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What to Do in a Crypto Bear Market

Aug 18, 2023
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Marketing Batman

The cryptocurrency market is currently experiencing its longest bear market in history, with altcoins showing a downward trend since May 2021, bar a brief reprieve in early 2022. Altcoin investors are gradually losing faith in the markets due to their stagnant state.

Bear markets are prolonged periods when prices fall.  In the stock market, a fall of more than 20% is often taken as a sign of a bear market. But this definition doesn't really apply to cryptocurrencies because they are so volatile and prices can rise or fall by 20% in a matter of days. It is best to think of a cryptocurrency bear market as a long period of sustained price declines.  

Bear market, source: corporatefinanceinstitute

The opposite of a bear market is a bull market - a time when prices are rising and confidence is high. 

Prolonged and extreme price declines are among the most difficult times an investor can experience. Especially when cryptocurrency prices drop by as much as 50% in a matter of months - as has happened multiple times over the past year. But unfortunately, investments sometimes lose value and we need to deal with bear markets. While they can be stressful, they are also part of the investing cycle. It is important not to panic and stay focused on your long-term investing goals.

Here are six actions every investor should take when everything seems to be in the red.

1. Don't Panic Sell

It is very tempting to cut your losses when faced with extreme price declines. But if you do, you won't benefit if prices go back up. Also, selling after a sharp decline goes against the oldest rules of investing: ‘Buy low and sell high’. Admittedly, this is easier said than done as it can be difficult to time the market. But if you sell while at a loss,  you are bound to come out with a loss. 

Take a deep breath and remember why you invested in cryptocurrencies in the first place. Take a look at why prices have fallen and ask yourself if your original investment thesis is still valid. If so, now is not the time to sell.

In a bull market, your goal is to build wealth and profit. In a bear market, your goal is to survive until the next bull market by losing as little of your portfolio as possible. If you focus on trying to grow your portfolio during a bear market, it is going to be an uphill battle.  It is not impossible, but it is surely not easy.

2. HODL Is Long-term.

HODL, source: Zipmex

Another way to put the recent decline in perspective is to focus on your long-term goals. Investing is no small feat, thus knowing how to HODL in a bear market is a top skill. Cryptocurrencies are volatile, and we've seen rapid declines like this before - and we'll likely see them again. But if you're investing with a five- to ten-year time horizon, it is much easier to hold your position when the market is turbulent.

It is also helpful to look at Bitcoin’s (BTC) price action. Bitcoin is the oldest cryptocurrency on the market. While the price chart reveals several notable price fluctuations to the downside, what's reassuring is, BTC has always found a way to bounce back. 

3. “Buy the Dip”

Almost all crypto enthusiasts say this on social media every time prices fall. And as common as the advice, even to the point of banter, this can be a good move. 

 "Buy when there is blood on the streets, even if it's your own blood." – Warren Buffett 

However, this is not the best strategy for everyone. Dips may ‘dip’ further if you ‘buy the dip.’ Hence it is crucial to know ‘how’ to ‘buy the dip.’ Some investors buy dips in smaller increments -  for example, buying a crypto asset worth $100 today and buying another $100 worth next week if prices continue falling. This is a form of average cost effect that can cushion the impact of prolonged price declines.

The premise of the strategy for beginners is simple: choose low-risk assets, regularly invest a pre-set amount, and forget about everything else until the market heats up.

This strategy has two steps:

  • Identify which assets you want to have
  • Use the dollar cost average (DCA) on these assets and hold them

Asset Allocation

The first step in this strategy is to identify which assets you want to own. These assets will be the bread and butter of your portfolio until the markets start to heat up.

It is helpful to have a risk profile in mind when making this selection. Ideally, you should allocate a large portion of your portfolio to more generic assets that you trust will rise during the next bull run — like Ether and Bitcoin!

Dollar Cost Averaging

Once you've decided on your portfolio allocation, the next step is to establish an amount you want to periodically invest in these assets. This strategy is one of the most basic investment strategies called Dollar-Cost Averaging. 

Dollar Cost Averaging, source: Twitter

Dollar-cost Averaging is an investment strategy that aims to reduce the impact of volatility on asset purchases. It involves buying equal amounts of the asset at regular intervals.

The beauty of DCA is that it takes the work out of timing the market. Simply buy the same amount of a crypto asset at the same time for a period (for example, every month). Don't pay attention to the price of the asset irrespective of what it is. Calculate your profits once the next bull cycle hits. 

The biggest problem with DCA is that people get excited about the fact that they keep buying the dip. This can result in them spending money they didn't actually intend to invest in cryptocurrencies - or money they need for other financial goals. They may also buy cryptocurrencies without doing the usual due diligence, which can then cause them to lose all their money. 

If you don't have enough money, already have a high percentage of cryptocurrencies in your portfolio, or don't have time to research which cryptocurrencies to buy, don't buy crypto assets just because prices are low. There will be more bottoms - and maybe next time you'll be in a better position to take advantage of them.

4. Diversify Your Portfolio

Any minimally reasonable investment advice should always start with diversification as a means of spreading risk across your portfolio and limiting exposure to any type of asset.

No matter how confident you are, it is a dangerous game to go all-in on a particular investment, that is, to invest all of your wealth in a single asset. This strategy is incredibly risky, as the investor is vulnerable to any slight change in the value of their portfolio.  

On the other hand, by spreading your investment across several assets, any fall in one asset class could be offset by better performance in another, making for a robust portfolio. This is because it is very difficult for people who actively buy individual crypto assets to consistently outperform the market. Hence, a diversified portfolio is usually much better protected against the risk of loss, which can improve stability and earning potential. To build a diversified portfolio, you need to clearly understand your investment objectives and your risk tolerance.

It should be noted that portfolio diversification does not eliminate risk, but it can generate a better return – compared to risk – if the strategy is well structured. Often, diversification pays off in the long run.

5. Brush up on your Knowledge and Research the Market. 

Instead of focusing on how much the market has fallen, use this time to research. Spend time learning about cryptocurrencies in general, or individual cryptocurrencies. If there's a crypto sector you want to understand better, that could be a good place to start. You may also want to improve your investing skills so that you can handle risk differently in the future.

6. Risk management is Crucial

The steps above will help you wait out a bear market and possibly even profit from it. But bear markets are also a good reminder to control your risk exposure. You should only invest money you can afford to lose so you're not forced to sell in a prolonged bear cycle. You should also make sure that cryptocurrencies only make up a small part of your investments. A diversified portfolio means that poor performance in one type of investment need not result in financial disaster. 

A well-diversified portfolio should include stocks, bonds, and alternative investments such as real estate or commodities, while making sure to invest across different sectors and regions. In the ideal case, the losses in one asset class can be offset by the gains in another.

Bottom Line

No investor looks forward to a grueling bear market. Regardless, if you play your cards right during this period, you can benefit. In the midst of the euphoria of a bull market, it is easy to look like a financial genius. In a bear market, your strategies will make you question your skills and confidence. So do the basics and trust your strategy's long-term time benefits


What Is Responsible For The Bear Market?

The current state of the cryptocurrency market is a reflection of the broader economic and regulatory environment. Increased scrutiny by regulators and the entry of traditional finance firms into the cryptocurrency space are significant factors contributing to the bear market.

How Long Does A Bear Market Usually Last? 

The duration of a bear market ranges from two months to several years. However, a bully cycle almost always follows a bear market. 

Should I Invest In Bitcoin And Other Cryptocurrencies Right Now?

If you are interested in cryptocurrencies but are on the sidelines, the recent fall in price may convince you that now is the time to “buy the low.” Prices are comparatively low and a future bull market is likely. Go into your investment with a long-term mindset and you could make a lot of money in 1-2 years!