The cryptocurrency sector has been through many ups and downs. It’s currently in bear territory amid a global market slump. Crypto investors need to learn how to survive in bear markets, and this article is here to help.
Bull vs. Bear Market
In finance diction, a bull connotates positivity, and a bear symbolizes negativity. A bull market is on the rise with a sound economy to back it up. A bear market is when the values of assets are receding amid an economic downturn.
Cryptocurrencies have been through many bullish and bearish markets. 2020-21 was the most recent bullish period for crypto, and the value of many tokens soared. For instance, Bitcoin reached an all-time high of $69,000 in November 2021.
After riding high waves in 2020-21, cryptocurrencies began falling in 2022. It wasn’t alone, as stocks, bonds, and many other assets followed suit. After the Russia-Ukraine war kicked off in February 2022, global investors feared energy disruptions and economic recession, leading to a slump in investment activity. Crypto was a victim of this slump.
It’s widely assumed that any market where assets have fallen 20% and continue declining is bearish.
How To Survive Bear Markets
Bear markets are part of life, and you need to prepare for it by following these steps;
Diversification is a golden rule of investing. Spread your investments across several tokens whose value and utility you’re convinced of. For example, you can hold Bitcoin, Ether, Cardano, and Polygon to have a balanced portfolio. Putting all your investments in one token is risky and can cause hefty losses if markets slide into bearish territory.
You can consider the 40/30/30. Invest 40% in relatively stable tokens, 30% in average-risk tokens, and 30% in high-risk tokens. This way, you’ll be protected by the stable and average-risk tokens in bearish times.
You can use hedging strategies to minimize your risk in a downturn. For instance, you can use the Stop Loss feature on your crypto exchange to automatically sell an asset if it falls below a specific price. Similarly, you can use the Take Profit feature to automatically sell an asset and take liquid profits if it rises above a specific price.
Another way to hedge against downturns is by taking short positions on the tokens you purchase. This way, if the market falls, you can still profit from your short positions to cover losses from your long positions.
Automated Trading Tools
You can use automated trading tools to analyze market sentiment before investing. These tools can analyze tokens and help predict their future performance based on past results and current market conditions. They’re not perfect, but they help you make sound investment decisions.
Dollar-сost Averaging means investing a fixed amount of money into a token at regular intervals, notwithstanding market conditions. This strategy enables you to take advantage of lower prices during bearish times and benefit if the market recovers in the short or long term.
Investments should be based on data and not emotions. The latter can lead you to irrational decisions that harm your portfolio. Avoid making impulsive investments driven by fear, panic, hype in crypto news sites, etc. Have a plan and stick to it as long as possible. Short-term changes may seem enticing to act on, but they increase your probability of losses.
Maintain Cash Reserves
You should maintain sufficient cash reserves at all times. If the market slides into bearish territory, you can use your reserves to buy some assets at lower prices. As the legendary investor Warren Buffett once said, “Be greedy when others are fearful.”
Your cash reserves also help you cover emergency expenses without selling your investments.
We have explained the best tips for surviving bear markets as a cryptocurrency investor. Follow these tips, and you’ll likely perform well during market downturns.