What to Do in a Crypto Bear Market? 8 Strategies to Apply

You will have heard about the bulls and bears of trading. If you are new to this space, it can be hard to remember which term means what. A simple way to remember it is that "bulls can run," which denotes a buoyant and active market, while a "bear can have a sore head," which denotes a weakening market.

Simply put, a crypto bear market is when a cryptocurrency market trades at 20% lower than their previous high mark for an extended period. Given that crypto prices are much more volatile than other financial assets, the 20% mark is important here. Before you take any action, be certain you are aware of the total picture. When a crypto bear market is brewing, early signals almost always show up on Bitcoin’s price movement. Other cryptocurrencies normally fall into line behind it. 

Here are some keys to navigating a bear market, with explanations to come:

1. Stay Calm and Assess your Options.

2. Carefully Assess the Current State of the Market.

3. Avoid Leaving Your Crypto on Exchanges.

4. Don’t Try to Time the Bottom.

5. Look out for Dollar-Cost Averaging (DCA).

6. Avoid Shorting in a Crypto Bear Market.

7. Consider Staking.

8. Diversify Investments Across Various Crypto Assets. 

Quick-but-Critical Definitions

Bear and bull markets apply to all forms of financial trading. The crypto market is young and developing and is giving new meaning to bear and bull markets as every phenomenon related to crypto is supercharged. The highs are higher, and, as we have seen from recent bear markets like the crypto winter of 2023, the lows are lower.

Bear Market: As we've said, this scenario is defined as a prolonged drop in asset prices, leading to your portfolio decreasing in value. In a bear market, asset supply is generally greater than demand because – and you see from where the name comes – the “bears” begin to sell losing assets before further price drops.

Bull Market: When asset prices are increasing over a prolonged period and your total portfolio increases, i.e., the opposite of a bear market. Confidence returns to the investors, and they return to buying, leading to a condition where prices rise, or are expected to rise. 

Bull Vs. Bear market

Generally, investors are bullish, and most assets – including digital ones – normally post positive returns on investment (ROI) in the long term. However, things change and that is why you are reading this.

As bull markets normally persist for a longer time period, it is easier for investors to return a profit. Navigating a bear market, while it is still possible to profit through shorting, is more difficult. So much depends on investor psychology and risk management, but there is more to be considered.

Crypto Winter

Before launching into our helpful guidelines, here is one more key term you need to know - “crypto winter.” This term has nothing to do with the time of year or the weather. This rather dark and apocalyptic term instead refers to a lengthy period – normally measured in months – during which most digital assets dip steeply in price. One such crypto winter came between early 2018 and mid-2020, when Bitcoin dropped more than 85% of its value compared to its all-time high. Other cryptocurrencies dropped 90-95%. Guess what? After rebounding and going on a bull run, the crypto market fell into a bear run again in 2023, losing almost all its value.

Eight Strategies to Employ in a Crypto Bear Market

Nobody buys into crypto expecting to weather a prolonged bear market. Most crypto investors are attracted to the high upside of the asset class and the promise of steep gains. Thus, it takes a mental adjustment to accept a crypto bear market when it comes around. To help you navigate the inevitable (every assets goes through up and down cycles) downturn in crypto assets, we have collated a list of the best actions available to you:

1. Stay calm and assess your options

Don’t panic and, as much as you are able, calmly consider where you are. This is crypto. Volatility should be baked into your trading plan. The absolute worst thing you can do is make rash decisions. Emotional decisions will come back to haunt you, particularly as a trader. Renowned American economist Benjamin Graham once said, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

Begin by going back to ask yourself why you invested in crypto initially. Was it to make a quick buck by trading short-term or did you believe in crypto’s long-term possibilities? Did you want to be part of as many opportunities as you were able? The answer sets the stage for you moving forward out of the bear market, unscathed.

2. Carefully assess the current state of the market

In 2023, Bitcoin fell to a low of just under $17,000. Saying that out loud was scary to many because Bitcoin’s high, just a few months prior, had been $69,000. At the time of writing, after Trump's second inauguration, Bitcoin is trading at $104,000. It is a market that is synonymous with bull and bear periods.

In a bear market, don’t be anxious about selling. As noted above, it is not easy to control your emotions during bear markets. Therefore, analyze why prices have fallen and dig deeper into the reasons. Develop your own solutions. Re-strategize before taking any action.

Take your time to research and learn about one or more of the cryptocurrencies. Always rely on credible sources and track the market regularly. As an investor, it is imperative that you know about crypto market trends and changes.

For investors with a higher understanding of technical analysis, i.e., predicting an asset’s price movements based on patterns, indicators and chart trends, there are indicators that gauge when an asset has hit bottom. One method is to track the asset's moving average. Two key elements of the tool include providing a hint on whether the crypto is overbought or oversold.

3. Avoid leaving your crypto on exchanges

This advice applies to traders who own actual crypto, not traders who have invested in crypto through contracts for difference (CFD). While there always is a concern about having your cryptos on a custodial crypto exchange, the risks of losing them completely increases greatly during a turbulent bear market. A sudden market crash could lead to some/all crypto exchanges becoming insolvent. This is not being said just to scare you; it is always a possibility. Therefore, opt for a non-custodial wallet app or – even better – a test hardware wallet, where you have full control over your crypto holdings.

4. Don’t try to time the bottom

It is a fact of life that no one can accurately predict the bottom of a bear market. You can devote all your available time to research and analysis and the best you can do is make an educated guess. Certainly, the more you study and analyze, the better your “guesses” become, and that is exactly what the experts do. However, one bad call and all could be lost, which takes us back to the headline of this section, which is about what you can do to ride out bear markets. Still, learn all you can in order to make your best moves, but do not put all of your holdings into that one “sure thing.”

5. DCA

An investment strategy that is usually successful during a bear market is  Dollar-Cost averaging (DCA). With this strategy, you continue to purchase small amounts of an asset over time, regardless of the price. A typical DCA schedule would see you investing $50 in Bitcoin every week rather than $200 all at once. Of course, you may change your DCA schedule occasionally, as you desire.

6. Avoid shorting in a crypto bear market

Traders use shorting as a technique to profit from falling crypto prices. Normally, shorting is an ideal method for use when an asset hits an established support level, i.e., within the normal course of business. However, many experts do not favor the approach when it comes to Bitcoin or other cryptocurrencies because it could lead to unlimited losses or even liquidation of your position. This is a fundamental issue with shorting and no amount of experience can prepare you for a market whose bottom is falling out.

Shorting is selling an asset at a high price with the intention of repurchasing it later at a low price. In practice, it is borrowing a certain cryptocurrency at a current market price and selling it immediately. When prices fall, you purchase the same amount of crypto at a lower price and return it to the lender, profiting from the difference.

For example, when you purchase a crypto (going long), you can never really lose more than the amount of that investment. Thus, if you purchase Bitcoin for $1,000, the maximum you could lose is $1,000. By contrast, the potential gain is limitless (at least on paper). If you short Bitcoin for $1,000, the maximum you will gain from that trade is $1,000. However, if the crypto’s price begins to increase and the uptrend continues, your losses could pile up indefinitely. To make matters worse, if you short using margin, you must continue paying the interest charges, in addition to the original loss, for as long as you choose to keep your position open.

7. Consider staking

Staking is the practice of locking away your coins on a proof-of-stake (PoS) blockchain for a period of time and being rewarded for it. This may be a good way for you to earn a passive income from your crypto holdings. It is an easy-to-use strategy that also minimizes the emotional impact of a bear market. You can stake coins and earn extra income during a crypto bear market. Many layer-one protocols permit the staking of native tokens on their networks for yields.

8. Diversify investments across various crypto assets

With more than 17,000 cryptocurrencies on the market, no one can predict which one will rank highest or recover quickest, just as it is difficult to predict just how long the crypto bear market will continue.

You should investigate various cryptos to learn their all-time highs and their overall performance and to determine their roadmaps. A new roadmap announcement, which might include a new partnership or rebranding, just might be a major clue that crypto is on the up. 

One approach to hedging your bets is to use DCA for a range of different crypto assets, which may even involve reducing trade sizes even more. Before making such a move, learn and understand previous all-time highs and past performance, and how your chosen crypto fared in previous crashes. 

Additional Investment Strategies for Bear Markets

Every trader’s situation is different. Make sure you cover your costs, i.e., living expenses, if you are trying to make it as a full time trader. If you are dependent on short-term market gains to pay the rent, you are not in a position to make sustainable choices as your portfolio value takes a dive.

Avoid volatility. If you are working through an investment house, consider moving a portion of your crypto holdings to gold, cash or some other stable asset. 

Identify growing market segments. Some cryptos retain their value better during a severe market downturn because they are associated with market segments that are seeing substantial growth. Crypto examples are those used in online gambling, the video game industry, or fan-based NFT marketplaces. These are worth evaluating, particularly if you already have specific knowledge about such market segments.

Look beyond price. Although a crypto’s price may drop in a bear market, there still may be advantages to owning some coins. Some funds earn fees from lending coins to a liquidity pool or staking them to a blockchain consensus network. Alternatively, you may want to hold onto crypto to preserve your position in the decentralized autonomous organization that sets policies. Although Bitcoin is a pure currency, more and more altcoins are tied to key technologies and can continue to deliver financial rewards.

Invest in derivatives. These are complex financial instruments that permit investors to minimize risk and make money even when market prices decline. Blockchain derivatives that handle crypto futures and options are starting to become more prominent. While not entirely without risk, they allow experienced investors to make big profits in falling markets. 

Conclusion