The past few months have been brutal on the cryptocurrency markets, with bitcoin (BTC) dropping to $21,000 (approx) in June 2022, its lowest price since November 2020, and many cryptos falling over 90% from their all-time highs in late 2017 and early 2018.
Most analysts and investors agree that most of the market’s declines are caused by the simple fact that most cryptocurrencies are not viable long-term projects or investments, even though some of the current bear markets may be attributed to increased regulation and worry about falling Bitcoin dominance in the space.
Given the volatility that cryptocurrency generally suffers, the risks and difficulties brought on by a crypto bear market typically occur on a much broader scale. Even though they feel like the grim reaper, bear markets aren’t as terrible as traders and investors fear them. Occasionally, during a bear market, an opportunity to enter the market with lower risks, greater returns, and “dip-buying” chances will present itself.
However, bear markets often result in highly volatile price movements and losses, so without doing the required research, one could quickly lose everything during these times. This blog will go in-depth on the what, how, when, and why of crypto bear markets and survival strategies for 2023.
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What is a Crypto Bear Market?
The term “bear” indicates the attack style of a bear, where it starts high and then strikes downward with all its power and weight. In financial markets, bears are known for their market-crushing power. A bear market refers to a general downturn in a financial market that causes investor pessimism and economic losses. This can happen locally or globally but typically refers to national economies or markets. A crypto bear market is where both cryptocurrencies and digital assets suffer price corrections, market fluctuations, high volatility levels, regulatory changes, and more.
When there is a dip of 20% or more from the current value, then it is said to be a bear market. The last primary crypto bear market occurred between January 2018 and December 2018, when Bitcoin fell over 70%. It’s estimated that Bitcoin will take at least another five years to recover from its all-time high value of over $68,000. Investors are inclined to panic and sell when prices drop in a bear cryptocurrency market. Due to a decrease in demand, this may result in even more price cuts.
What Causes a Crypto Bear Market?
It may not surprise you, but bear markets in crypto are primarily driven by FUD (fear, uncertainty, and doubt). This can be translated into real-world actions such as a drop in trading volume or even people selling off their holdings. The main causes are warfare, political situations, pandemics, and sluggish economies, which may trigger the start of a bear market. Government intervention is also something that could cause panic among investors.
In terms of recovery, it’s hard to say what exactly will happen because there’s no precedent for how cryptocurrency behaves during a bear market. One thing is sure, though: if you sell your coins at rock bottom prices, then chances are you won’t have much luck when prices rebound again later on down the line.
These are the factors causing a crypto bear market:
1. Excessive Leverage
Your business is your responsibility, and everyone needs to accept that. However, some new crypto traders are taking on debt using digital currencies as collateral. This isn’t smart because if a coin’s value falls below your borrowing cost, you’ll have lost money, which could be more than what you started with. It doesn’t matter if you lose money on trade; it matters if you lose more than you had invested in the first place. And that’s what happens when people take on too much leverage.
2. Liquidity Shortage
It is often difficult for investors to exit a position when they want, especially when it involves highly illiquid cryptocurrency. In some cases, there may be no buyers willing to purchase at a certain price level. This can lead to losses even when markets rise because investors have difficulty getting out of their positions.
A prolonged period of high crypto market volatility could exacerbate problems with liquidity and make it more difficult for investors to look forward during a bear market. Cryptocurrency trading is dominated by small retail investors who might not be able? Or want? To weather long periods without the ability to exit positions or withdraw funds from exchanges.
3. Crypto Regulations and Bans
In 2018, Facebook outlawed all advertisements and ICOs linked to cryptocurrencies (ICOs). For those considering an ICO, this resulted in a significant setback. Over 1.4 billion people utilize the network, implying that access to clients has just been cut off by about 99 percent for many businesses and bitcoin startups. The ban remained in effect for nearly a year. Giants like Twitter and Google also made multiple similar measures in the same year, banning any advertising related to cryptocurrencies or initial coin offerings (ICOs) on their platforms, though they later removed the prohibition.
Additionally, a massive bear market resulted from China’s countrywide ban on cryptocurrency transactions in 2021. Other nations that outlawed cryptocurrencies include Iran, Bolivia, Colombia, Egypt, Indonesia, and Egypt.
4. Crypto Markets and Stock Market Link
We all know that people who invest heavily in crypto will be struck if the stock market goes down because, during a bear market, crypto traders tend to cash out their investments and get back into traditional markets such as stocks. That’s why it’s essential for you not only to diversify your portfolio but also to keep abreast of what’s happening with different investment markets (stock/real estate/etc.). If one market seems especially unstable, find something else that interests you and focus more on that.
Also, both markets act similarly. The traditional market is also on an upward trend when the crypto market is rising. And when the crypto market falls, then you can expect that the stock market will also fall. So you must keep track of what’s happening with these markets and plan your investments accordingly.
5. Crypto Influencers
Influencers tend to manipulate the market and try to promote a crypto coin based on personal intentions by simply posting a tweet or making a post about it. This is what causes people to buy or sell. This is called FUD (Fear, Uncertainty, Doubt) or FOMO (Fear of Missing Out). This can cause people who don’t know much about cryptocurrency investing or blockchain technology to lose money due to these influencers. In addition, many influencers have been involved with pump and dump schemes which are illegal in most countries.
Last year, Elon Musk did a few tweets in favor of Dogecoin and manipulated the crypto market for a few days. The SEC has taken action against such influencers, and so should you. It is highly recommended that you do not follow any influencer blindly but rather do your own research before investing in any project. Some companies pay for positive reviews about their projects; they call them bounty hunters. These companies pay bounty hunters in cryptocurrencies for writing positive reviews about their projects which helps them gain traction and popularity among investors.
6. Crypto Security Breaches
Due to the popularity of cryptocurrency exchanges, hackers will probably continue to attack them. Attack strategies used by hackers change as regulations and security precautions tighten. The theft of cryptocurrencies like bitcoin from exchanges and investors via phishing scams, malware assaults, and other methods was reported as numerous significant thefts in 2018. Users are actively finding ways to reduce their risk exposure and stop any breach or theft from happening because there is so much cryptocurrency money at risk. Panic ensues, and investors withdraw funds from the cryptocurrency market.
How Long Will a Crypto Bear Market Last?
At any given time, dozens of cryptocurrencies have seen their values drop precipitously from all-time highs and have subsequently been declared dead by some. But according to the last market dip, we can see that it took nearly a year for crypto markets to recover. So if you’re considering investing in cryptocurrency, knowing how long a bear market is likely to last before you commit your money is essential. And remember: just because crypto prices are down doesn’t mean they won’t go up again soon!
Well, for instance, Bitcoin was trading at all-time highs of around $69,000 in November 2021, but as we can experience now, it has fallen drastically and is currently trading at a price of around $20,378.55. But the same situation happens every now and then. It always bounces back. So if you plan to invest in crypto markets, you should keep patience and hold on to your investment until prices start rising again.
Top 7 Crypto Bear Market Strategies
Prepare yourself and your portfolio for possible market falls. At least 80% of crypto projects will fail—that’s a guarantee. While we can’t know precisely when or how low prices will go, here are some strategies you could follow to survive (and thrive) during crypto bear markets. We cannot stress enough that investing is a high-risk game, so follow these tips at your own risk—even if there is no sign of a market correction.
1. Buy the Dip
There’s no way around it; buying into a bear market will be costly. If you don’t play your cards right, you could buy at an all-time high and be locked into your position for a long time. This doesn’t mean that you should never invest during a bear market, but you should use trading techniques such as dollar-cost averaging, which can minimize risk while buying more coins over time. Dollar-cost averaging (DCA) refers to dividing one’s capital into fixed amounts and regularly investing those fixed amounts at set intervals.
For instance, imagine you have $5,000 in reserve money. Breaking the sum up into five tranches of $1000 or even ten tranches of $500 and trading with those smaller sums would be an excellent DCA technique.
DCA takes advantage of dips to maximize gains, resulting in significantly lower average prices per crypto coin over time. Buying the dip will be advantageous because it is not unusual for the market to return from the low to a higher position in a few weeks or months. Additionally, you won’t be able to “buy the dip” unless you have a stash of fiat currency, stablecoins, or spendable money in your bank accounts.
2. Diversify Your Crypto Portfolio
If you’re going to go into crypto investing, you must diversify your holdings. That means not just investing in one coin. It also means looking at other types of coins besides utility tokens and currencies like privacy coins, store-of-value coins, and new ICOs trying to solve real-world problems using blockchain technology. As a result, you might end up owning less of a given coin than you had initially intended if other projects turn out to be more useful or valuable than expected (e.g., Ether has been on an absolute tear lately). But remember: The whole point of crypto is buying low and selling high. If you’re not okay with that fact, don’t invest.
3. Understand and Utilize Technical Indicators
Technical indicators show the movement of prices visually. They let you view price movement throughout time rather than just at a single point. Technical indicators provide an advantage when determining why specific assets are performing well or poorly and how long that trend might stay. Most importantly, they aid in more accurate risk measurement. You must comprehend what technical indicators signify and how to apply them successfully in uncertain situations to make wise selections during a bad market. Investors can keep on top of complicated markets as they experience shifting market circumstances throughout a bear cycle by comprehending and using technical indicators.
4. Stake Crypto
Staking is a process that enables cryptocurrency owners to support and secure their blockchain networks while also earning rewards. In a nutshell, if you stake a cryptocurrency, you are helping confirm transactions on a blockchain by being an additional node. In exchange for doing so, you receive your own transaction fees and rewards (cryptocurrency). So, how do you go about staking?
The first step is to determine which cryptocurrencies have a staking mechanism. You can use sites like CoinMarketCap or CryptoStakePool to search for them. After you’ve found one that interests you, read up on its staking page or whitepaper. These documents will provide all the information needed to start staking immediately, including how much time it takes and what kind of rewards are involved. Many times, these projects even offer free tokens just for signing up! Once you have some crypto stored in your wallet, all that’s left is waiting until your block reward comes through!
5. Consider Derivatives
As things stand, crypto futures don’t have quite as much impact on Bitcoin prices as expected. At least not yet. But here’s a trick for trading that could become more useful in future bear markets: When you sell futures contracts, try offsetting your position by selling Bitcoins at roughly similar prices (the proverbial 100x difference). This is known as covered hedging, and it can help significantly reduce your net losses if you manage to get things right.
6. Harvest Your Losses While You Can
The crypto bear market that started at $20,000 is nearing its third anniversary. We’re all still here—but many have just about had it with crypto. That’s understandable: If you invested right before all those bull run memes got stale, it’s been a tough 18 months. Unfortunately, many people who bought near last year’s highs are struggling now more than ever—and if they had held onto their Bitcoin (BTC), they would be better off today. The same goes for last year’s altcoin run; many investors regret not harvesting gains when they could.
7. Keep Calm and HODL
A crypto bear market is bleak – especially for new investors. But if you’ve bought at a peak during a bull market, one of the worst things you can do is panic sell. During bear markets, it’s essential to keep your emotions in check, but it’s easier said than done. These emotions are pretty standard, but once you surrender to FUD, it leads to making snap judgments that end in losing trades.
This is when “HODLing” is applicable. HODLing can also help you get through the phase if you have researched and are confident in the asset’s long-term potential. Simply understand the basics of a particular crypto asset before making any decisions, and act appropriately. Keep your cool and have a concrete plan in mind before placing a trade. It can make all the difference between making a profit or losing money.
Develop a long-term strategy, never invest more than you’re willing to lose, and don’t go down the rabbit hole scanning different exchanges at all hours of the day to verify results.
Volatile markets need patience; if you lack it, you will suffer losses. Panicking never helps; instead, have a detailed plan to handle the situation, whether a bear or bull market. Becoming overly greedy and overleveraging during a bull market would also result in losses.
Bear markets are invariably influenced by a wide range of external factors, including economic growth, investor psychology, and global news or events, which are undeniably slow and unpredictable. To survive and maximize the return on your cryptocurrency investments, be sensible and attempt to implement the aforementioned strategies. Do your homework and take your time.
If you find it a little challenging to implement these strategies, you can always work with a crypto consulting agency like Blockwiz that can provide you with a plan for surviving and thriving in a bull or bear market. The benefits of crypto consultants on the team may be seen in every situation involving risk reduction and better decision-making.