How to Survive and Profit in Bear Markets?
Jul 13, 20228 min read
The year 2021 was highly fertile for crypto traders and investors. Most crypto assets have updated their all-time high, showing users an unprecedented bullish rally. This situation has prompted millions of new traders to jump on the bandwagon and get their piece of the pie. Nevertheless, such a sharp growth was followed by an equally sharp fall. Such a scenario is usual for the crypto market. By opening the price chart of the same Bitcoin, you will see that the market is cyclical and constantly experiencing ups and downs. However, what we call a bear market is a challenging psychological time for traders and investors. How can you compensate for losses or even make a profit in a bear market? Let’s look at it in today’s article.
What Is a Bear Market?
A bear market is a decrease in asset quotations by at least 20% from recent highs. During this period, there is a panic in the market, sales volumes are increasing, and opponents of cryptocurrencies rejoice that the bubble has burst. Inexperienced traders are especially susceptible to herd instinct, so they close their positions. However, a bearish period is the best time to enter the market and diversify your portfolio. By opening the Bitcoin price chart, you will see that its price is growing yearly, despite periods of decline. The trader needs to be patient, get certain skills, and wait for the trend reversal.
How to Earn Crypto in a Bear Market?
When Bitcoin reached its price peak in 2021, many traders thought with chagrin, “I should have bought.” Now, when the market is in a bearish phase, there is an excellent opportunity to buy tokens of various crypto projects. The “buy the dip” strategy is among the most popular for many investors. For some, this “rule” is even the principal investment strategy. The expression “Buy the Dip” has a weighty justification — the market is constantly growing. With rare exceptions (both by assets and by periods), it is. Investing more when the price decreases will be advisable if any asset has a steady uptrend. Treat it like a discount purchase. However, it is not necessary to buy up all the assets.
- Invest in reliable, time-tested projects that have a solid foundation. For example, Bitcoin, which is an indicator of the market, has a robust community, is massively used as a means of payment, and so on. Or Ethereum, which is already the most popular platform for launching Dapps, and with the launch of Ethereum 2.0, considerable increases in price are possible.
- Study the project team, the level of execution of goals provided in the roadmap, and long-term plans. How accurately developers adhere to their plans is one of the indicators of success. In addition, analyze whether the project has enough funds to survive the bear market. Study tokenomics, the prices of private and seed rounds, and the token release schedule.
- Invest in tokens of projects produced in trending directions. Study profitable areas that accumulate large amounts of money. For example, GameFi applications are becoming more and more popular.
There is a crucial detail in the “buy the dip” strategy. It is not worth investing all the funds at once because we are never exactly sure when the price will push off and go up. Therefore, we recommend using the DCA strategy (dollar-cost averaging). DCA involves gradually entering the asset, namely purchasing equal parts with a specific frequency. This means that instead of depositing all the funds into the asset in one payment, you divide them into several pieces and invest them in the asset according to a specific schedule.
Let’s say we have $1000 and assume that the bearish trend will last about a year. We divide our $1000 by the number of weeks per year and invest about $20 weekly in the desired asset.
As a result, our investments will have a long-term character during the bear market, which should allow us not to miss the moment of the beginning of an uptrend and reduce the risks when entering an asset during a downtrend at the same time.
Short-selling is a classic strategy of bears, i.e., traders who want to make money on price reduction. The bear purchases a crypto asset on credit, pays a commission and interest on this loan and disposes of the funds received at its discretion. For example, Bob borrows an asset from the exchange and sells it at the current price of $2000. After a week, the asset drops by 20%, Bob buys the asset for $1600 and returns it to the exchange with interest (for example, $5) and commission (for example, $2). The remaining $393 is his profit. Within the framework of crypto exchanges, two tools allow traders to short-sell cryptocurrency:
- Margin trading. The essence of this method is the ability to borrow assets from an exchange/broker and make more expensive transactions. Accordingly, margin trading makes it possible to earn more on transactions.
- Futures is a contract between two bidders to buy/sell a certain asset at a certain time at a price specified in the contract. Futures contracts are divided by delivery dates into quarterly and perpetual futures contracts.
Margin and futures trading allows you to increase profits by using leverage.
Crypto exchanges strive to have as many users as possible place their funds with them. This allows exchanges to increase liquidity and use cryptocurrency for other purposes. In addition, during the bear market period, users can earn income and not just leave their assets out of work.
Deposits come with a fixed or floating interest rate. In return, users receive a portion of the crypto exchange’s income — the principle is the same as that of banks.
The yield is constantly changing for floating-rate deposits and can be higher and lower compared to fixed-rate deposits. However, the latter has one caveat — interest is accrued only after the end of the selected period, but the longer the period, the higher the yield.
Lending implies a relatively high income, from 12-15% APR. Depending on the exchange, the lending percentage can be set independently, and loans can be provided at a fixed rate.
There are centralized lending platforms (Nexo, Crypto.com) and decentralized (Maker, Compound, Aave).
Decentralized financial platforms (DeFi) are considered more secure, but their interest rates are lower than those of centralized ones. Therefore, using DeFi to take out cheap loans and then provide them at higher rates on centralized sites is advantageous.
Farming (liquidity mining)
Farming is a new form of income generation in cryptocurrency, which came to us from DeFi.
Liquidity mining means that investors act as liquidity providers (LP). They supply liquidity to the platforms and earn a portion of exchanges trading fees. For their support, they also receive LP tokens that can be used to generate passive income.
As in the case of loans, the yield varies depending on the total volume of the liquidity pool. The farming process is practically the same as lending, but with one caveat: not a separate cryptocurrency is added to the liquidity pool, but a pair. For example, ETH and USDT. Therefore, both cryptocurrencies should be on the wallet balance.
Staking (Proof of Stake) is an energy-efficient alternative to mining (Proof of Work). From the investor’s point of view, staking is an opportunity to place your savings in a bank (protocol) via a crypto wallet to receive a fixed income over time. For this, holders receive remuneration from the network up to 36% APR. In addition, this approach encourages investors to keep cryptocurrency as long as possible, which positively affects the exchange rate dynamics.
Two ways to stake cryptocurrency are by launching your node or delegating coins to validators.
The first method requires technical knowledge and is suitable only for those with a large amount to invest. But this way, you can increase profitability because other participants can vote for your node.
The second way is delegation. You do not need to install a node. It is enough to delegate coins to the network validators.
In addition to traditional staking, criticized due to the lack of liquidity, the DeFi sector allows us to get the most out of our tokens — liquid staking. With liquid staking, users can receive both staking rewards and any rewards received for using their tokens in DeFi apps. In fact, Liquid Staking provides a representative L-token in the same proportion as the user’s original token in exchange for placing its tokens in the corresponding protocol.
Thus, if you place an ATOM bet in the Persistence Protocol, you will receive a pATOM token in a proportion equivalent to the deposited ATOM assets. You can use these pATOM tokens in any DeFi protocol to generate more profit.
An airdrop is a wonderful tool that helps traders get tokens of various projects for free. During bear market periods, airdrops are a kind of bonus. Tokens of successful projects can significantly increase in price, which will help to cover the current losses somehow. Airdrops come in several types:
- Retroactive airdrop. The best and most exclusive type of drops in the entire field of cryptocurrencies, to get it, it is necessary to fulfill the conditions that the project lays out. For example, the airdrop of UNI tokens was conducted among users who used the Uniswap exchange at least once.
- Bounty airdrop. As part of the bounty program, the project lays out the conditions for participation in the program: subscribe to their social media, write about the project on your social media.
- Exclusive airdrop. Exclusive airdrops are usually given to those who supported the project in the early stages.
- Airdrop per hold. Also, projects carry out airdrops among those who keep a specific coin in their wallet.
As you can see, there are many ways to survive in a bear market. Perhaps not all of them can compensate for your losses alone. But with the proper approach and combination of these methods, you have a chance not just to break even but also to earn.
💚 Try out a SimpleHold mobile wallet app. 📱
💚 Find us on Twitter, Telegram, and Reddit. See u around! 👋🏻