5 Ways to Survive the Crypto Bear Market
A bear market is characterized by extended periods of falling prices. It's typically defined as a situation where security prices drop by 20% or more from their recent peaks. Bear markets are usually linked with overall market downturns, such as those in the crypto market, but they can also be related to specific assets. For instance, if Bitcoin undergoes a prolonged price reduction period, it could instigate a bearish phase in the crypto market. The prospect of falling prices may seem intimidating, particularly for newcomers. However, this slower and less buoyant market stage presents various opportunities. Here are five tactics to maximize the potential of bear market periods.
Stalking
Blockchains such as Cardano (ADA), Polkadot (DOT), Solana (SOL) and more offer the option for their holders to engage in staking within their networks. Staking involves committing your cryptocurrencies to a specific network, acting as a validator (responsible for confirming transactions) on that blockchain, and subsequently earning rewards.
Cryptocurrencies that employ the Proof of Stake (PoS) consensus mechanism permit staking on their platforms. Transactions like USDT to USD are verified on the network using the PoS system, similar to miners operating within the Proof of Work (PoW) consensus. You are rewarded with new tokens whenever a block is successfully validated on the blockchain.
Staking provides a means for passive income through your crypto assets, which can be used to offset any losses during a bear market. This process necessitates tying up your cryptocurrencies, thereby preventing panic selling. However, it's worth noting that staking also reduces the liquidity of your crypto assets.
Concentrate on the Long Term
Nobody can predict the end of a bear market. History shows us that in traditional finance (TradFi) and crypto, every bear market is invariably followed by a bull market. Many traders formulate a long-term strategy that remains unswayed by temporary market volatility; this ensures they neither invest beyond their means nor find themselves liquidity-strapped when they wish to buy.
The peaks of bull markets can be exhilarating, just as the troughs of a bear market can be intimidating. These occurrences often evoke powerful emotions, particularly among those new to the crypto market. Maintaining composure during lows and highs has consistently been a winning trading tactic.
Avoid Shorting
Shorting is a strategy used by traders to profit from a decrease in the value of cryptocurrencies. This makes it an ideal technique during bear markets, where price declines are frequent. Yet, many experts caution against shorting Bitcoin and other cryptocurrencies because of the potential for unlimited losses or position liquidation. This inherent risk associated with shorting cannot be mitigated entirely by experience, and unexpected downturns can result in significant losses.
When you purchase a cryptocurrency (a long position), your losses are limited to the amount you've invested. For instance, if you buy $100 worth of BTC, your maximum potential loss is $100. However, the potential profits are theoretically limitless. Imagine the BTC price soars, turning your $100 investment into $500, $1,000, $10,000, or more.
The situation reverses when shorting. If you short a coin at $100, the most you can make from that transaction is $100. If the crypto's price begins to rise and continues on an upward trend, your losses could accumulate without limit. If you short with leverage, you'll have to pay interest charges on top of the original loss for as long as you maintain the position open.
Dollar-cost Averaging
During periods of crypto market decline, a negative year is not unusual and forms part of the overall business cycle. If you're an investor with a long-term horizon, meaning you're targeting an investment period exceeding ten years, it would be beneficial to utilize the dollar-cost averaging (DCA) strategy.
Dollar-cost averaging is an investment approach where the total sum to be invested is spread over regular purchases of an asset, aimed at mitigating the effects of market volatility on the aggregate purchase. These purchases are made at consistent intervals irrespective of the asset's price.
By acquiring crypto assets regardless of price, investors often secure them at a significantly lower cost during market downturns. Ultimately, this allows investors to lower their average cost, improving the overall entry price for their crypto assets.
Yield Farming and Liquidity Mining
Yield farming involves you supplying your digital assets to decentralized finance (Defi) platforms as a holder of cryptocurrencies. This contribution bolsters the liquidity of these platforms, and you take on the role of a liquidity provider. Liquidity providers are entitled to rewards from the platform, which are typically derived from the platform's own revenues.
For example, if you deposit your cryptocurrencies in Uniswap, a prominent decentralized exchange (DEX). Doing so contributes to the Uniswap Liquidity Pool and becomes a liquidity provider, making you eligible for reward earnings. Beyond these rewards, Uniswap also provides you with UNI tokens, the network's own tokens, at no extra charge. This practice is referred to as Liquidity Mining. Both approaches offer complimentary tokens and a source of passive income, which can serve as a buffer against losses during a bear market.
Endnote
Achieving a perfect strike rate is virtually unattainable, regardless of your experience level in the game. Nevertheless, applying the strategies we've talked about will greatly diminish your vulnerability to crypto bears. In addition, adhere to other fundamental practices like always setting stop-loss orders if you're trading.