Investing during bull runs might seem like a piece of cake. But what can you do when prices start falling? Well, to begin, you need to adapt to the downturn, both mentally and technically. This guide will teach you how to prepare for a bear market that could be right behind the corner.
In our post, we explore the crypto market cycles, how and why they occur, and how to detect a market shift before it’s too late. We will also try to help you prepare mentally when everything seems to be going wrong. Moreover, we will provide some foolproof strategies to conserve your hard-earned capital. You will even be able to start making profits even though prices are plunging.
What Are Stock Market and Crypto Market Cycles?
Bull markets, like the one the crypto and stock markets are currently experiencing, can be quite exhilarating. When every coin is going up, everyone’s a genius. No matter which project you invest in, the money just seems to be pouring in. The meme coin craze of 2021 has emphasized this FOMO aspect of cryptos even further. It brought investors insane profits with zero fundamental value.
However, at seemingly regular intervals, the market comes tumbling. Prices crash and no amount of good news seem to have a positive impact anymore. History has shown us that markets – commodities, stocks, bonds, all work in cycles. Crypto is no exception.
In crypto, the bull market cycles are closely related to the Bitcoin reward halving. This is a mechanism that is hard-coded in Bitcoin’s protocol. To control the ongoing supply, every 4 years the mining rewards for Bitcoin are cut by half. Because of the impending scarcity, this usually has a positive impact on Bitcoin’s price.
This becomes a catalyst for the rest of the market, which ignites a cycle of FOMO (fear of missing out). Prices soar and everyone’s a winner!
That said, all of these all-time highs have been followed by stark price declines. These can last from a few months to several years and can be quite taxing on both your morale and portfolio value.
How To Prepare for a Bear Market and Detect a Market Downturn
Bear markets can be caused by a combination of various events, too numerous to list here. However, they usually start with market exhaustion paired with a major negative macro event.
- In 2013, it all started with the seizure of Silkroad funds and was followed by the demise of Mt. Gox, the biggest bitcoin exchange at the time.
- In 2018, the burst of the ICO bubble and stark regulations against these crowdfunding practices initiated the 2019 crypto winter. As a result, the crypto market cap fell by 85% in just 1 year.
And while there are no surefire ways to tell that the market has reached its peak and it’s about to tumble, there are some indicators that can give you some hints. These mostly include:
The first thing you need to assess is a shift in a market trend. Any financial advisor would tell you that in traditional markets, a drop of 20% in value means a shift into a bear market.
In crypto, this is not as easy to estimate, as these digital assets have been able to recover from such crashes in the past.
In the above chart, we can see that Bitcoin managed to recover from a 50% price decline and regained bullish momentum after reaching a crucial support line.
The second factor that can influence the market is the behavior of the investors themselves. If the general sentiment of the market is becoming extremely fearful, this could lead to massive sell-offs.
In turn, these sell-offs contribute to prices going even further down, leading to more sell-offs and so forth. To effectively judge the market sentiment, you can:
- Consult the Bitcoin Fear and Greed index.
- Use social monitoring tools, such as Lunarcrush.
- Follow the news closely, and try to “feel out” the sentiment by the amount of negative news in the media about the market you are invested in.
To be fair, detecting a market top in crypto is quite challenging. This is why you need to learn how to prepare for a bear market even if all the signals are pointing upwards. This way you will be able to react quickly when it happens and limit the damages.
How to prepare for a Bear Market Mentally
So, now that you know how to detect market shifts, it’s time to learn how to prepare for the bear market that is inevitably coming. When crypto and stock prices are falling, the most important thing is to stay positive. While bear markets can be very unpleasant for your portfolio value, they can hurt you even more mentally. Capital loss or hindsight regret can weigh heavy on one’s shoulders and can even drive you to depression. This is why it’s extremely important to:
Take a Step Back From Everything
The first thing you need to do when entering a bear market is to take a bit of distance from your investments. Being mindful about your crypto dealings is your first step towards a successful and carefree investment process. A market crash can be overwhelming, and you might be tempted to make up for your losses by reinvesting without careful financial planning.
Taking a breather while the markets stabilize might be the best thing you can do for both your health care and your capital.
Avoid FOMO and FUD at All Costs to relieve your Anxiety
The fear of missing out (FOMO) is a strong market driver in crypto. Given that some cryptocurrencies can double or even decuple in value in just a few days, it can be very hard to resist the temptation to jump on a new investment.
However, investing in random coins, especially in a bear market, can be a recipe for disaster. More often than not, these are mere fakeouts. By the time you have bought in, the price starts to fall, keeping you in a losing spiral where your portfolio value disappears right before your eyes.
The same goes for FUD (fear, uncertainty, and doubt). It can drive you to sell your assets at a loss, which you might regret in the future. Make sure that you keep your emotions in check, and you will be better off in the long run.
Keep Some Perspective
During a market decline, it’s hard to see the light at the end of the tunnel. Everything might seem grim in the short term, with the media usually doubling down on this negative sentiment with news about wars, the pandemic, US stocks crashing, etc. In these instances, remember this: “When in doubt, zoom out”.
The long term is usually much more positive, especially regarding cryptocurrencies. When looking at the big picture, you will realize that markets come and go in cycles and that sooner rather than later, you will come out on top. When your investment spreads over a whole decade, the bear markets in your journey will be nothing more than a blip on the charts.
How To Prepare for a Bear Market by Reallocating Your Portfolio
Staying on top of your mental health is important, but it’s only one part of learning how to prepare for a bear market. In bear markets, you need to stay conservative about your investments, regardless of your risk tolerance. There are a few ways to do so, as seen below:
Diversify Your Assets
Limiting your capital to a couple of asset classes is extremely risky, at best. Because the crypto market doesn’t always correlate with sock markets such as Nasdaq and dow Jones, asset diversification can be a lifesaver in these instances.
You can invest in less volatile assets such as bonds or fall back onto equities that payout frequent dividends for a reliable fixed income. Real estate and dividend stocks remain some of the best ways to keep some cash flowing while the volatile crypto market stabilizes.
Use Stablecoins to Hedge Against Volatility
Another good asset allocation tip on how to prepare for a bear market is to put most of your crypto holdings into stablecoins when the prices start falling. These on-and-off ramp cryptocurrencies are pegged to fiat money and will retain their cash value while the rest of the market crashes. You will be able to shield yourself from the volatility, while you wait out the turmoil, and find a better market entry point.
Stablecoins are also one of the best ways on how to make money in a bear market. You can lock them on various lending platforms at good interest rates and earn between 5 and 10% yield entirely passively, with extremely low risks.
Limit Your Exposure to Risky Assets
Finally, if you want to remain in the crypto ecosphere, rebalancing your portfolio will be essential to preserve your capital. The MO is to:
- reduce your risky positions to a minimum
- allocate your capital into strong assets such as Bitcoin and Ethereum.
A good crypto portfolio for bear markets consists of 60% stablecoins, 20% Bitcoin, 10% Ethereum, and 10% high-risk assets. This last part will allow you to take quick profits from coins that are hyped-up in the short term and make up for your losses.
Learn To Use Bear Market Investment Strategies
Many think that there’s no money to be made in a bear market. After all, how can you profit, if the prices are going down? Actually, the next bear market could be the best period to accumulate even more Bitcoin on the cheap so that you can take profit once prices start soaring.
Keep an Eye on Good Projects for Swing Trading
Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”. Once the market has bottomed out or entered an accumulation phase, smart investors will use this opportunity to make profits with short-term trading.
Moreover, this is when good analysts shine. In bear markets, instead of hype, it’s the fundamentals that drive the prices. If you are able to find the coin that really manages to innovate, you can strike a gold vein. This was the case with BNB during the 2019 bear market. Savvy investors were able to triple their money while everything else was losing value.
DCA While Everything is on Discount
Dollar-cost averaging is one of the most risk-free investment strategies available. Regardless if you are investing on Wall Street or in crypto, DCA will allow you to slowly accumulate various assets and take the volatility out of the picture.
This long-term investing strategy implies that you will be buying a selection of assets, for a fixed amount, at regular intervals. This has two advantages:
- It avoids the misfortune of investing all of your capital at once before a price drop.
- It softens the price curve and makes your investment less dependent on price spikes or drops.
In a nutshell, your goal is to accumulate a large number of assets that will inevitably regain their value in the long term.
Use Shorting as Your Bear Market Strategy
If you are still wondering how to make money in a bear market, you can use shorting as a high-risk, high-reward bear market strategy. This involves betting against the price of an asset, meaning that you are expecting its value to drop.
But how do you make money by shorting? Well, for starters, you never purchase any assets. Instead, you borrow said assets and sell them immediately at market price. Once the price drops, you buy back the assets, return them to the brokerage that lent them to you. You then pocket the difference and make profits from the price dip.
Keep in mind that this is an incredibly risky technique. If the market goes up, there’s no limit to how many losses you can register. Set stop losses and never use high leverage if you don’t want to destroy all of your capital at once.
In this article, we gave you some good pointers on how to prepare for a bear market. Through careful planning, wealth management, and mindfulness, you can come on top of these inevitable gloomy periods. If you use some of the bear market strategies we gave you, you can even accumulate some additional crypto assets in preparation for the next price rally. Finally, remember to prioritize the other valuable investments in your life, such as your mental and physical health, education, and personal relationships.