What Should You Do To Thrive In A Crypto Bear Market?
Bear markets happen frequently. That doesn't make it any simpler to foresee them, forecast their duration, or gauge the severity of the decline. However, you don't have to be clairvoyant to take a few wise measures to reduce your bear-market losses while also increasing long-term investment profits.
Every investor typically feels apprehensive during bear markets. Even more so for a novice, it may seem the world is ending. It may be common knowledge that investors are sure to make gains during bull cycles. However, in bear markets like this one, an incredible amount of pessimism sets in.
The co-founder and strategic lead at the Kylin Network, Dylan Dewdney, once mentioned in an interview that the two major mistakes that investors make while feeling anxious are “One, over-investing and two, not investing with conviction.”
“You need to find the sweet spot where you have enough conviction in your investments while managing the resources devoted to them such that you are 100% comfortable with being patient for a long time. Lastly, bear markets are where the magic happens — buying Ethereum at $90 in December 2019, for example,” Dewdney said.
Bear markets occur when there is a general dip in the prices of assets, by at least 20%, from their most recent highs. For example, the current bear market has Bitcoin (BTC) down by more than 70.6% from its November all-time high of $68,000. Bitcoin is now trading just above the $20,000 mark at the time of writing.
Bear markets: Genesis, Severity, and Durations
Bear markets are often tied to the global economy. They occur just before or after the global economy goes into recession. Where there is a bear market, there’s either an ongoing economic meltdown or a looming one.
A steep and sustained price dip from recent highs is not the only indicator of an ongoing bear market. However, there are other economic metrics that investors must still factor in. For example, some indicators include inflation, interest rates, and rate of employment or unemployment, among others (especially in the developed countries, as their economies make up the larger share of the global economy).
However, the relationship between the global economy and a bear market is even more straightforward. When investors notice an economy is shrinking, there are widespread expectations that corporate profits will soon start to decrease. And this pessimism causes them to panic and sell off their assets, thus, pushing the market even lower. A bear market occurs when investors overreact to bad economic news.
In any case, bear markets are typically shorter than bull markets. According to a recent CNBC report, bear markets usually last about 289 days–although the current crypto bear market has lasted far longer. Bull markets, however, can go even above 991 days in good economic conditions. Although no one knows how long a bear market might last, here are a few tips on weathering it.
Navigating a Bear Market
As an investor, there is probably nothing anyone can do to prevent unfavorable market conditions or improve the economy. Nonetheless, there are lots of potentially significant moves that you can make to protect your investments. How, then, can you protect yourself—and your assets -– in a market downturn?
Practise Dollar-cost Averaging
Dollar-cost averaging (DCA) is an investment strategy in which an investor regularly buys a fixed dollar amount of a particular asset, irrespective of that asset’s price in dollars. The plan is based on the conviction that over time, the asset’s prices will generally pick up the pace and eventually trend upward during a bull run.
When this prudent investment approach is carried out during bear markets, the investor’s buy price is averaged over time. You can enjoy the benefits of buying the dip and avoid investing all your life savings during market highs. After all, as dreaded as bear markets are, they are the best times to buy crypto assets at the lowest prices.
How do you get started with dollar cost averaging? First, you can carry out Dollar-cost averaging by buying specific cryptocurrencies as the price dips further. For example, if you bought some Bitcoin at $30,000, Bitcoin’s current price of $20,000 would mean you were currently down by half on your assets. On the other hand, if you bought an equivalent amount of Bitcoin at $20,000, your investment would have increased by half if Bitcoin reached $30,000, wiping out your original loss. When the bull market returns and Bitcoin inevitably reach a new all-time high above $68,000, you would have doubled your investment on the initial investment while almost quadrupling your buy at $20,000. In addition, specific Nigerian fintech such as UseAccrue, Bamboo, and Risevest offer Dollar-cost averaging options for stocks, cryptos, and other financial assets.
Diversify your Portfolio
If you have a diverse range of assets in your portfolio, the impact of bear markets may not be as severe. When bear markets are entirely in progress, the prices of assets generally plunge but not necessarily by the exact amounts for every asset. So, this valuable strategy ensures that an investor has a mix of winners and losers in their portfolios during a bear run. Thus, diversity will reduce losses from the portfolio to the barest minimum. This asset diversification blog post explains all you need to get started with asset diversification.
Always Consider Defensive Assets
During prolonged bear markets, some companies (mostly younger or smaller) tire out along the way. In contrast, other more-established organizations with more substantial balance sheets can withstand the harsh conditions for as long as necessary.
Therefore, anyone looking to invest in company stocks should go for stocks of those companies that have been in business for a longer time (preferably ones that withstood the 2008 crisis). Those stocks are defensive. And, they are usually more stable and reliable in a bear market–with a potential to yield more rewards as bull markets turn up.
Want to get started with stocks? This blog on how to do your research before picking which stock(s) to buy is a perfect read.
Introduce Bonds Into Your Portfolio
Bonds can also offer you some relief during bear markets because the prices of bonds usually move opposite to the prices of stocks. Hence, bonds are a vital part of any near-perfect portfolio, giving you relative ease to the pain of a bear market as an investor.
This tutorial below gives some insight as to how you can get started with Nigerian bonds:
Play Blind To The Market
There is no doubt that a bear market will tempt you to run and never look back. Your will and endurance will also be tested. But, as history has shown, bear markets will not last forever, and neither will the current one.
According to Hartford Funds, more than 26 bear markets have existed between 1928 and now. And each one of those bear markets was immediately followed by a massive bull market, bringing more than enough profits to make up for whatever investors might have incurred losses in those bear markets.
So, it is essential always to take your mind off the markets, especially if you’re investing for the long term, like for retirement. Eventually, the bull markets you’ll witness along the way will lead to a more robust portfolio than the bear markets.
The Bottom Line
As explained earlier, some risks come with bear markets. However, they also offer a reasonable basis for success for you in the next bull run. However, that depends on good strategic investment planning combined with patience. So, the losses you may have suffered during this bear market could quickly turn to profits when the market finally turns around, whether you’re always DCA-ing, diversifying into other assets, investing in ETFs and index funds, or stocks, or simply waiting it out.