In the stock market, a drop of more than 20% is often judged as the mark of a bear run. But that definition doesn’t really apply to cryptocurrency, as it is so volatile that prices can rise or fall by 20% in a matter of days. It is more accurate to see a crypto bear market as a long period of consistent price declines. The opposite of a bear market is a bull market, a time when prices are rising and confidence is high.
Prolonged and extreme price declines are some of the most testing moments any investor can face. Especially when cryptocurrency prices lose up to 50% in a matter of months, as they have at various times over the past decade. But, unfortunately, investments sometimes decline in value and bear markets are something we all have to deal with.
Here are four moves every investor should make when everything seems to be in the red.
1. DON’T PANIC SELL
It is extremely tempting to try to cut your losses when faced with large price falls. But if you do, you will not profit when prices start to rise again. Moreover, selling after a big fall goes against the oldest investment rules: buy low and sell high. Of course, this is easier said than done, as it can be difficult to time the market. But selling at a loss will lock in your losses.
Take a deep breath and remind yourself why you invested in cryptocurrencies in the first place. Maybe you believe that blockchain technology can transform the way we manage money, or that Web 3 will be the next generation of the internet. Look at why prices have fallen and ask yourself if your original investment thesis is still true. If so, now is not the time to sell.
2. KEEP YOUR EYES ON THE LONG TERM.
Another way to keep this latest fall in perspective is to focus on your long-term goals. Cryptocurrency is volatile and we’ve seen crashes like this before, and we’re likely to see them again. But if you invest with a five- to 10-year horizon, it’s much easier to hold when times are turbulent.
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It also helps to look at the price history of Bitcoin (BTC). Bitcoin is the oldest cryptocurrency and a glance at its chart shows several significant price drops. What is reassuring is that so far it always recovers and reaches new highs.
3. USE THIS TIME TO RESEARCH
Instead of focusing on how much the market has fallen, try to use this time to research. Time spent learning, whether about cryptocurrencies in general or individual cryptos in particular, is never wasted. If there’s a crypto sector you want to understand better, that’s a good place to start. Or you may want to develop your investment skills so you can manage risk differently in the future.
Personally, I’ve spent this bear market learning more about various passive income opportunities. In the face of falling prices, I find it reassuring to know that my cryptoassets are earning annual returns of 5% or more. I have a few coins staked, which means they contribute to the overall safety of the network and pay steady returns. I have also put a small amount of my portfolio into higher risk options such as yield farming and liquidity pools.
4. CONSIDER BUYING THE DIP
“Buy the dip” is a rallying cry on social media every time prices go down. And, going back to the buy low and sell high logic mentioned above, it can be a good move. As Warren Buffett said: “Buy when there is blood in the streets, even if the blood is your own”.
But it is not the right choice for everyone. For a start, prices can fall further. This is why some investors buy dips in smaller stages: they might spend $100 today and then spend another $100 next week if prices fall further. It is a form of dollar cost averaging that can soften the impact of prolonged price declines.
The biggest danger is that people will get excited about the idea that cryptocurrency is “on sale”. As a result, they may spend money they did not plan to invest in cryptocurrencies, or money they need for other financial purposes. They may also buy cryptocurrencies without doing their normal due diligence, which can hurt them in the long run.
If you don’t have spare cash, already have a high exposure to cryptocurrencies in your portfolio, or don’t have time to research which cryptos to buy, don’t try to buy just because prices are low. There will be other lows, and maybe next time you’ll be in a better position to take advantage of them.
RISK MANAGEMENT IS CRUCIAL
The above moves will help you wait out and potentially even profit from a bear market. But bear markets are also a good reminder to manage the amount of risk you take on. That means you only invest money you can afford to lose, so you’ll never be forced to sell at a low level. It also helps ensure that cryptocurrencies only represent a small percentage of your investments. Having a diversified portfolio means that if one asset class performs poorly, it won’t spell financial disaster.