5 Rewarding Strategies to Overcome Crypto Bear Markets

By Anush Jafer
10 Min Read

The high reward and high risk that comes with investing in crypto assets are challenging for new investors entering the space. Crypto bear markets, especially, test the resolve of these individuals as assets print double-digit losses over an extended period. During these bearish phases, investor and overall market sentiment are at an all-time low. Most investors experience extreme fear that causes them to panic sell their positions at a loss.

However, crypto bear markets present a rare chance to accumulate assets at discounted prices and position oneself better for the next bull run. With the right strategies, from portfolio diversification to staking, it is possible to survive and overcome a bear market.

Opportunities during Crypto Bear Markets

Since its inception in 2009, Bitcoin and the broader cryptocurrency markets have experienced enormous cycles of growth and decline. These cycles are known as bull and bear markets. Market cycles with highs and lows, peaks and troughs are typical in all financial markets, including cryptocurrencies. In traditional financial markets like the stock market, bear markets refer to a sustained decline in asset prices by 20% or more. In crypto, however, volatility and downward price swings are far more pronounced. The reasons for the heightened volatility in crypto relative to other traditional markets are explained in this guide.

 

Given the cyclical nature of market cycles, bear markets are fortunately short-lived. Nevertheless, periods of steep declines and negative sentiment are challenging to navigate for experienced traders and novice investors alike. However, deciding to invest in crypto during a bear market can be a wise and strategic play for several reasons.

Discounted Asset Prices

Investors can purchase crypto assets at discounted prices and undervalued rates during bear markets. This allows investors to find bargain entry points to the market.

Accumulation

With discounted prices, investors can expand and increase the portfolio holdings of their preferred projects or crypto assets.

Lower entry barrier

When prices are lower, investing in a wide range of various crypto projects and assets requires less capital. Declining prices of crypto assets during a bear market give new investors with limited funds the opportunity to enter the market.

Risk to Reward Ratio

In a bear market, when asset prices are falling sharply, there is typically more upside price potential than downside. This is especially the case for proven and fundamentally strong assets like Bitcoin and Ethereum that have weathered the storm of previous bear markets. Entering the market during this period allows investors to buy low with the prospect of selling high when prices begin to rise again. That said, the risk of further declines remains. Therefore, it’s critical to have clear exit strategies to minimize losses if the market doesn’t perform as anticipated.

Strategies to Overcome Crypto Bear Markets

Even though bear markets offer opportunities for investors to position themselves effectively for the next bull cycle, the truth is that most investors find it challenging to seize these chances. These missed opportunities are caused by a lack of thorough understanding of what constitutes a crypto bear market and a failure to learn strategies seasoned investors use to maneuver bear markets. The following are some of the most popular strategies to minimize risk during crypto bear markets.

1. Portfolio diversification and allocation 

According to CoinMarketCap, there are over 22,200 cryptocurrencies. Not all of them will yield high returns, nor will they all result in losses. Spreading investments across different assets helps minimize risk and the potential impact of any one investment’s poor performance. When prices are declining across the market, with some assets declining more sharply than others, diversification is particularly crucial during a bear market.

From DeFi summer and the NFT revolution to play-to-earn games and the metaverse, narratives in the crypto sector are fast-paced and evolve quickly. Therefore, learning about different sectors within the cryptocurrency space, following trends, and appropriately diversifying a portfolio across industries can be beneficial in the long run. This strategy offsets losses in one market sector while taking advantage of potential gains in a different sector.

Portfolio diversification and allocation go hand in hand. While lower market cap projects could yield extraordinarily high rewards during bull markets, the potential for losses is just as exacerbated during bear markets. Therefore, apart from performing rigorous due diligence, it is essential to have a well-balanced portfolio with a high percentage of blue-chip cryptocurrencies like Bitcoin and Ethereum. 

2. Dollar Cost Averaging

Crypto bear markets are unpredictable. It is notoriously difficult for even seasoned investors to predict the precise bottom of a bear market. Lumpsum investing, or investing a large sum of money at once, carries many risks, especially in a bear market. As asset prices fluctuate and drop rapidly in a bear market, a lumpsum investment quickly loses a significant portion of its value. In this scenario, investors are forced to hold losing positions for a prolonged period. This can have psychological implications for an investor, as losses from the significant investment induce a sense of pressure and anxiety to sell.

To combat the psychological pressure of investing a large sum of money all at once, a more viable strategy to adopt is Dollar Cost Average (DCA). This approach involves investing small, fixed sums at regular intervals over time, regardless of price fluctuations. DCA lessens the impact of short-term market fluctuations by helping to average the overall investment over time.

Many crypto exchange platforms like Binance and Coinbase also provide automated dollar cost averaging software. Using automated systems further helps reduce the stress associated with timing the market. 

3. Staking

Staking is a central component in the world of cryptocurrencies. Apart from staking aiding in securing networks and making them more decentralized, it is an important strategy to overcome bear markets. Staking is a rewarding strategy during crypto bear markets because it allows holders of certain cryptocurrencies to generate passive income by holding and staking their coins on a platform or wallet. This is accomplished through a process called Proof of Stake whereby the holder locks their coins in a wallet and is rewarded for helping to secure the network.

Investors are well-positioned for a bullish reversal when they generate passive income during a bear market. Furthermore, since investors’ assets are securely locked on a blockchain through staking, this inhibits panic selling.

4. Practice Emotional Regulation

The declining prices with crypto bear markets create an emotional whirlwind for investors. The volatility, uncertainty of the market, negative sentiment, and the dissemination of misappropriated news often trap investors in several cognitive biases. These biases often contribute to poor decision-making when making investments. 

Investors tend to weather bear market periods by avoiding constant price checking, adopting a long-term patient strategy, turning off external noise, and understanding cognitive biases.

Read this detailed guide to learn more about the common cognitive errors crypto investors make and the methods to overcome them. 

5. Do Your Own Research

The euphoric parabolic upswings in price driven by hype in crypto bull markets are non-existent in bearish phases. While the overwhelming sentiment remains negative during bear markets, the lull in the market also offers a window of opportunity for investors to increase their crypto knowledge. Therefore, investing in oneself is potentially the most fruitful course of action in crypto bear markets.

Expanding one’s knowledge about core crypto concepts like walletsself-custodywhitepapers, etc., learning technical analysis, engaging in crypto communities to identify market trends and events, and finally conducting due diligence on projects before investing position investors for success in bear markets. 

Conclusion

Crypto bear markets are a period of uncertainty and risk but are navigable. With the right strategies in place, bear markets could form a solid foundation for investors’ success in the next bull run. 

Despite market slumps, the crypto industry is advancing rapidly, as evidenced by growing institutional interest, user adoption, and job growth. As a result, the future remains bright for this growing industry.