How to Survive a Bear Market
Sep 24, 2022
Bear markets occur regularly throughout history and are normal. Are your portfolio and state of mind ready? We’ve got you covered.
What is a bear market?
A bear market is the opposite of a bull market and is usually defined by a prolonged drop in asset prices. It is no coincidence that bears give the trend its name. During an attack, these animals knock their prey down with their paws to tear them apart.
Within the crypto space, this period is also called Crypto Winter. Most likely, the term was derived from the hit HBO series “Game of Thrones”. In the series, “Winter Is Coming” is a famous line from the Stark family, which is used as a warning that a lasting conflict or trouble could descend at any time.
Pullback, correction, or bear?
There is no sharp definition of how much assets have to decrease in value to call it a bear market. Generally, a "bear market" is said to be when prices drop by at least 20% compared to their most recent highs, and the decline continues for a longer period of time.
There are two more terms that also describe a market downturn: a pullback and a market correction.
- A pullback is a minor drop of 5% to 10% that is only short-term, usually lasting just a few days or weeks.
- A correction occurs when the market drops at least 10% from its most recent peak. Such corrections occur more frequently. A correction can also refer to a price drop in an individual asset, but a bear market usually refers to the market in general. This means the decline occurs not only within the crypto space but in multiple market segments like stocks, precious metals, real estate, etc.
What causes bear markets?
A bear market occurs when there are more sellers than buyers.
There are a lot of things that can have an influence on prices going south: economic slowdown, a pandemic, geopolitical crises/wars, changes in the tax rates, rapid inflation, high unemployment rates, etc.
People faced with uncertainty tend to de-risk their market positions. Cryptocurrencies are high-risk assets that investors tend to get rid of in exchange for more secure assets like gold, cash, and real estate.
How long do bear markets last?
In the past, a "cycle" in crypto lasted for 4 years, and the technological advancements (e.g Bitcoin Halving) behind a cryptocurrency have been a catalyst for the start of a markup phase for the asset. Previously, a halving event caused a year-long price surge, followed by a 1-year bear market before slowly recovering to the previous peaks across a timeline of 2 years. Will this scenario play out again? We've no clue and past performance is not indicative of future results.
What are the early signs of a bear market?
While it is impossible to predict when prices will drop and we enter the bear territory, there are some things to keep an eye on which can help us to read whether we are entering a downturn.
- Extreme optimism. The more bullish and confident the public sentiment is, the riskier the market becomes. “Up only” moods accompanied by endless rocket emojis on Crypto Twitter might raise some red flags for you and be a sign to rethink your portfolio/strategy. As Sir John Templeton once said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”, when people are euphoric, they’re less likely to notice little but significant things happening.
- Slowing economy. It is earnings call season and companies report numbers that are way below analyst expectations. Yikes. A slowing economy affects the availability of money, which in turn affects trading volumes. E.g. High-interest rates make money much more expensive in the economy.
- Business downscaling. Businesses also get affected by economic downturns. Corporate profits start to decline, and growth stagnates, which then leads to staff layoffs and budget cuts.
- Low consumer confidence. People begin losing faith in the market as a whole and seek to sell their coins and tokens out of fear of loss. At the same time, there are no new buyers entering the market, and a bear arrives.
How to prepare for bear markets?
Invest only what you are willing to lose
Investing is always risky. Rule number one is to only invest what you can afford to lose, and to understand how much ‘spare’ money you have. Invest only the money that won't harm your lifestyle in any way.
Define your investment strategy
Do you know what you are saving or investing your money for? We don’t take “I just want to be rich” for an answer. There’s always something lying underneath this desire — make it tangible. Also, consider your investment time horizon i.e. the period of time you expect to hold your investments until you need the money.
Setup an emergency fund
An emergency fund is a separate account used to cover or offset the expense of an unforeseen situation. While the size of your emergency fund will vary depending on your income, lifestyle, and monthly expenses, a rule of thumb is to put away at least three to six months' salary. This fund is your safety net and it shouldn’t be considered as part of long-term savings and investment plans.
Diversify investments beyond crypto
Putting all eggs in one basket is risky. In every bear market, some market segments get hit harder than others. A diverse portfolio can help you minimize losses and take advantage of gains in growing markets. While we love crypto, there’s so much more out there than just blockchains. To have a truly diversified investment portfolio, you may want to consider adding bonds, commodities, stocks from different industries, countries, and risk profiles, as well as real estate to the mix. DYOR, friend, Do Your Own Research.
Don’t follow investment advice blindly
Rule #1 in Crypto: Everybody is shilling their bags. This is when people get the word out about the assets that they own in hopes of pumping their price. It may be difficult to distinguish a shill from an unbiased post, but sometimes it's pretty obvious. The best way to protect yourself from these market practices is to do your own research.
How to deal with bear markets?
Ok, so you didn’t take profits and have become a bag holder. Now what? You need to survive. Traders' balances can get completely wiped out during bear markets. We have some tips for you to increase your odds of survival.
Don’t try to make your losses back
When everything goes south, investors tend to feel the need to try to take control of their portfolios. Doing more trades and trying harder is not the recipe for the desired results. Instead, stick to your original investment strategy and don't apply leverage when trading.
What would you do if you encountered a grizzly bear in the woods, who’s preparing to attack? Would you fight back or run away? Both options are life-threatening. There's no point in running away from a bear, it's much faster, catches up with you and then if you fight back, it tears you to pieces. But one chance at survival is to do nothing and play dead. If a bear thinks you're dead, it loses interest and moves on. So by staying calm and not making any sudden moves, you'll save yourself from becoming a bear's lunch.
This strategy can also be applied to the market. Trying to trade back your losses is just as futile as fighting a bear. And if you panic sell every crash, your portfolio will be mercilessly eaten up by the bear. Instead, remember your investment strategy and why you included certain cryptos in your portfolio. Has something changed fundamentally in your long-term investment thesis? If not, simply doing nothing and playing dead might be the best strategy.
DCA instead of BTFD
The term dollar-cost averaging first appeared in Benjamin Graham’s book ‘The Intelligent Investor ’. In the book, Graham defines DCA as a strategy in which:
“The practitioner invests in common stocks the same number of dollars each month or each quarter. In this way, he buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all his holdings.”
Make DCA your friend. While a real friend can help you deal with your emotions, DCA takes them out of investing and helps to avoid the temptation to time the market. To begin, decide on the amount you want to invest, choose the assets you want to accumulate, and make small regular purchases according to a schedule. You can even activate the “recurring buy” feature in your favorite exchange’s app, it’s quick and easy.
Use the extra time to DYOR
DYOR is a very common saying and it stands for “Do Your Own Research”. The primary reason people DYOR in crypto is to make informed decisions about their investments and to protect their assets. Learning how to evaluate a project is the #1 way to long-term success in the market.
Here’s a list of things to consider before investing:
- The utility and use cases
- The team behind the project
- Market cap
- Trading Volume & Liquidity
- Circulating Supply vs Total Supply
- The White Paper
- The Road Map & Vision
- The Community in general and on socials
Keep coins off exchanges
This goes without saying. Take your coins off exchanges. Bear markets can be brutal and even some of the biggest players of the past bull can file for bankruptcy. As a user, you may have your crypto assets frozen with no access. Check out our crypto wallet guide, if you haven’t moved your coins to cold storage yet.
Have faith in market recovery
Crypto bear markets are inevitable and always very uncomfortable for investors. If it's your first downturn, give yourself the gift of learning everything you can off of it, about the markets in general and how you react and perform during these times. It will pay off down the road because the next bear market may always be around the corner. Stick around and be ready when the market recovers.
Disclaimer: This article doesn’t serve as financial advice. Its only purpose is to explain and educate about the available options. None of the strategies given should be considered solutions to your situation or absolute truths.