As a trader, you should capitalise on natural trends by adjusting your bear market investing strategies, such as utilising cryptocurrency derivatives or diversifying across numerous assets. In this post, we will dive into the respective markets and investor strategies that works.
What Is a Crypto Bear Market?
Each cryptocurrency investor will have an own perspective on what a crypto bear market is. A bear market occurs when market prices decline by more than 20% from their previous peak.
However, because the cryptocurrency market experiences historical highs and lows on a daily basis, this definition is less useful. A crypto bear market is characterised by poor market confidence, declining prices, and excess supply (often lasting 3 months). Bear markets, often known as “crypto winters,” can last several months and occur when investor mood drops.
Bull Market vs Bear Market
There are various hypotheses explaining why these markets are called after bulls and bears. Observers in London in the 1700s reported that bulls attack by thrusting their horns forward, whereas bears attack by swiping their paws downwards.
Both animal attack patterns are intended to imitate market behaviour (upward for a bull market, downward for a bear). Bull and bear markets are both cyclical, driven by supply and demand. In bull markets, demand outstrips supply, while in bear markets, supply exceeds demand. While both include major price changes and shifts in market mood, the causes, duration, and other variables are different.
For instance, bullish markets are more liquid than negative markets, owing to larger trade volumes and increased demand for assets. Higher liquidity could make it considerably easier to buy and sell significant amounts of cryptoassets without affecting market pricing.
The lengths of bull and bear markets can vary greatly. Some think that crypto bull and bear markets follow a four-year cycle centred on Bitcoin’s halving event (a 50% reduction in the Bitcoin reward miners receive for mining new blocks). The halving occurrence has traditionally resulted in bull markets, and while known historical evidence appears to corroborate this notion, it is too early to determine with certainty.
Usually, bear markets have occurred immediately after a significant price increase in a short period of time, when demand far surpassed available supply. As demand falls, there is usually a liquidity shortage. However, bear markets have coincided with a shift in investor attitude as a result of negative regulatory developments and high-profile frauds and scams. Bull and bear markets refer to protracted periods of rising or declining prices, respectively. Bull markets in cryptocurrency can persist for months and are fuelled by broad investor confidence.
How Investors Trade Bull or Bear Markets
Bull Markets
During crypto bull markets, traders often encourage others on social media to “HODL” (buy and hold) or “buy the dip” (purchase when prices temporarily diverge from the upswing).
The purpose of the latter technique is to continue acquiring cryptocurrencies and benefit if prices recover from their lows. Certain digital assets or crypto sectors may outperform others at different periods of a bull market for a variety of reasons. In order to capitalise on these potential gains, some investors may choose to diversify among multiple cryptoassets.
Diversification helps distribute risk across many assets or markets. More experienced traders may seek to boost their profitability by utilising derivatives, which allow them to use leverage to generate outsized gains at the expense of increased risk. Popular forms of crypto derivatives are:
- Margin trading involves borrowing funds from a broker to trade cryptoassets.
- Futures trading are agreements between traders to buy and sell an asset for a specific price at a future date.
- Perpetual swaps are futures contracts that do not have an expiry date.
Traders must be aware that trading derivatives can be dangerous because it usually includes leverage, which is likely to expose them to liquidation if the trading outcome goes against their prediction.
Bear Markets
During bearish markets, investors often prioritise risk management by selling assets for more stable alternatives, such as cash and stablecoins. This may protect traders’ portfolios from further losses. Short selling is a prominent trading method used by bear traders. Borrowing assets, selling them immediately, and then repurchasing them at a cheaper price, benefitting from the fiat price difference.
Investors often use dollar-cost averaging to avoid timing the market. DCA entails investing a set amount of fiat into cryptocurrency on a regular basis, such as purchasing $100 worth of BTC every month, independent of market swings.
This could be an effective way to accumulate cryptoassets during a downturn while lowering the total cost-basis. Furthermore, it eliminates the uncertainty of attempting to time the market with a single lump-sum investment. Advanced traders can use crypto derivatives such as futures to profit from probable market declines, similar to bull market trading strategies.
Why Do Crypto Bear Markets Happen?
Bear markets, like bull markets, are a normal part of the market cycle. They’re the result of multiple separate variables working together. This includes:
- Investors taking on excessive leverage: Crypto analytics firm CryptoQuant reports that the BTC leverage ratio reached an all-time high in January, indicating excessive leverage among investors. This means that investors took on extra risk by utilising loans to fund futures products. High leverage increases market volatility.
- Lack of liquidity: Liquidity issues arise when leveraged investors liquidate their holdings, impacting the market’s overall liquidity. Furthermore, if a whale sells, the market is swamped with more supply than demand, lowering prices.
- New cryptocurrency rules: Remember China’s prohibition on cryptocurrency mining in 2021. US investors are currently concerned about the US government’s prospective new powers over cryptocurrency investments.
- Stock market trends: Cryptocurrency is typically considered an uncorrelated asset on the stock market. However, crypto markets are interwoven with traditional markets. In other words, it is typical for investors to be active in both the cryptocurrency market and more traditional markets such as the stock market. This means that developments in the stock market, such as the imminent inflation, have an impact on the cryptocurrency market as portfolios diversify.
- Activities of crypto influencers: Crypto influencers, such as Elon Musk, can have a significant impact on the market with their tweets. Fortunately, his viewpoint appears to have less significance in the cryptocurrency field these days. Other celebrities, such as Kim Kardashian and Floyd Mayweather, are also promoting shitcoins and frauds, which are producing problems for new investors.
- Crypto security breaches: When a major exchange is hacked or a blockchain security hole is discovered, many investors panic and either transfer cash or sell. This puts additional burden on the market, increasing volatility and investor anxiety.
Crypto Bear Market Investing Strategies
Experiencing your first crypto bear market can be challenging, especially if you purchased at historic highs during the recent bull market. But for experienced investors, it’s all part of the journey. Experienced investors may find a crypto bear market advantageous for their long-term plan, including tax benefits. Let’s look at some of the most prominent cryptocurrency bear market methods.
1. Buy the dip
You must have heard investors say, “Buy the dip.” This is the most popular technique for a bear market. Investors sometimes hoard stablecoins or fiat dollars to buy crypto assets when prices are low. It simply refers to the act of purchasing a specific amount of cryptocurrencies when the market is sufficiently negative.
When prices return to old or new highs, those who bought during the dip will benefit. It’s not a tactic exclusive to the cryptocurrency sector either. Warren Buffet, a stock trading hero, famously stated, “When there’s blood on the streets, you buy.”
2. Use Dollar-Cost Averaging
You can buy a dip in a single trade, such as investing all of your cash in a particular cryptocurrency. The safer approach is to employ dollar-cost averaging (DCA). This approach entails dividing your reserved capital into smaller portions and making multiple trades throughout a down market.
For example, suppose you had 1000 USDT and wanted to buy ETH while it was cheap. A powerful DCA method would divide this investment into five portions of 200 USDT each and invest in different dips of Ethereum. This improves the possibility that you will buy at the bottom of the drop, when the cryptocurrency has hit its lowest point before rising again.
Dollar-cost averaging produces significantly better results than buying early in a drop before the price has bottomed out, unless you were fortunate enough to go all in at the right time!
3. Diversify Your Crypto Portfolio
In a down market, diversifying your portfolio reduces risk, as seen in the previous example of buying Ether. Cryptocurrencies will experience varying levels of volatility. While BTC and ETH fell 40% in the last 90 days, LUNA and AVAX enjoyed a little increase.
This does not mean you should invest in every shitcoin you can find. It suggests you shouldn’t put all your eggs in one blockchain. There are over 17,000 cryptocurrencies to choose from; not all will be winners, and not all will be losers.
Don’t make random investments. Use the following performance indicators:
- Previous all-time highs: It’s not assured that this will happen again, but it gives you a sense of the possibilities.
- Past performance: This does not guarantee future performance, but it can provide an approximate estimate of potential in a bull market.
- Roadmaps: A big update, such as a mainnet launch, can lead to huge price increases in cryptocurrency assets.
4. Understand and Utilize Technical Indicators
Technical indicators, which are based on statistical analysis, provide insight into the performance of an asset or the overall market. They can help you determine the optimal time to buy and sell. There are numerous cryptocurrency technical indicators available, however some of the most popular include:
- Bitcoin dominance: This refers to its market capitalisation in relation to the entire cryptocurrency market. Bitcoin continues to create or break the cryptocurrency industry, as other coins follow Bitcoin trends. However, during the recent bull market, Bitcoin’s dominance decreased as other cryptocurrencies gained prominence. So, if the entire market capitalisation is increasing while Bitcoin dominance is declining, this might be a sign of improved market performance.
- Moving average: This is the average price of a cryptocurrency over a certain time period, typically 200, 50, or 20 days. A price above a long-term moving average suggests an upward trend. If the price falls below a long-term moving average, it indicates a downtrend.
- Relative strength index (RSI): This determines if an asset is overbought or oversold, indicating a bullish or bearish trend. Crypto is overbought if the RSI is near 70%, and underbought if it is less than 30%.
5. Stake Crypto
Dwindling gains are not good for any cryptocurrency portfolio. If you have a long-term strategy, you may protect your cryptocurrency against falling values by staking it and earning profits. You can make passive income by locking your cryptocurrency into a specific blockchain for a set period of time, regardless of its current value.
Staking involves risk, especially if the underlying asset is not increasing in value. Even in these cases, staking will boost your overall asset value. The easiest method to decrease risk is to choose a shorter staking duration, a platform with frequent staking incentives, and avoid anything that seems too good to be true.
6. Consider Derivatives
We will begin by stating that this option should not be considered by anyone who is not completely aware of the hazards associated with margin trading and derivatives. Do your homework first, then consider whether the advantages for your particular situation exceed the hazards.
Nevertheless, even in a down market, many seasoned investors can reduce their risk and profit by using derivatives. Futures and options are the most widely used products, and they function similarly. An investor borrows an asset, such as Ethereum, with the expectation that it will be sold before a specific date at a higher or lower price. They can assist in lowering personal risk because you can decide not to end the trade if it would result in a loss.
When you buy the product, you will lose a comparatively tiny amount, but you will shield yourself from a bigger loss. By shorting, or betting on an asset’s price falling, margin trading can also enable seasoned investors make money in a bear market. There are dangers associated with margin trading, just like with derivatives.
7. Harvest Your Losses While You Can
You can utilize cryptocurrency losses to lower your tax liability, so it’s not all bad news. You can carry forward any losses you don’t use indefinitely, and there is no cap on the number of investment losses you can deduct from your capital gains. To further lower your tax liability, you can even deduct up to $3,000 in investment losses from your income.
Even better news for US investors is that cryptocurrency is exempt from the wash sale rule, at least not now. This is due to the fact that cryptocurrency is categorized as a property, and only securities are subject to the wash sale law. Therefore, you can sell your cryptocurrency at a loss in order to collect the capital loss and lessen your tax liability, and then you can repurchase it at a reduced price.
When the market eventually recovers, you can use your losses to offset any profits for the 2022 fiscal year, which might save you thousands of dollars in capital gains tax by the 2023 tax deadline.
8. Keep Calm and HODL
The cryptocurrency bear market is gloomy, particularly for novice investors. However, panic selling is one of the worst things you can do if you purchased at a peak during a bull market. Markets can be bullish or bearish. The best method to manage your cryptocurrency portfolio is to have a clear plan in place to deal with both. Panicking at the prospect of a bear market will have the same effect as when investors become overly greedy and overleverage themselves in a bull market, resulting in losses.
Create a long-term plan, never spend more than you can afford to lose, and avoid getting caught up in the minutiae of checking performance by searching through several exchanges at all hours of the day. You can manage all of your assets from one location with the use of a basic cryptocurrency portfolio tracker like Koinly, which may also assist you in seeing untapped profit and loss potential.
Bull and Bear Traps
When a cryptocurrency climbs during a weak market, investors buy more of it, creating a bull trap. But when every purchase has been made, the price drops due to the decreased demand, and investors lose money overall.
A bear trap is a brief decline in a bull market that gives the impression that prices are going to drop farther lower when they aren’t. When “trapped” investors sell their cryptocurrency holdings to prevent losses, the market keeps rising.
Final Remarks
For new cryptocurrency users, it can be crucial to comprehend the distinct features of bull and bear markets, their duration, and the strategies used by other traders throughout these periods.
Investors may be able to adjust their methods and make more educated trading decisions if they are aware of the differences between various market periods.
