How to weather a bear market: Ideas for coping with crypto downturns

Looking for ways you can mitigate a crypto bear market? Read on …

Bear market                                 
How can we deal with a crypto bear market? - Photo: Shutterstock
                                

Contents

Bitcoin has crashed in value almost 70% in seven months, and the whole cryptocurrency scene is currently going through a bad time. The market, which has been headin south throughout the course of 2022, was hit badly in May, when the depegging of the UST stablecoin and the collapse of its associated LUNA cryptocurrency saw the overall value of all cryptocurrency plummet. So what is the best strategy in a bear market like this?

Bear markets explained

What is a bear market? The accepted definition is that it is a market that has fallen 20% or more over a sustained period of time. At the start of 2022, the worldwide crypto market was worth a little under $2.189trn and, on 15 June 2022, it was worth $904.9bn, a loss of nearly 60%. Even if we look more recently, the market cap for crypto on 5 May was around $1.8trn. Clearly, we are in a crypto bear market now, whether we like it or not.

What does this mean? In terms of the bull vs bear market question, in a bull market, people are more likely to buy and in a bear market, people are more likely to sell. 

It is not just crypto that is struggling. On 14 June, the S&P 500, an index of US company shares which is used to measure how well the markets are doing, announced that it, too, was in a bear market. This will have a knock-on effect on how well crypto is doing, because investments are down in general, then people will either have less money to spend on crypto or, perhaps more pertinently, they will have less of an inclination to invest in cryptocurrency. 

That said, investors should not necessarily panic too much. We have been here before, whether it was in the summer of 2021, as people tried to recover from the Great Crypto Day Crash of 19 May, or whether it was in the so-called crypto winter (in reality, an extended period of consolidation) that happened after the late 2017 and early 2018 crypto bubble. But how do you best cope with a bear market? Let’s take a look and see what we can find out.

Stay positive and be careful

The first thing to remember about dealing with a bear market is that it will not last forever. However, cryptocurrency has not been around for long enough that we can confidently say when the current bear market will end. Afte the bubble of late 2017 and early 2018, many prices settled down after the drop. In comparative terms, they did not do much once they had dropped from their elevated positions.

However, 2021, especially the first few months of 2021, was a notably bullish time for cryptocurrency, so it is always possible that the market will pick back up in a few years. It is also possible that the current state of play is actually where the market should be, and 2021 was an elongated spike. On the other hand, it might also be the case that the boost in interest that crypto saw in 2021 might have, ultimately, caused the natural level to go up, meaning that there is room for some growth before a period of consolidation. There are a lot of unknown variables but, at this stage, it can be argued that staying cautious may not be a bad thing.

Sell or hold?

When you are in a bear market, it might seem like the best time to sell your assets. That is what everyone else seems to be doing.  But what you do depends on your attitude to risk. If you have followed the single most important rule of investing, never invest more money than you can afford to lose, then, at least in theory, there is a case to be made that you should not be selling, but hold on to your assets. After all, if you can afford it (and if you have been sensible, you should be able to afford it) then it might make more sense to be patient rather than to get rid of your investments at a loss. On the other hand, you might want to get out when the losses are not too bad. It pretty much depends on you.

Mixing it up

Bear market
Can diversifying a portfolio help in a bear market? - Photo: Shutterstock

What does your portfolio look like. If you have all the same crypt, or all the same kind of crypto, then you might find that things are worse for you than if you mixed things up. For instance, while the crypto market has been pretty weak so far this year, the metaverse sector, which was, perhaps, cryptocurrency’s biggest success story in the second half of 2021, has performed especially poorly. If you went into the metaverse, and only the metaverse, as it was booming late last year, then you will be down by more than if you had a range of investments in your crypto wallet. Mixing the risks is a commonplace idea within general investing, so diversifying your portfolio can, potentially, shield you from the worst of any crashes that take place within a bear market.

Dollar cost average: little and often?

One strategy that investors use when making their way out of a bear market is called Dollar Cost Averaging. The idea is that you pay a fixed sum every month to buy a certain commodity. By doing that, at least in theory, you should be able to compensate for any losses made during the switch from bull to bear when the market goes back the other way. Again, though, you will need to be careful whichever way you play it, and you will have to do your own research to make sure that whatever it is you invest in is right for you. It is also very important never to invest more than you can afford to lose. 

Staking in a bear market

Another tactic that might keep you ticking over, depending on what crypto you hold, is staking. The idea behind staking is to use your crypto to earn passive income. When you stake a cryptocurrency, you keep it locked up for a period of time and, in theory, you will gain interest. Most of the time, and especially at a time when the markets are down, there is always the possibility that the money you will make from staking will be less than the money you could make from just selling the crypto, at least in the short term. But, if you are determined to see the downturn through, then you could come out the other side with a bit more than you originally had. That said, some big cryptos - such as Bitcoin - do not operate with a staking capability, so make sure what is in your portfolio is suitable for doing this. 

Buying in the dip

You will often hear the advice to buy in the dip, one of the big principles behind crypto trading. Since a bear market represents a significant dip, then, if we follow that advice, a bear market might be the best time to invest. However, there is no telling when the dip might bottom out. It is entirely possible that things will get worse before they get better. On the other hand things might recover, in relative terms, comparatively quickly. What you do not want to do is to worry too much about the nature of the dip. It also follows that you will need to be patient when it comes to using this strategy. Things may not turn around immediately, and the figures might well get worse before they get better. Again, at the risk of sounding like the more exuberant crypto enthusiasts, you will probably need to have diamond hands and HODL if you want to make this strategy work. 

Keep in mind that no one can honestly predict with 100% certainty how long this current state of affairs will last, nor when it will get better, or how fast and how far it will get back up. As always with crypto, it makes sense to be careful, do your own research, and be patient. 

FAQs

Yes, we are. The market is down 20% from recent highs, which fits the definition.

It depends on how and when you define when it ends. It all depends on whether the market recovers, how quickly the market recovers, and where it recovers to. There is no simple answer to this question. That said, outside of crypto, a study has found that bear markets last an average of 289 days while bull markets can last three times as long, up to 991 days. 

A bear market is when a market is down 20% or more from a recent high over a period of time.

There is no guaranteed way to make money in either a bear or a bull market, but if you read the article, then you might see some potential suggestions on how not to lose too much money in a cryptocurrency bear market. Ultimately, though, you will have to be patient.

Depending on how you define the term, you can argue that there was a brief crypto bear market in the summer of 2021, as many coins lost a substantial chunk of their value following the Great Crypto Day Crash of 19 May that year. If you are looking for an extended period of time, then the “crypto winter” which ran from the middle of 2018 to late 2020, a time when many cryptocurrencies prices stayed comparatively stable, albeit down from the highs of late 2017 and early 2018, would be the answer. 

Further reading

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