17.06.2022

Blog: How to survive a bear market

Blog: How to survive a bear market

A bear market refers to market conditions where the value of investments declines for a prolonged period. Bear markets are mentally very taxing, which is why everyone who has invested in cryptocurrencies should have a plan ready on how to act in a bear market.

              
Cryptocurrency bear market

In traditional stock markets, a bear market is usually defined as a more than 20 % drop from the peak of the market. Because of the high volatility in the crypto markets, it usually takes more than a 20 % drop in prices, but more crucially a more extended period of declining prices, that the crypto market is considered to be in a bear market. Historically crypto market bear markets and their counterparts of bull markets have followed the price development of Bitcoin. However, the prices of smaller cryptocurrencies have usually dropped more than Bitcoin in the bear markets and then again raised more than Bitcoin in bull markets. The last proper bear market in cryptomarkets was from the turn of 2018 to 2020 when Bitcoin fell over 80 % from its peak price, Ethereum fell over 90 %, and many smaller cryptocurrencies even more than that. In the end, even though Bitcoin and Ethereum recovered, many smaller cryptocurrencies didn’t survive the decline and they dropped practically to zero and were eventually forgotten.

Mistakes in bear markets

Before diving into the plan for a bear market, let’s go through three common mistakes often made in bear markets. The first one of them is trying to time the market. What would be nicer than buying from the absolute bottom of the market and watching how your investment’s value goes higher and higher. Unfortunately, nobody has a crystal ball and so timing the bottom right is practically impossible. Usually when investors try to time the market they sell their cryptocurrency at declining prices so that they could buy them back at even a lower price later. However, this usually leads to people waiting through the bottom, always just waiting for even lower prices, until they finally buy back after the reversal at the time when the price has already risen over the price where they sold.

The second mistake is letting emotions be in the driving seat. Prices falling for a long time is mentally ver hard for investors, and the desire to sell everything while there is still something left will seem tempting to many. Some on the other hand might think the words legendary investor Warren Buffet “be greedy only when others are fearful”, which leads them to try to time the market. Often being too pessimistic or greedy just leads to poor decisions, which is why it's better to stick with the original plan and not to give power to your emotions.

Last and probably the biggest mistake is giving up altogether. Unfortunately, in bear markets many end up selling their investments and after having had a bad experiment they give up on investing altogether, at least for a while. Some finally will start investing again in the next bull market, when the prices have already risen over the selling price. This means it would have been wiser to never sell the investments and just hold on to them through the bear market.

Plan for the bear market

Long declines in the value of the investment asset easily create despair and often investors' interest in the markets may completely run out as the prices just keep falling. Before the bear market, many might feel like their interest in cryptocurrencies would not end even if the prices fell a lot. But this is exactly what happens to many and it is a completely natural reaction. This is why it is good to have a plan for the bear market already beforehand. This blog is written mainly for regular investors and this is why we won't go through techniques used by professional traders. Next, let us introduce three means which can be used to build a plan that helps to avoid the three mistakes mentioned above.

Firstly, in bear markets it is good to focus on assets that have already proven they can survive bear markets. Like mentioned in the blog about investment bubbles, bear markets are very effective in separating good investments for the bad ones. For example, Bitcoin and Ethereum fell about 80-90 % in the bear market started in 2018, but recovered, whereas many smaller cryptocurrency projects collapsed completely. This is why especially in bear markets it is good to focus on projects with stronger fundamentals, even if many more speculative projects would seem to have more potential for growth. By focusing only on a few assets it is easier to follow their development because you don’t have to try to divide your attention to many different projects at the same time as your interest is falling.

The second point is cost averaging of your investing. This means dividing your buys into many smaller batches rather than investing the whole amount at once. Especially in volatile crypto markets, this is a very good way to lessen the uncertainty experienced due to big price swings. Best way to cost average your buys is to set automatic purchases. When the purchases happen automatically for example every month or every week, you won't be as tempted to try and time the market and it is easier to avoid stopping investing altogether. Already by using this method, one can practically avoid the largest mistakes in bear markets.

Naturally, the last point is to stick with the plan. Everyone’s plan depends on their own opportunities and risk tolerance. For example, someone who doesn’t want to do close research about markets can set automatic purchases for Bitcoin and Ethereum for every month and read up on the markets once a month to keep up with the biggest news on the cryptomarkets. Somebody else could want a bit more risk and their plan could be to follow closely a few of the biggest cryptocurrencies which they have decided to buy when the prices fall below certain levels and sell a part of them if prices rise above a certain level. Whatever the plan is, it is good to build it based on one's own starting point and to avoid the common bear market mistakes mentioned above. And then above all else follow the plan.

Summary

This blog went through what common mistakes investors should avoid in bear markets, and how a regular investor can create a plan for the cryptocurrency bear market. Historically bear markets have been the best places to increase one’s knowledge about cryptocurrencies and find new investments. In reality, this is very hard because falling prices decrease the motivation and interest for investing. This is why for many it is better to create a plan for the bear market that doesn't require much action or even interest in the markets and then just follow that. One of the best tools for this is setting up automatic purchases for every week or month.

Manu Isto Cryptocurrency specialist
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Last updated: 20.06.2022 15:07
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