How to Structure Your Portfolio in a Bear Market

The cryptocurrency market is one of the most volatile investment ecosystems in the world. In particular, from an all-time high at $69,000 last November, Bitcoin’s price dropped by nearly 52.2% to $33,000 in January and has since risen over 15% to the $40,000 level. Markets go up and down all the time, but if you look closely, it becomes apparent that certain events repeat over time — for example, bear markets.

When the Bears Come Marching In

Bear markets are characterized by an overall negative sentiment. Cryptocurrency markets are particularly sensitive to changes in sentiment. Upgrades, regulatory, and geopolitical announcements can, and have shaken entire tokenomies in mere minutes, making sentiment a crucial variable to track. Fortunately, there are a few ways you can shape your portfolio so you’re not completely blindsided by these random events.

Shun Risk

When you think a bear market is incoming, selling your riskier investments is one of the first and most crucial courses of action to take. Knowing when to let go isn’t an exact science, but making an informed decision here can help keep the bears from taking a bite out of your holdings. Near-complete devaluation of asset prices is common in the cryptosphere, especially if you’re investing in shady projects. Take the recent Squid Game token, for example. A portfolio that isn’t prepared for bearish movements, especially a cryptocurrency portfolio, takes on incredible risk. Risky times require low-risk measures, and compared to some altcoins, even Bitcoin is a relatively safe bet. However, most traders will recommend relying more on stablecoins to protect investments against falling market prices.

Find More Baskets

Everyone’s heard this, but it pays to listen to it. Putting all your eggs in one basket puts your portfolio at high levels of risk and is probably the fastest way to lose your entire portfolio. Diversification ensures that no single investment drags you down. While it may decelerate your portfolio’s growth, it’s always better to make small, steady gains than play defensively after tanking heavy losses. Unfortunately, cryptocurrency markets tend to influence each other more often than traditional securities markets. This makes diversification less effective than in conventional stock markets but is still a vital step to safely surfing the violent waves of digital asset markets. When Bitcoin rises, the whole market benefits. When Bitcoin falls, everything goes into free-fall. However, some projects manage to climb back, or at least hang on, and having a diversified portfolio ensures you’re prepared for the journey back up.

Acquire Tokens on Sale

This will sting hardest for the portfolios that aren’t prepared for a bear market. Asking someone who’s suffered losses to invest more money is a tough sell, but sound investment advice in the long term. Buying more assets at a lower price averages out your entry, leaving you in a much better position when markets stabilize. Panic is an emotion that professional traders become used to ignoring because when the numbers flip red, it’s often the unprepared that start selling first. Significant drops can warrant vast amounts of capital withdrawals from exchange platforms. Leveraged long traders will attempt to recover as much as possible, selling assets at highly undervalued prices to pay off their debts. This is the best time to accumulate. Anticipating bear markets means knowing when to take profits, so you always have the funds needed to slurp up steal deals. Despite projects expanding into each other’s territory being commonplace, there are loose sectors within the blockchain industry to distribute your portfolio capital. With Bitcoin capturing nearly half of the total crypto market capitalization, it is a sector of its own, built around its community of developers improving the protocol, making performance tweaks, and executing improvement proposals. Bitcoin is also supported by a rather softspoken, yet very profitable, mining industry. Other sectors include smart contract platforms, which power entire sectors like decentralized finance (DeFi), non-fungible tokens (NFTs), stablecoins, and projects working on the metaverse movement.

Stake Your Holdings

Bear markets often see lending rates drop, but putting your assets in staking protocols can keep you accumulating at undervalued prices, even when you have no capital left to buy the dip. Staking can only be performed on networks that use Proof-of-Stake (or its variants) as their consensus mechanism. In a Proof-of-Stake network, validators are picked at random from a pool of stakers who lock their assets into a smart contract for a chance to validate transactions. The more your stake the higher your chances of getting selected to validate transactions, leading to greater rewards. Bear markets also tend to put higher reliance on stablecoins, and with high stablecoin demand comes higher returns from lending them out. Staking does present some challenges in terms of the user experience. Directly staking on a network can entail huge upfront costs (32 ETH on Ethereum) or interacting with staking pools, letting users pool together their tokens to validate transactions and split the rewards. Most pools take a sizable chunk of the rewards for themselves, sometimes making it very hard to find pools worth partaking in. Centralized finance (CeFi) platforms offer lower rates but are much more reliable, taking on all the market risk while ensuring consistent returns. Exchanges like Phemex consistently provide up to 8.5% APY on USDT deposits worth up to $1.5 million through their Earn Crypto platform.

Bet Against the Market

Frowned upon by the more hardcore crypto enthusiasts, shorting is probably the most effective way to protect your portfolio against a potential bear market. Whether you short by borrowing, selling, and buying back in at a lower price to repay your loan, or buying a call contract on the derivatives market, shorting severely lessens the blow when markets start to bleed. On Phemex, for instance, shorting is as simple as selling a perpetual contract, which is a type of derivative that doesn’t expire, instead maintaining its peg to the underlying asset using a funding rate mechanism. When markets are bullish, longs pay shorts to disincentivize long positions, and vice versa in bear markets. An important note to make here is that short selling as a hedge will mute your profit margins from sudden bullish corrections and retracements since a part will go towards making up for losses incurred by selling short. However, placing stop and limit orders can mitigate this, ensuring you only take on a manageable amount of risk.

Keep Your Head

During a bear market, it can seem like all the odds are stacked against you. Everyone around you will say whatever suits their agenda. In these moments it’s important to remember that markets don’t stay red forever, and they go up more often than they don’t. Twitter can be hard to navigate in these times, with various communities weaponizing negative sentiment to keep their investments protected. Pump and dump scams seduce anxiety-ridden hands, assuring them they will recover their losses. Interest rates on borrowing skyrocket, while lending rates plummet. The prepared investor hunkers down and waits patiently for the bulls to regain control, using the tools available to keep the bears at bay.