What is the Best Strategy during the Bear Market?
Following the most recent dip which saw the Fear and Greed Index, which measures market sentiment, hit its lowest level since July. The price of Bitcoin saw a drop to as low as $45,000 on the 3rd of December, 2021 and it appears there might be a bear market encroaching (by many parameters) a very successful year for the crypto industry.
There are currently a lot of uncertainties hovering in the market and as a trader, this opens up opportunities for you to leverage. Of course, holding crypto assets in a bear market is not the dream of any investor. However, when you apply some of the best strategies we’ll share in this article, you’re bound to come out unscathed at the other side of this.
- Understanding the bear market
- The best way to invest during the bear market
- The best crypto ETF during the bear market
UNDERSTANDING THE BEAR MARKET: CHARACTERISTICS AND TYPES
Indicating a period when prices fall in the market, the bear market is the alternate of the bull market. A price drop equal to or greater than 20% most of the time indicates the onset of a bear market. Characteristically, bear markets often set in after recent highs.
When prices drop, many investors panic, and in an effort to cut their losses, they close their open positions and withdraw their money. If the investors’ panic continues for longer, prices continue to decline. While everyone panics during the bear run, if you’re calm enough, you can make the most of the market during the period.
There are several factors which result in a bear market. Examples of these include disease outbreaks, a sluggish economy, bursting market bubbles, drastic economic shifts, crises, wars, etc. However, skilled traders can find the perfect entry positions coupled with several short-selling opportunities in the face of these.
You too, can. But you must first understand the various types of bear markets.
Types of Bear Market
Different bear markets have varying durations, impact, and recovery times. Hence, for the strategies we’ll share below to work, you must understand the market context perfectly.
- Cyclical Bear Market — The cyclical bear market occurs at a business cycle’s end, where high inflation and interest rates are. While profit plummets. The market condition then rubs off negatively on the country’s economy.
- Structural Bear Market — Structural bear markets occur mainly during stock market bubbles. However, a country’s economy’s imbalance can also result in a structural bear market. The 2007–2009 global financial crisis is an example of this.
- Event-driven Bear Market — The event-driven bear market is a response to negatively-impacting global occurrences. Examples of these are; wars, terrorist attacks, pandemics, etc.
Characteristics of Bear Market
Here are signs that’ll help you accurately identify a bear market.
- Drop in the prices of cryptocurrencies
- Investors begin to sell thanks to negative market sentiments
- A decline in economic spending
- Plummet in earnings
- Increased unemployment index
Once you start noticing these, map out a strategy with which you’ll seamlessly execute a combination of any of the following bear market trading best practices.
BEST WAYS TO INVEST DURING THE BEAR MARKET
These are some of the best things to do when the market is looking bearish:
- Controlling Your Fear
Fear is an emotion, and you’ll make irrational decisions when you invest with emotions. So ensure that whatever investment decision you make isn’t driven by fear. Keeping fear in check helps you handle bear market scenarios better. In the grand scheme of the market, when you look back at it, the disruptive bear market of the moment may become nothing but a slight market fluctuation.
- Accumulation with Dollar Cost Averaging
Seasoned investors know that bear markets are part of the realities they will have to deal with at one point or the other. However, as a newbie, it’s crucial to maximize dollar-cost averaging during bear runs if you invest long. To do this, you have to buy the coins or tokens of the crypto project you’re interested in when the market is down — this is a better entry position. Upon purchasing these tokens, you can then look forward to profiting as the market recovers and you ride the pump
- Diversify Your Portfolio
In investing, ‘’diversify your portfolio’’ is one of the most used phrases. The statement remains valid, even in a bear market. Ensure that you spread your investment across different assets. Assets like crypto projects, USDT (for liquidity sake), stocks, alternative assets etc. The diversification you do depends on how well you tolerate risk. Your goals should also factor into your investment decisions during the bear market.
- Sell Short
Short-selling is one of the ways you can maximize the realities of the bear market. Since the market is in a downward spiral, jump on the trend. First though, ensure that you find a good entry position. Short selling means you are speculating further price falls. If this prediction is good, you make a profit. Though, you should know that because of volatility, the prices of cryptocurrencies may rise at any point, even in a bear market.
- Take Profits Regularly
Even if you’re a long-term investor, when things are in your favour, it’s advisable to take profits sometimes. It’s hard to predict where a bear market is headed from any position. Hence, you should take a safe amount of profit from the market.
- Set a Stop-loss order
A Stop-loss order initiates your exit from a position once certain conditions are met. Stop-loss order is vital when it’s impossible to predict how bad a market’s situation can get. In addition, stop-loss orders help you manage losses when the market is against you. However, stop-loss orders are based on initial market performance, which doesn’t guarantee the future.
THE BEST CRYPTO ETF IN THE BEAR MARKET
During the bear market, it would be best to invest in our DAO Tech Stonks or DAO Golden Cross strategies.
DAO Tech Stonks doesn’t really get affected by the crypto bear market, because it invests in tokenized stocks. DAO Golden Cross however is suitable for the crypto bear market, because it changes the strategy into ‘defense’ mode and saves you from big losses (depending on the market condition, the strategy has two different modes).
You can read more about these strategies in these Medium posts about them.
Like every other market condition, there’s a risk attached to investing in the bear market. However, as an investor, the information above will help you safely navigate the period. If you employ these investment strategies well, you can come out of the bear market profitable.
DAOventures is a DeFi ETF Index Fund for fund managers and crypto investors. Its mission is to make DeFi simpler, more accessible, and inclusive. DAOventures provides baskets of auto-compounding LPs, upon innovatively designed crypto ETF index funds.