Crypto bear markets are challenging for investors, especially those new to crypto. However, there are investment approaches that can help during a difficult market environment. Read on to learn six portfolio management approaches you can adopt during a crypto bear market.
Move Into Reputable Stablecoins
As an investor, you can safeguard the value of your crypto portfolio by moving a section of it into stablecoins, preferably reputable ones that are pegged to the US dollar. As their name suggests, stablecoins maintain a “stable” price in terms of a fiat currency and usually don’t experience wild price swings like most crypto assets. As long as they work as designed and remain relatively stable, they help lower the risk of your portfolio.
USD Coin (USDC), Binance USD (BUSD), and Tether (USDT) are among the top stablecoins by market cap and represent possible options for investors that are keen on protecting the value of their crypto assets. They are backed by the US dollar on a ratio of 1:1.
Allocate Towards Bitcoin & Buy the Dips
Bitcoin is the most established cryptocurrency. It has been around the longest and, most likely, has attracted more trust over the years than any other cryptocurrency. As a result, it doesn’t drop as much in price as other altcoins during the bear market.
Let’s look at the numbers.
At the time of writing this article, the price of bitcoin was down 68.7% after it hit an all-time high (ATH) of around $68,000 in November 2021. While this might appear like a big drop, altcoins have performed much worse since they recorded their all-time highs. For instance, Ripple is down 91%, Dogecoin 90.7%, Polygon 72.1%, Litecoin 86.3%, and Tezos 82.2%.
Knowing this, you could move a portion of your portfolio — or all of it — from altcoins to bitcoin, thereby possibly limiting further losses. If the bull market returns, you could move back into your preferred altcoins to potentially earn high returns. Moreover, you could add more BTC to your portfolio now that prices have dropped. This strategy may be rewarding if Bitcoin rises beyond $70,000 in the future.
Switch Into the Highest Quality Assets
We’ve already seen that bitcoin outperforms most altcoins during the crypto bear market, making it a high-quality asset. But it’s not the only one.
Ethereum, the second-largest cryptocurrency by market capitalization, is also widely considered a high-quality asset by crypto investors. It is well-established and widely used in the decentralized finance (DeFi) and NFT space. Therefore, it has earned a lot of trust from the investor community. Note that ETH had only dropped by 65.1% at the time of writing, which means that it is one of the few altcoins, whose price has dropped less than that of bitcoin.
Furthermore, BTC and ETH are more liquid than low-market cap crypto assets. This means investors have a higher chance of being able to sell these high-quality assets on any cryptocurrency exchange with limited risk of slippage. Digital assets with low liquidity, on the other hand, increase investor exposure to slippage. Slippage is the difference between the price you expect a buy or sell order will execute for and the actual price the trade got executed for.
Stay Up-to-Date With the Crypto Market
The cryptocurrency market is ever-changing, with constant emergence of new digital currencies and projects. To ensure your portfolio continues to grow, it’s essential to stay informed about the latest developments and news in the crypto space.
Nevertheless, monitoring the performance of your crypto assets across multiple blockchain networks, stored in various wallets and exchanges, can be a challenging and time-consuming task. This is where the CoinStats Crypto Portfolio Tracker becomes invaluable, enabling you to efficiently manage your entire profitable portfolio – including cryptocurrencies, decentralized finance (DeFi) assets, and non-fungible tokens (NFTs) – all in a single location.
Hedge Your Portfolio With Crypto Derivatives
Through the use of crypto derivatives such as bitcoin futures and options, you may be able to hedge your crypto asset portfolio against a further decline in value. Hedging, in this case, means investing in financial derivatives to minimize the risk of your crypto investment.
Sell Bitcoin Futures
Bitcoin futures are contracts between two investors agreeing to purchase or sell BTC at a particular time in the future for a pre-determined price. In other words, bitcoin futures allow investors to speculate on the asset’s future price. This crypto derivative tracks the price of bitcoin without the need to hold the digital asset.
You can hedge your crypto portfolio by selling (going short) Bitcoin futures. If the crypto market falls in value during the contract period, the drop will be offset by the profit made from your short BTC futures position. Most digital assets are strongly correlated to BTC, making this crypto asset a good hedging solution for investors. A strong correlation means that asset prices move in tandem.
Let’s say you want to hedge half of your portfolio from plunging in value in the next three months. So, you short BTC futures on a crypto exchange like Binance at $21,000 based on the agreement that you’ll buy this same contract at the same price in three months. Assuming BTC and the entire crypto market slumps by 25% during the three months, you’ll buy the futures contract at $15,750. This will give you a profit of $5,250 since you sold it at $21,000. The profit will cover half the losses your portfolio incurred due to the 25% drop in crypto market value.
Buy Bitcoin Put Options
Bitcoin put options are contracts that give investors the right but not the obligation to sell BTC for a specified price (strike price) at a particular point in the future. This crypto derivative also helps investors speculate on the future price of BTC.
Let’s say you’re worried your crypto portfolio value could plummet by 50% in the next three months. Therefore, you buy a bitcoin put option at a strike price of $10,500. This price is 50% lower than the present BTC price of $21,000. Note that put options also require investors to pay a premium (which is the price of the options contract).
If the crypto market and BTC collapse in the next three months by more than 50%, then you’ll be “in the money.” The profit you generate will cancel out the plunged value of your portfolio. If the market fails to collapse as you predicted, you’ll lose the paid premium.
Practice Tax-Loss Harvesting
Tax loss harvesting in crypto is a strategy investors can practice to lessen their tax liability during a bear market. It involves selling your investment at a loss and then repurchasing it immediately after so that you can reduce your capital gains tax bill by the loss you made.
This strategy may be applicable in countries, where cryptocurrencies are regarded as capital assets and are, therefore, subject to a capital gains tax. Investors will only realize a capital loss or gain when they trade or spend their crypto assets.
HODL & Wait It Out
HODL is a strategy where investors “hold” their crypto assets as they wait for the bear market to end. This strategy is suitable for investors that believe the assets in their portfolio will resume an upward trend and potentially surpass their current all-time highs in the future.
Crypto bear markets are typically followed by a bull run, where some digital assets hit new highs. For example, the crypto winter that started in 2018 concluded at the end of 2020. Almost a year later, Bitcoin’s price rose by more than 3x the ATH it had recorded in the 2017 bull run. If history repeats itself, this strategy could work.
While these solutions could be helpful during a crypto bear market, investors should always proceed cautiously. This means only investing what they can afford to lose and conducting thorough research before acquiring any crypto asset. Investors can also arm themselves with crypto analytics tools to assist their research.
Should I Sell During the Crypto Bear Market?
That’s entirely up to you. However, selling your crypto for fiat currency during a bear market may not be the best idea because you will likely be realizing a loss. The strategies discussed above are potentially better alternatives.
How Long Will the 2022 Crypto Bear Market Last?
Grayscale Investments’ researchers predict the bear market will last for the remaining part of 2022 and into 2023. However, in reality, nobody really knows when we will see the next bull market.
What Crypto Coins Will Survive Bear Market?
While it’s impossible to predict what coins will survive a bear market with any degree of accuracy, the cryptocurrencies that have the best chance of survival are those with real-world use cases, strong financial backers, an experienced core team, and a thriving community.