Trading Strategies For Crypto Bear Markets

There’s a saying in the financial markets: “Never confuse genius with luck and a bull market”. While anyone can seem like a crypto market wizard in a bull market when prices are rising, only a small percentage can keep and hold on to their gains and more in a bear market. Surviving a crypto bear market can be a challenging task for even the most experienced traders. 

 

The key to surviving a crypto bear market is to have a well-thought-out strategy and plan. In this article, we share some of the strategies on how to survive crypto bear markets.

 

What Is A Bear Market In Crypto?

A bear market is characterized by a 20% decline or more in crypto prices over some time. This means that a price decline and correction in the high-teens percentage is not technically considered in bear market territory unless it reaches the 20% mark. Bear markets can last for several months up to several years, and can be triggered by various factors such as economic uncertainty or FUD

 

Bear markets are a normal part of every market cycle. Examples of some notable crypto bear markets include the 2011-2012, 2017-2018 and 2021-2022 bear markets.

 

Bear Vs Bull Markets

Bull markets are the opposite of bear markets. In a bull market, prices rise by 20% or more from recent lows. It is not uncommon to see some crypto moving up in price by 50% or more in a single day. 

 

How Long Does A Crypto Bear Market Usually Last?

Previous crypto bear markets range from around 185 days up to 415 days. While previous bear markets are not indicative of future bear markets, we can expect the average bear market to last at least a couple of months based on the data.

 

Signs Of A Crypto Bear Market

These are some telltale signs of a crypto bear market.

 

  • Prices of most cryptocurrencies are down 20% or more for an extended period 
  • The majority of investors are pessimistic
  • FUD and bad news flood the daily news

 

Crypto Bear Market Strategies

Dollar cost averaging (DCA)

Instead of putting all of your money in at once, dollar cost averaging involves dividing the total amount of money into equal parts and investing the same amount at regular intervals over some time. 

 

The benefit of this approach is that it allows you to reduce the impact of price volatility on your crypto portfolio. By investing the same amount over some time, you will buy more crypto when its price is lower and fewer crypto when its price is higher thus allowing you to lower the average cost of your crypto.

 

However, it is important to note that dollar cost averaging only works with cryptocurrencies that have strong fundamentals that are likely to appreciate over time. If you dollar cost average into a crypto with poor fundamentals, you might buy the crypto down to $0.  

 

Hedging

Hedging is a strategy that you can use in bear markets to hedge and mitigate your risk by offsetting potential losses from one investment with gains from another. In bear markets, most crypto prices tend to decline. If you have long positions and bought these cryptocurrencies, chances are your crypto portfolio will experience losses.

 

Hedging your positions can protect your crypto portfolio from significant losses. There are several ways to hedge against a bear market, including but not limited to short selling, inverse ETFs, futures and perpetual swap trading. These hedging strategies allow you to score some gains even while crypto prices fall, potentially offsetting losses from your long positions. 

 

It is important to note that hedging does not guarantee the protection of your crypto portfolio. Hedging strategies can also be more complex than the typical trading strategy so make sure you are well-versed and have already some experience in the crypto markets before implementing hedging strategies in a bear market.

 

Sit on cash

Perhaps one of the simplest ways to avoid significant losses on your crypto portfolio during a bear market is to go 100% in cash. While this strategy might not be as sophisticated as the other bear market strategies, do not let the simplicity of this strategy fool you. To be in the crypto markets for the long run, you need to protect your capital. Without it, you cannot participate in the next bull market.

 

Another reason to sit on cash during a bear market is based on simple math. If a crypto portfolio suffers a 50% loss, many mistakenly assume that to break even, the value of their portfolio just has to go up by 50%. But the math does not work that way. If the value of a portfolio falls by 50%, it will have to go up by 100% just to break even. In fact, the larger the losses, the more significant the subsequent gains have to be to get the investor back to square one. 

 

Losses work geometrically against you. Sitting on cash during crypto bear markets can allow you to potentially sidestep devastating losses that can be hard to recover from. Sidestepping a bear market would require the timing of the markets. While no one indicator consistently predicts the tops and bottoms of the crypto markets, there are trading indicators that you can use to make more informed decisions. 

 

The importance of minimizing losses and preserving the capital of your crypto portfolio cannot be overstated. To be in the crypto markets for the long run, you will need to be able to tide through the (significant) declines in prices during a bear market.

 

While bear markets are a natural part of the investment cycle, there are strategies (some of which we have shared with you in this article) that you can use to minimize the impact on your crypto portfolio. 

 

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. 

 

Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.


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