What is the Best Way to Invest During a Cryptocurrency Bear Market?
Cryptocurrency bear markets are some of the worst times for investors, as they are filled with uncertainty and declining profits. In order to reduce losses during these periods, which can last upwards of two years, dollar cost averaging over the long term, investing without emotion, and creating a sell plan are some of the steps that investors can take.
In both traditional stocks and cryptocurrencies, bear markets are the enemy of investors. They signal a time when the prices of assets continually decrease with no end in sight. As soon as investors begin to think prices are at their lowest, they drop another 10%, which is demoralizing and leads to a significant loss in profits.
Recently, the cryptocurrency market has entered a bear market, which is signified by the fact that the total cryptocurrency market capitalization is down around 50% from its all-time high. Meme cryptocurrencies and high-inflation DeFi coins, such as Dogecoin and Pancakeswap, have decreased in price by around 70%, and more promising coins like Bitcoin and Ethereum are down 50%.
Not only has this bear market been bad for the price of assets, but also for the popularity of cryptocurrencies. Retail investors, who were once scrambling to buy as many NFTs and Dogecoins as possible, have since sold their holdings and moved into other assets, like commodities or the stock market. This means that those left in crypto now are the true believers in the space and are not interested in meme coins or chasing 1000% yields on unsound tokens.
During these uncertain times, it is important for investors to have a plan and exercise caution in order to not lose all of their money. Let’s look at a couple of tips that will help investors with preserving their capital during a cryptocurrency bear market.
First, investors should practice more due diligence when choosing what coins to buy. In a bull market, almost every cryptocurrency breaks its all-time high and sees 100% to 500% gains. In a bear market, only the strongest projects survive, and many projects never recover due to a bad product, unmotivated team, or general lack of interest. For example, only five of the top 25 coins from the end of 2017 hit a new all-time high in the bull market of 2021, and the rest of the coins either fell out of the top 100 or are somewhere in the top 50. Thus, it is crucial to only back projects that have lots of potential, real-world use cases, developer interest, and institutional interest. Arguably, interest from institutions and venture capital firms is most important, as if an investment is good enough for a firm with hundreds of dedicated researchers and investors, it should be good enough for the average person. Nonetheless, individual research and diligence should be done with every new cryptocurrency an investor is considering adding to their portfolio.
Due diligence should also be done on the projects currently in an investor’s portfolio. Even though a coin may have performed well during this bull market, there is no guarantee it will hold up until the next one. As a result, investors should closely evaluate the projects they are currently holding and see if there are any that should be sold. Even though the price may be down from its all-time high, a bad project’s valuation will only decrease over time, and the 70% loss may turn into a 90% loss.
When buying and selling cryptocurrencies, investors need to act without emotion, which is another critical trait of a strong investor. Even though there may be tens of thousands of dollars on the line, investors need to be strong in their beliefs and not buy purely based on the fear of missing out, also known as FOMO. Furthermore, investors also need to be emotionless during price declines. If an investor did their due diligence and knows that a project is solid, then a price decrease should be seen as an opportunity to buy at a discount, not the loss of capital. Any investors that use emotion as their primary investing tool will always be buying high and selling low.
One of the most common emotions felt during a bull market is greed. For most investors, bear markets are euphoric, and everyone feels like they are a genius investor. The thought that the markets will eventually decline seems crazy, and $1 million Bitcoin seems to be in sight. However, for the investors who do not invest with emotion, this is not the case, and they know that every market eventually corrects downwards.
If investors have chosen projects they believe in, and still want to invest more during the downturn, the best way to do so is with a dollar cost average, or DCA, strategy. This strategy involves buying a set amount of crypto every certain number of days, typically every seven days. This ensures that no matter what happens in the market in the short term, investors are able to consistently buy crypto at an average weekly cost. Furthermore, it prevents people from “buying the dip” at Bitcoin when it is $50,000, then having no money left to buy at $30,000.
Serious investors should create a sell plan during this bear market in order to lock up gains the next time the prices increase. Even though it may seem hard to stomach the thought of selling Bitcoin at $50,000 when it seems that $100,000 is right around the corner, sticking to a sell plan is important for actually making profits. If nobody ever sells, then nobody ever makes a profit, and all of the worry and money poured into investing was a waste. A solid sell plan will ensure that investors capture some of their gains while also still giving them the potential to make more.
Even though following these strategies will not guarantee that investors make money, it will certainly help with the worry, doubt, and fear that takes hold during bear markets. Investors need to remember to be emotionless, dollar cost average, and only hold projects that they believe in. Not only will this help them ensure that they will not lose all of their money, but also will help them sleep better at night knowing that their investments are safe.
By Lincoln Murr