In this episode of BeInCrypto’s Video News Show, host Juliet Lima discusses several trading strategies to use in a bear market.
Trading cryptocurrencies under normal market conditions is already challenging. As a new assets class, they can be extremely volatile, and they lack a long-term history to base trading models on. This makes them even trickier to deal with when the market has taken a turn for the worse, also known as a bear market.
Bear markets occur when prices in a market decline by more than 20%, which is often accompanied by negative investor sentiment. However, during such times, there are several strategies traders can use to make the most of the turbulent time period.
Buying the dip
While new cryptocurrency traders may be feeling forlorn at Bitcoin’s dip over the course of this year, it may seem more familiar to more seasoned traders. Looking at charts of past years, downtrends are eventually overtaken by uptrends, also known as a bull market.
But even during times when the prices went down, the lows were higher than they were previously, meaning the price is continually increasing over time. In such cases, purchasing crypto during one of these down periods means traders are actually buying at a discount.
This is known as market cycle psychology and for crypto adoption, as it is a new technology, this can be represented by the Gartner hype cycle. The peak of inflated expectations has passed, and we have reached the trough of disillusionment.
However, if traders believe in the project and see that it provides value, people will continue to use and buy it in the future, eventually reaching the slope of enlightenment. Once the plateau of productivity has been reached any crypto purchased prior will have proven worth it.
Dollar cost averaging
Another strategy even simpler than buying the dip is known as Dollar Cost Averaging, which was covered at length in another video. With DCA, rather than trying to strategically purchase an asset during a down period, traders instead consistently buy an asset over a longer period of time, regardless of the price.
During bear markets, this may seem counterintuitive, as the value continuously seems to go down. Yet, as the price eventually goes up, the value of the assets usually averages out to be worth more than what was paid for them.
Stablecoin switcheroo
The final strategy is a more advanced technique, in which traders should first determine their risk capital or the amount of money they’re willing to lose. While Bitcoin has for the most part consistently appreciated, other cryptocurrencies have completely collapsed, such recently with the TerraUSD stablecoin.
However, this last strategy involves the use of stablecoins, which are cryptocurrencies where the value is pegged or tied to another commodity or financial instrument, usually a currency like the US dollar.
When crypto starts trending down, traders can exchange it for a stablecoin to retain its value. Then, when the price begins to rise and the bear markets begin to end, they can convert it back into the choice of cryptocurrency again, hopefully at a lower price to get an even larger quantity. Although this requires a keen eye and very strategic timing, making it the riskiest of the three strategies presented here. A mistimed exchange could go disastrously wrong and result in a substantial loss of value.
Besides these three strategies, Juliet has 3 parting suggestions for trading in a bear market:
- Don’t sell
- Buy more
- If you sell, buyback cheaper
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