[Disclaimer: I own Bitcoin and several altcoins. This is not investment advice and is provided for information only. This considers the economic case for cryptocurrency and is not a recommendation to buy. Do your own research and consult a financial advisor.]
A crypto bear market is brutal.
According to Glassnode, they last anywhere between 227 and 435 days with bitcoin drawdowns of between 75% and 84%.
In bear markets altcoins tend to fall even more, often up to 95%.
In all other markets, a bear market is normally defined as a decline of 20% or more.
However, crypto is so volatile that it can fall 20% even in a rising market. For crypto that is just a really healthy bull market correction.
Instead, for crypto, my preferred definition of a bear market is a fall below the 200 day moving average. This is a common technical analysis indicator and is a good reflection of the long term mean.
A fall below the 200 day moving average for a prolonged period of time is known as a crypto winter and, so far, these have been predictable and cyclical phenomena.
Anyone can make money in a crypto bull market. The real proof of your abilities as an investor or a trade is how you perform in a bear market. This is true of crypto or any market.
The key is to minimise your losses, preserve your capital for the next bull run and prepare yourself psychologically so you can get through it. It’s also important to have good security practices, avoid exchanges and lending platforms and make sure the bulk of your holdings are in cold storage.
Here are my 10 tips for surviving a crypto bear market.
Best Ways To Survive A Crypto Bear Market
1. Stay Calm and Don’t Panic Sell
This is easy to say and hard to do. But when the market starts a serious decline it is easy to freak out. The news media and social media will be full of fear and you will be tempted to dump everything.
Stop, pause and gather yourself.
Assess the situation and come up with a plan.
You may decide to sell, and that is fine. But if you are going to sell, do it methodically and rationally.
Don’t panic sell into the fear.
2. Assess Your Cash Position
Cash is king in a bear market.
Yes, its value is being eroded by inflation. But consider this:
- Inflation eats away at your capital at a slower rate than a crypto crash
- A loss of value to inflation is psychologically less damaging.
Many people tend to hold little cash in a bull market, since they want to take advantage of rising prices.
This makes sense but it does leave you a little bit exposed when the market turns. Only having a small cash position causes two main difficulties:
- You will feel the pain of the bear market much more both psychologically and financially.
- You will have less capital to redeploy at the bottom to take advantage of the next bull market.
What you should do is consider your cash position for the next 12-24 months.
Work out how much you need to set aside for:
- Day-to-day expenses (hopefully this is covered by your job)
- Upcoming big ticket items
Then, most importantly, consider how much you need to be psychologically comfortable in a bear market.
I find it much easier to turn off the news, put away the charts and zone out in a bear market when I have a comfortable cash buffer. If I don’t, I find myself glued to the news and the charts feeling every gut wrenching leg down.
If it means selling something at a loss to get to a comfortable cash position, then so be it.
If it means selling something at a profit, but way off the high, then so be it.
As it is commonly said, nobody ever went broke taking profits.
3. Assess the Coins You Hold
A bear market is the best time to reflect upon the coins that you hold.
If you haven’t already taken the time to look deeply into the projects, then you should do so.
If the coin has a use case and an investment thesis, then this should strengthen your conviction to continue to hold it during a market downturn.
If you think the coin has shaky foundations, then it is worth considering whether you should exit your position.
During every bear market, Bitcoin gets stronger and those who have done the work to understand it have no fear of holding during a downturn.
However, in every bear market cycle many altcoins will die. Others might survive but will never recover their all-time highs.
You should think long and hard about which altcoins, if any, you are prepared to hold through a bear market and what your position sizing is.
4. Take Advantage of Bear Market Rallies
If you do decide to sell for whatever reason, then it makes sense to exit positions while minimising losses.
Don’t just dump at the first moment it crosses your mind.
Bear markets in general are famous for massive rallies and crypto bear markets in particular have some spectacular ones.
A good technical analyst can help you identify these but in general you want to avoid selling when the market has just taken a major dump.
Try to sell when the market rallies back up and shows signs of putting in a lower high before another leg down.
The top of the range in a bear flag is a good time to exit.
5. Revisit Your Asset Allocation
This is a two-step process:
- Assess your crypto position as a percentage of your total portfolio.
- Assess the allocation of coins within your crypto holdings.
Chances are, if you rode the previous bull market up, you are overweight your target allocation for crypto in your portfolio and overweight altcoins relative to Bitcoin.
In a bear market, crypto will fall faster and further than anything else. So if you are overweight crypto then that will correct itself on its own.
But perhaps you may decide to take some profits, even somewhat off the highs, in order to lower your crypto allocation.
Personally, in the current bear market, I decided I was overweight ETH relative to Bitcoin.
So I sold some ETH. It was way off the high but still in profit, and I immediately used that cash to place three buy orders for Bitcoin at various price targets.
Once you have reviewed your asset allocation and are happy with it, it should give you the fortitude to ride out the rest of the bear market.
6. Get Prepared To Buy More
If you have done everything mentioned so far and are calm, cashed up and happy with your coins and asset allocation, then you need to start preparing for when you will re-enter the market.
Money is made buying low and selling high. Big money is made in bear markets because that is where you find your best entry points.
As the saying goes, buy when there is blood in the streets, even if it is your own.
There are two ways to approach this process:
- Regular Dollar Cost Average
- Dollar Cost Average Near the Bottom
If you have a regular DCA set up then you don’t need to do anything. You will have bought all the way down the bear market and will continue to buy as it recovers. This is the least risky option.
If you don’t have a regular DCA set up, what you can do is wait until you think the bottom is in or at least very near and then by in consistent sized chunks at a range of entry points. That way you still average in your entry point in case the market falls further.
This is normally my strategy in a bear market. I don’t have a regular DCA set up. What I do is assess my asset allocation, determine the amount of capital I have to commit, and split it into about five chunks with five different entry points.
Picking the exact bottom is an impossible task, so this has some risk:
- If you go too early you can suffer further short term losses and miss better entry points further along.
- If you go too late you missed the most attractive entry points that a regular DCA would have captured.
But the benefit, if you can get it right, is that a greater proportion of your capital enters the market at more attractive pricing than it would with a regular DCA.
The approach you take really depends on how confident you are at getting close to the bottom and how much time and energy you have to closely follow the markets.
There are a number of indicators you can look at to estimate the likely range at which the bottom will fall. You can then average your buy orders in that range.
A few things that help are:
- Percentage retracement compared to previous bear markets
- Market psychology and evidence of a capitulation sell off
- Extreme fear and pessimism in the media
- Technical indicators including the percentage drawdown below the 200 week moving average, trading volumes, log channels, on chain analysis
I’m not a technical analysis expert, although I feel like I am getting better the more and more I study it.
So what I do instead is try to find a handful of analysts who are well respected and have a good track record. I absorb their analysis, note what they agree and disagree on and then formulate my plan from there.
7. Stop Checking Your Portfolio Too Regularly
It is always tempting to euphorically check your portfolio on the way up and despairingly check it on the way down.
I am guilty of this way too often.
However, it is good investing wisdom to try and avoid this if possible.
If you are happy with your cash position and your asset allocation and have made the rational decision to hold, then checking the price does nothing except manipulate your emotions and tempt you into selling.
This is where Benjamin Graham’s concept of Mr Market can help.
Graham described Mr Market as an emotional and irrational business partner who every day offers to buy you out at random prices. Some days the price is wildly high, some days it is wildly low and some days it is fairly valued.
If you are content in holding your investment for the long term, then Mr Market’s low ball offers in a bear market should not trouble you.
Just ignore the market, hold and don’t check too often.
Instead make time for the things you love in the real world. Spend time with family and friends, take care of your health, go for a run and do things that make you happy. Don’t let yourself be agonisingly glued to a screen, fretting and unable to sleep at night.
Being down big amounts in crypto is extremely uncomfortable but remember it is the market with the fastest and most severe drawdowns but also the fastest and most astronomical gains.
Like night follows day, a bull market will follow the bear market if you can psychologically get through it without panic selling or capitulating.
8. Reflect On And Refine Your Investing Process
Hopefully you have a documented investing process.
If you don’t, you probably have a mental one.
A bear market is a great time to commit your investing process to paper and reflect on your performance in the last bull market and the current bear market.
Questions you could ask yourself include:
- Did you follow your process in the bull market or did you buy with emotion?
- Did you try to assess fair value or did you FOMO in?
- Did you understand what you were invested in and the risks that came with it?
- Did you take profits on the way up?
- Did you recognise the signs of the bull market top?
- Did you sell with a clear head in the bear market or did you panic sell?
- Whose advice or analysis did you follow?
Every bear market you survive will add to your character, experience and fortitude.
You will take hard lessons, so you might as well document them and use them to better inform your investing process in the future.
9. Be Careful Of Trading
Swing trading is amazing if you are experienced, are good at it, have a tight process and the discipline to follow that process.
If you don’t have those things, then trading can be a great way to lose all your capital very quickly.
If you are normally a patient buy and hold investor and you find yourself with an account that is underwater, it is tempting to try and make it back in a few risky trades.
Maybe you have even had some success timing some short term moves.
Just remember that you generate a tax obligation for each crypto trade and be aware that shorting can expose you to catastrophic losses if a trade goes against you.
Don’t be tempted into trading a bear market out of fear, hope or greed.
Only do it with a rationally thought out plan.
10. Get Your Crypto Off Exchanges
Never leave large portions of your assets on exchanges. Move them into cold storage instead.
Crypto exchanges are always at risk of failure but this is especially heightened in a bear market.
When you keep crypto on an exchange you do not have access to your private keys. All you have is a promise that the exchange will provide you with your assets on request.
They can and will default on that promise if they have to.
By moving your assets into cold storage you gain control of the private keys and can store them offline.
Crypto bear markets are short but brutal.
With clear thinking, good reflection, a plan and the right psychology, not only can you survive bear markets but you can make a lot of money in the future by buying at attractive entry points.
If you own quality assets then trust your thesis, don’t get shaken out of your position and don’t be tempted to panic sell.
If you can make it through, you will reap the rewards on the other side.