Due to the nature of cryptocurrencies and the wide price swings often seen in the crypto market, bear markets can quickly start and finish. Here are a few trading trips to maximize your returns while trading in a bear market.
What Is a Crypto Bear Market?
A bear market is typically defined as when market prices drop by 20% or more. This 20% rate is not fixed; bear markets frequently cause price falls that are much higher than this figure, and investor pessimism and low confidence levels can lead to even greater drops in price, even if there is good news in the market.
Bear markets often develop right before the economy enters a recession, and economic figures such as poor hiring, slow wage growth, high inflation, or dramatic changes in interest rates that indicate a slowing of the economy can lead to a bear market. In the crypto space, these same factors can also lead to dramatic changes in prices, and other developments such as if a government is banning cryptocurrencies or is introducing more stringent and complex KYC requirements can also lead to significant drops in price.
Here are a few trading strategies that you can use to maximize your returns and/or limit your losses in a bear market.
Adopt Dollar-Cost Averaging
Dollar-cost averaging is when you invest a fixed amount of money at fixed intervals, such as investing $100 in a certain commodity or token every week or every month. By doing this, you do not have to time the market. You essentially hedge between the market falling further after you buy and being able to enter at a lower price point by buying before the market rallies.
By diversifying your holdings, you enjoy the benefit of potentially having a few winners amongst many losers in a bear market. Not all industries, tokens, or platforms will perform badly or fall in price during a bear market. For example, with traditional stocks, even if the market is slumping, some industries may do well, as we saw with the home industry even though the rest of the market was falling due to the pandemic.
Similarly, when it comes to cryptocurrencies, some tokens and platforms such as Layer-2 solutions may do well when other projects are doing badly. This recently happened when projects such as Polygon and Loopring enjoyed considerable success when the rest of the market was suffering from high gas fees, congestion, and falling prices.
Buy and Hold for the Long Term
Remember that you are in the game for the long run. Bear markets are simply a test of your patience, and too many “weak hands” fold in bear markets. The statistics show that many “whales” accumulate high-cap tokens such as BTC and ETH during bear markets when prices are low since these players expect prices to eventually rise. By buying during the bear market, they can buy low and hold before prices rise again. Adopting a similar strategy is just as beneficial for smaller players as it is for savvy, well-funded institutional players.
Do Your Research to Identify Opportunities
Finally, one of the best strategies for bear market trading is the same as general investing at other times: identify promising opportunities and buy into them. First, do some research on past bear markets to identify the sectors, tokens, or projects that went up or maintained prices during prior bear sessions and invest wisely a proportion of your money in those projects. Second, identify promising projects that are expected to do well over the long run and invest in those as well. Bear markets do not last forever and if you can correctly pick a promising project that will deliver benefits to users, market prices will eventually pick up for those projects and you can make handsome returns by having bought low and selling later at a higher price.
Identifying the Onset of a Bear Market
You can use a number of indicators to predict when a bear market may begin.
First, look at interest rates. To encourage borrowing and investment, the Federal Reserve lowers interest rates when it expects the economy to slow down. This is a sign that a bear market may soon be on its way.
Second, look at trend lines. If short-term moving averages of several tokens or industries are headed downward, this may indicate that a bear market is on its way.
Finally, even though this measure is more about short-term corrections than a true bear market, if a token is overbought, you can use these figures along with RSI (relative strength index) numbers to predict that a correction is due. In the crypto space, corrections can be as high as 15-20% or more, which is as high as the price falls seen in bear markets. Learn more about diverse trading strategies at our blog post here.
Wisebitcoin and Cryptocurrency Trading
Wisebitcoin was founded to make it easier to invest in and track a wide range of cryptocurrencies. With advanced and easy-to-use trading tools and access to many popular tokens and assets, Wisebitcoin helps investors participate in and invest in many different crypto projects and platforms with the potential of earning returns using different trading strategies.
Whether you’re looking to diversify your portfolio, learn about different projects, or generate income using trading strategies of your choice, Wisebitcoin can provide you with the liquidity and access you need to succeed. Learn more about our platform or open a new account by visiting Wisebitcoin.