The cryptocurrency market, much like any other financial market, experiences cycles of expansion and contraction, often referred to as bull and bear markets. These market cycles result from a complex interplay of factors, including investor sentiment, technological advancements, regulatory changes, and macroeconomic trends. As the crypto market matures, it becomes increasingly crucial for you to understand these cycles and adapt your strategies accordingly.
A bear market can be a dramatic time in the life of any investor. It's a time when prices plummet, optimism wanes, and traders become fearful. Such times could very quickly negatively affect different areas in our lives.
You may, for example, be forced to sell off some of your positions to pay for fundamental necessities or commitments. In these cases, it is essential to modify your investment plan and the level of risk you are willing to accept with your investments.
This article will explore the top 7 moves to make during a crypto bear market, empowering you to preserve your capital and capitalize on the opportunities that arise during these challenging periods.
What Is a Cryptocurrency Bear Market?
Each cryptocurrency investor will have their definition of what constitutes a crypto bear market. A broad definition of a traditional bear market is when prices fall more than 20% from a previous high. However, this definition isn't as helpful given that the cryptocurrency market is no stranger to price drops of as much as 90% during bear swings.
As a result, a crypto bear market is better defined as a prolonged period in which market confidence is low, prices are falling, and supply exceeds demand. It can also refer to a period of economic recession in which economic activity slows.
One notable example was the so-called “crypto winter” from December 2017 to June 2019, when we saw Bitcoin’s price fall from $20,000 to $3,200.
A typical crypto bear market happens typically every four years, on average, and usually lasts over a year. This is why planning your investment strategy for different market periods is critical.
How to Capitalize on Opportunities in a Crypto Bear Market
It's challenging to remain calm when crypto-assets are recording double-digit losses. It is important to remember to stay realistic and take proactive steps to preserve your funds and, consequently, grow your portfolio when the winter ends.
Here are some moves every crypto investor should consider when everything seems in the red.
HODL (Hold on for Dear Life)
HODL is the term coined in the crypto world. It results from the misspelling of the word ''hold'' and the phrase ''hold on for dear life''. It is usually considered a tactic among crypto owners.
The main principle here is to buy the asset and hold it indefinitely. HODLers are crypto investors who hold on for dear life despite the volatility and price swings, a bull or a bear market, and the changing narratives.
This tactic is more than a strategy. It defines an ideological outline held by these users. It represents the untainted belief in the crypto industry and its underlying technology despite all obstacles it may face.
When to HODL?
In short: forever.
In long: there are many instances when you should opt for this tactic. For example, people who admit they cannot conduct short-term transactions such as scalping, day trading, or any other complicated strategies for profit now employ HODL as a technique.
Next, as we mentioned, use this if you are a firm believer in the industry. It is not a mere faith that it will make it against all odds. The believers think crypto is inevitable and will replace the traditional finance sector altogether.
HODLing also saves you from FOMO (Fear Of Missing Out) and FUD (Fear, Uncertainty, Doubt) since these terms are usually associated with short-term narrative oscillations and hypes. The focal point of HODLers is investing in a bright future with their favorite coin rather than focusing on short-term price movements.
So, if you see yourself as the type of person looking for a long-term investment, HODLing is the right strategy.
Dollar Cost Averaging (DCA)
DCA is another relatively calm approach to the uncertainties of the market. It is a tactic known in both the TradFi and crypto worlds.
It refers to spending a small, fixed amount of money regularly, which may offer higher profits over time while saving you time and anxiety.
By purchasing your favorite assets on a regular schedule, you will automatically invest more over time, regardless of what happens in the crypto market. This strategy allows you to increase your holdings while lowering overall risks during drops.
The DCA strategy also lets you observe the industry with more of a long-term focus. The method is a relatively straightforward one:
Decide on an asset you will DCA into.
Decide on the scheduled sum (e.g., $100 per buy).
Decide how often you buy (e.g., You will buy some BTC every Monday).
Find a reputable exchange and a safe place to store your beloved crypto.
Economists advise newcomers who lack the time or experience to estimate market returns or who get frustrated during bear markets to use DCA, as it may assist them in buying when the market is down, and stocks are cheap — assuming they follow the strategy.
But it is not only for inexperienced and impatient ones — this can also be an innovative and strategic move for more seasoned traders.
Give the Dollar Cost Averaging strategy a try with the KuCoin DCA trading bot.
Diversify Your Crypto Portfolio
A well-diversified portfolio is an important approach to successful crypto investing. You could lower your risk and promote your chances of long-term success by diversifying your investments among multiple assets.
You can restrict your exposure to any particular market or asset by diversifying your investments among several forms of digital assets.
Diversify your portfolio across crypto sectors, such as Proof of Work (PoW), Layer-1, Layer-2, metaverse, web3, NFTs, GameFi, AI, AR, and VR.
However, keep in mind that the crypto market mostly moves in tandem, so you will have to do your research on which cryptos are moving more or less with the market. You can base your research on technical analysis, fundamental analysis, sentiment analysis, or a combination of them.
Another alternative way to diversify your investments is branching out beyond crypto assets and including non-crypto assets from traditional financial markets, including stocks, bonds, real estate, commodities, and forex.
How to Diversify Your Crypto Portfolio?
An investor can choose to invest in cryptocurrencies based on the following:
Bitcoin: Bitcoin has firmly cemented its position as a safe-haven asset among cryptocurrencies owing to its appeal among institutional investors over the years and its limited supply. Even though BTC is the primary market mover, it may not have the most explosive price surges. It makes investing in and holding BTC especially beneficial in a bear market, as you won’t have to worry about extreme fluctuations in its price.
Altcoins: A slightly riskier option than Bitcoin, altcoins offer a high-risk-high-reward situation for your portfolio. Altcoins are a large category that you can split into blockchain coins, tokens, memecoins, etc.
Stablecoins: Investors often go towards safe-haven assets as you can hold them when expecting a downturn or an influx of opportunities ahead.
NFTs: While still an alternative investment, they are a good way to diversify your portfolio, especially as they give you access to a wide range of key sectors in the crypto industry - from the metaverse and GameFi to digital art and more.
Market cap size is the next type of diversification you can base your portfolio around. We can differentiate large-cap, mid-cap, small-cap, and micro-cap projects.
There is no best strategy for diversifying your portfolio, and the cryptocurrencies you select will vary based on your risk tolerance and profit appetites.
Larger cryptocurrencies in your portfolio will make it more stable but less prone to 100x gains. In any case, conducting a thorough analysis of all projects you invest in is essential. Make sure to go through the following:
White paper: It can provide a comprehensive report or guide on a specific product or issue and educate its audience. It answers why someone should trust a particular project.
Tokenomics: Strong tokenomics enhance a token's long-term value and incentivize early adopters, all while preventing inflation and supporting sustainable growth.
Price history: It is essential to see an upward trend in the adoption and value. Beware of sudden drops, as they may signify a pump-and-dump scheme.
Whether on-chain or real-world, we can split crypto investments by the industries they are trying to change.
Like stocks, we can divide crypto into sectors, such as DEX cryptocurrencies, AR/VR cryptocurrencies, healthcare cryptocurrencies, tokenized real estate, etc.
A diversified crypto portfolio provides a strategic edge for individuals just joining the crypto space: exposure to an exciting and fast-rising market without having to deal with the full impact of its inherent volatility.
Another way of making a profit during a bear market is short selling. Short selling is the process of borrowing and instantly selling a cryptocurrency, only to buy it back at a lower price and return it to net a profit. However, this process is as simple as “betting” on a price drop in practice.
Shorting could be a good way of profiting from the bear market, as you can expose yourself to the market plummets and earn from them. It’s important to note that shorting is an advanced strategy you should use with caution.
If you are interested in short selling, check out KuCoin Futures trading.
Hedging can be an effective way to protect yourself against potential losses during bear markets. You can utilize crypto derivatives trading that will negate the losses of your crypto holdings.
In practice, this would be shorting BTC for the same amount of exposure you have in BTC, meaning that any sharp price decrease will not affect you. Instead, your only loss will be the transaction fees, which are relatively negligible when considering the transaction volumes.
Anyone looking to reduce their exposure to the cryptocurrency market's volatility during a bear market could benefit from hedging.
To hedge, a trader will typically employ derivatives as a financial tool.
Futures and options are the two most prevalent derivatives to hedge crypto trading positions. Both allow you to go long and profit when the price of an underlying asset rises or short and profit when it falls. They often represent the right to buy or sell an asset at a specific price on a particular future date.
Limit Buy Orders
One interesting strategy crypto traders employ is placing limit orders to buy crypto at ridiculously low levels.
“Why is this useful?” — you may ask.
Well, most traders will never catch the exact bottom as sharp downturns happen instantly, and crypto markets trade 24/7. However, setting numerous orders at unexpectedly low prices might help you secure your crypto at a much lower price than expected — virtually no cost.
A stop-loss order serves as a safety net for your initial investment, selling off part or all of your position if the price declines or market circumstances worsen.
Stop-loss orders can help you maintain discipline in your trading strategy and prevent making irrational judgments by clearly specifying entry and exit points.
These automatic orders help eliminate portfolio micromanagement and ensure you don't lose out on opportunities due to distractions.
When triggered, stop-loss orders execute a market or limit order, ensuring you will not end up with bags of unsold crypto for years.
Additional Tips for Effectively Managing Portfolio in a Bear Market
We have been specific with previous suggestions on behaving in an unfavorable market. Now, let's review some constant truths about investing that you should remember, whether during bear or bull cycles.
Only invest as much as you can afford to lose: Everyone knows the crypto market is unpredictable. Sometimes, even though you have read and applied extensive advice online, you can still experience failure.
If you're just starting your crypto journey, invest small, watch the market, get acquainted with the trading interfaces, and share your experiences.
Learn and prepare for the next cycle: As mentioned, always keep in touch with everything crypto. Follow the news, narratives, Twitter threads, and Reddit posts.
Follow influential people in the crypto field and listen to their perspectives. Look at the behavior of the pro traders, follow whales, and their actions. Of course, observing others and their activities is not enough, as you need to your own judgment and inner feeling based on the data you are presented with.
Additionally, be mindful of the regulations and keep yourself updated on the matter, so you can freely and in good faith swim in the crypto waters without fear.
Perform due diligence: Explore the White Papers, the tokenomics, the team, and their credentials, as well as previous projects. Getting acquainted with the team and philosophy behind each project you want to invest in is important.
Avoid investing or engaging in any financial activity based on sympathy or hype — for the project to rise and maintain its heights, it's essential to have a clear objective.
Store your crypto safely: It’s essential always to store your crypto where you find it safest. This option will differ for many people based on what they do with their crypto, but the principle remains true nonetheless.
A crypto hardware wallet, also known as cold storage, is a cryptocurrency wallet that stores your private keys safely offline to prevent unauthorized access. Cold wallets are considered more secure than hot wallets. They are often hardware devices that resemble a USB drive.
Some of the most popular ones are wallets coming from Ledger or Trezor.
Set realistic financial goals and determine your risk tolerance: First and foremost, remember the goals you set for yourself when you first began trading. Always keep your investing goals in mind, especially in the fast-paced world of crypto trading.
Perhaps you got carried away by the enthusiasm on social media, but now you're questioning the coin's long-term value. It may be time to reassess and redirect your cryptocurrency earnings to another investment. Set take-profit and stop-loss orders in order to keep your portfolio unfazed by your emotions. Stop-loss and take-profit orders will keep you grounded in reality and will allow you to exlude emotions from your trading.
Bear markets are nothing new to seasoned investors. If you play your cards right, you can use various strategies to get through it relatively unscathed or even with more crypto than you ever could imagine.
In this article, we tried to uncover everything you need to know about a crypto bear market and how to behave during one. The moves described above will assist you in waiting out and potentially profiting from this often pessimistic period in crypto history.
Bear markets are an excellent reminder to manage your risk to capitalize on the downturn correctly.