Cryptocurrency Investment Guide in the Bear Market

What is a bear market?

In the traditional definition, the bear market is relative to the concept of a bull market. Bear market describes a market situation in which the price of shares or securities shows a long-term downward trend, the most prominent feature is that the market is generally bearish, the price continues to decline, and the overall trend remains downward although there is sometimes a rebound. In the field of cryptocurrencies and blockchain, due to the lack of practical application scenarios, the lack of underlying assets to support, and other issues, the bear market is usually accompanied by fear and uncertainty of the market mood, the market panic under the continuous selling led to the continuous decline of asset prices.

Many industry insiders define bull and bear cycles using different economic indicators, such as on-chain transaction volume, investment and financing scale in the market, BTC basis, and BTC 300-day moving average price, etc. These indicators are all reasonably related to BTC price fluctuations. Therefore, we can intuitively judge the changes in bull and bear cycles through BTC price.

Source: https://www.coingecko.com/en/coins/bitcoin

In history, the cryptocurrency market has gone through four cycles of bull and bear markets. The first cycle lasted from 2009 to 2015. In the early days of Bitcoin (BTC) in 2009, the trading price was only $0.0008. By 2013, it reached a peak of $1,202 in a bullish market and then entered a downtrend until it reached the bottom in 2015.

The second cycle occurred from 2015 to 2018. During this period, the rise of the ICO model and the emergence of second-generation public chains like Ethereum (ETH) led to a diverse narrative. In December 2017, the price of BTC reached a historical high of $19,800. However, with the occurrence of black swan events and regulatory policies, the market turned bearish, and the BTC price dropped to around $3,000 in 2018.

The third cycle spanned from 2018 to 2022. With the explosive growth of various blockchain applications such as DeFi, NFTs, DAOs, and GameFi in 2020, the industry attracted a significant amount of institutional funds and users. The industry experienced tremendous imagination, and by the end of 2021, the BTC price reached a high of $69,000. However, it then entered a two-year-long bear market due to events like the May 19th black swan event. Despite facing various black swan events, the industry continues to innovate and develop.

Currently, we are in the midst of the fourth cycle of bull and bear markets. New narratives such as Web3 and AI are emerging, and compliance and application have become the main themes of development.

Crypto Bear Trends and Implications

From a macro perspective, the national economy is facing challenges under the Federal Reserve’s interest rate hike. Since 2022, there have been continuous black swan events in the cryptocurrency market. From the initial collapse of LUNA coin to the successive bankruptcies and liquidations of hedge fund Three Arrows Capital, cryptocurrency lending platform Celsius Network, Voyager Digital, and the world’s second-largest cryptocurrency exchange, the cryptocurrency market has officially entered a bear market phase.

Entering 2023, although the macro environment has seen a slowdown in the Federal Reserve’s interest rate hike and a relief in US inflation, there is a general expectation in the market that a new cycle of loose US dollar policy is about to begin. As a result, the price of cryptocurrencies as risk assets has rebounded. However, the liquidity risks stemming from black swan events continue to spread. In early 23, after the cryptocurrency lending platform Genesis Global Capital announced bankruptcy on FTX, a wave of bank runs occurred. Subsequently, all accounts were frozen, withdrawals were suspended, and bankruptcy protection was sought from the federal district court. During the fundraising period, a large number of layoffs also took place.

In the same year, Coinbase, the largest cryptocurrency exchange in the United States, also experienced a 20% reduction in workforce.

Although the cryptocurrency industry is in a bear market, blockchain technology is still evolving, and product technologies are constantly innovating. Investors should focus more on long-term investment strategies rather than short-term price fluctuations. A bear market does not mean there is no market. Various factors can affect the price of cryptocurrency assets, such as:

1. Regulatory policies: Governments and regulatory agencies around the world have implemented different policies towards cryptocurrencies, increasing market uncertainty. Changes in regulatory policies can affect investor confidence and consequently impact the price of cryptocurrency assets.
2. Macro environment: The recent interest rate hikes by the Federal Reserve have had a significant impact on the national economy. As the current interest rate cycle ends and the national economy undergoes a transformation, a new cycle of industrial development is expected to begin, potentially leading to a new bull market in the cryptocurrency market.
3. Market sentiment: Market sentiment plays a crucial role in the cryptocurrency market, with media and public confidence having a significant impact. Negative news and rumors can trigger panic selling by investors, leading to further price declines.

How to Take Action in a Crypto Bear Market

Mindset

A bear market is a challenging process, and investors need to maintain a good, steady mindset and continue learning without obsessing over the market every day. The goal in a bull market is to continuously accumulate wealth and make profits, while the goal in a bear market is to preserve wealth and prepare for challenges by having reserve funds. Meanwhile, investors can join cryptocurrency communities to communicate with others about trading experiences and rhythms, constantly review the gains and losses from the previous bull market, and adequately prepare for the next bull market. Additionally, investors can also research potential projects for product interactions, creating opportunities for profitable investments.

Asset Allocation

During a cryptocurrency bear market winter cycle, asset prices may hit new lows at times. The risks of altcoins are obviously greater than mainstream assets. Therefore, while preserving the main funds, if investors still want to gain some profits from short-term rebounds, they should build a robust investment portfolio to reduce risks. Investors can allocate funds based on BTC and ETH as the foundation of their portfolio. They can also choose one or two value projects in niche sectors that they are familiar with and pay attention to, and enter at suitable opportunities. At the same time, it is important to pay attention to market forces in the broader environment, such as the approval of BTC spot ETFs, BTC halving events, Federal Reserve quantitative easing, etc., as understanding these events is crucial for seizing investment opportunities and predicting the market.

Dollar-Cost Averaging

Dollar-cost averaging refers to dividing reserve funds into smaller portions and conducting multiple transactions over time. This investment strategy is also relatively simple during a bear market and helps mitigate the impact of asset price volatility. Therefore, BTC and ETH are obviously preferred targets, followed by stablecoins linked to target assets with lower volatility compared to other altcoins. After selecting the appropriate dollar-cost averaging targets, it is necessary to determine the frequency and type of dollar-cost averaging, such as monthly or quarterly, and wait for rebound opportunities or the bull market phase before considering selling.

Funds should be planned for the long term. If there are no available funds to continue investing when prices fall, it will affect the overall effectiveness of the investment. As the amount of regular investments increases, the impact of each subsequent investment on the average price gradually decreases, and the ability to mitigate risk through regular investments decreases. Many exchanges, such as Binance and Gate, have already launched investment strategies based on dollar-cost averaging.

Investment Rebalancing

Investment rebalancing is an important investment strategy for long-term asset allocation. It involves periodically adjusting the proportions of various assets in the investment portfolio based on factors such as one’s risk tolerance and investment goals to return them to the target asset allocation ratio. Due to market fluctuations, especially during bear market phases with continuous downward trends, the risk coefficient of cryptocurrency assets is higher compared to traditional investment assets like stocks and bonds. During a bear market phase, investors should try to reduce the proportion of these assets, avoid overly frequent trading, make appropriate adjustments to the proportions of various assets, and avoid fully leveraged positions to prevent the impact of black swan events on their investments.

How to Deal with Losses in a Bear Market

Losses are an inevitable part of investing and something that most investors have to face. Dealing with losses correctly is also a part of investing, finding ways to cut losses and prevent permanent losses, especially in a bear market where investment assets can significantly shrink due to continuous decline. Additionally, not being able to handle losses well can affect one’s investment mindset and lead to making wrong judgments, resulting in an even greater negative impact on overall returns.

First and foremost, it is important to acknowledge the existence of losses and not get trapped by them. Only a few people continuously profit without experiencing losses after buying assets. During a bear market phase, it is more important to consider long-term investments, as it is relatively easier to determine long-term overvaluation and undervaluation. Buying during undervaluation reduces the probability of losses, but short-term losses can still occur. In such cases, losses can actually be beneficial because buying at a low price during undervaluation provides an opportunity for even better prices as the stocks continue to decline.

Next, objectively analyze the reasons for the losses. If after a thorough analysis, it is found that the purchased variety is not worth continuing, then it should be decisively sold to cut losses; if the analysis reveals that the asset still holds value and is simply undervalued, then one can hold it with peace of mind or continue to increase the buying effort. For value assets, losses are opportunities to increase positions. When facing losses, one must have a long-term perspective, stick to their judgment, and withstand temporary losses, or decisively sell and cut losses in a timely manner.

It is also important to respond promptly to market changes. Pay attention to events such as the approval of BTC spot ETF, BTC halving, and loose financial environment, as they may become turning points for bull and bear markets. While keeping an eye on these events, users can also observe on-chain indicators and use professional data indicators for market analysis, such as the number of active addresses on the blockchain, BTC basis, etc.

Conclusion

Bull and bear refer to market participants’ judgments on the trend of the economy. Although there is uncertainty, most people define it as having a cyclical nature. Looking back at historical developments, we are currently in the fourth cycle of the cryptocurrency bull and bear transition. In a bear market, it is more important for investors to preserve capital than to make profits. Investors need to maintain a stable mindset, continuously learn, strengthen their professional skills, and choose mainstream assets for stable investments. It is crucial to grasp dollar-cost averaging and reinvestment strategies, reduce risks, and avoid black swan events that could impact their investment portfolios.

As the interest rate cycle comes to an end, the market is beginning to rebound. Investors need to pay attention to risks and accordingly adjust their investment portfolios to balance returns and risks.