can afford to lose and don’t obsess over the details of your investments.
A bear market in cryptocurrencies can be stressful for both experienced and new investors. But if you have bought at a peak during a bull market, one of the worst things you can do is panic sell.
Utilize Indicators
Technical indicators are used to track the performance of an asset or the broader market. They can be used by investors to help determine when they should buy or sell. No indicator is completely reliable, but they can often hint at an imminent market correction.
Staking Crypto
Bear markets remind investors that holding tokens and staking can be a good way to generate passive income. Staking is the process of locking your coins on a particular platform for a set period of time.
Most platforms provide two options: flexible staking, where you have the right to withdraw at any time, and fixed staking, in which you commit your tokens for a set time period. Tokens can be bought and sold on centralized platforms such as KuCoin, Binance, Crypto.com or Bybit.
Acknowledge Derivatives
Derivatives are complex financial instruments that allow traders to minimize risk, protect themselves from market fluctuations, and make money even when prices are falling. An investor borrows an asset and sells it before a given date at either a higher or lower price than the original cost.
They can help reduce individual risk as if the contract closes at a loss, you can choose not to execute it. They will have lost only a small amount for purchasing the product, but have protected themselves from a larger loss.
The Final Note
Investing gurus recommend these strategies to reduce losses and even build the value of your portfolio despite a market where prices are falling. The strategies do not work overnight. This means that the greatest upside is paired with the greatest risk.
The crypto market is volatile. If you missed the opportunity to buy the dip, keep in mind that another crypto crash could be on the horizon. It’s best to take profits, keep some capital in reserve for crashes and try not to panic when bears take over.
