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How to Minimize Your Losses (and Make Smart Moves) During a Bear Market
Since its debut in 2009, the Bitcoin and cryptocurrency markets have experienced several cycles of rise and fall, even within the wider long-term patterns known as bull and bear markets. While each market drop has so far been followed by a comeback and considerable growth, moments of fall can be unpleasant and difficult to manage for both experienced traders and new investors.
In this article, we cover five techniques that you might wish to employ during a market downturn in order to preserve the value of your portfolio, avoid emotional trading, and sleep better.
#1 – Don’t fall prey to FOMO and FUD
Staying up to date on the latest news and developments in the cryptocurrency industry is critical, but having too much knowledge may be detrimental. This is especially true during market downturns, when it is all too easy to be swayed by your emotions and make some poor-timed trades.
- FOMO (fear of missing out) and FUD (fear, uncertainty, and doubt) are common terms in the crypto space, and can have a stronger influence on our choices to buy and sell than many of us would like to admit.
- FUD generally refers to a negative market sentiment, caused by some rumor, unfavorable news article, or prominent figure expressing concerns about a particular market or asset. This can have a negative effect on the price as traders sell their holdings expecting further price decreases. FOMO is the opposite, speaking to a trader’s tendency to get carried away with wishful thinking after seeing positive price action or news, sometimes overlooking fundamental signals in a haste to jump aboard the next rocket ship to the moon.
Remember: No one can predict the future, and no single person’s advice is better than doing your own research and coming to your own conclusions. In some cases, influencers and publishers can actually have a vested interest in causing FUD or FOMO in order to manipulate the markets in a given direction. When learning about the latest updates across cryptocurrency markets, always try and confirm with multiple sources.
#2 – Set clear goals, diversify, and only trade within your means
No matter how confident you are in a particular asset, you should never invest more than you can afford to lose. The last thing anyone wants is to be caught in an emotional rollercoaster waiting for positive price action as the price of their portfolio slowly drops.
- Most savvy investors also choose to hold a number of different kinds of assets long-term to diversify their portfolio — from alternate cryptocurrencies to stock market index funds.
- It’s often said that crypto doesn’t sleep. Cryptocurrency markets are well known for their volatility and to counter this, crypto investors should predefine their trading strategies, and if possible, their entry and exit points.
- Even if you had access to every bit of information available, a sudden black swan event, hack, or tweet from a high-profile individual could cause prices to plummet. This is why it’s crucial to plan ahead and to take steps to mitigate your losses should some kind of sudden crash occur.
- Investors could consider fixed strategies like dollar-cost averaging (the process of buying or selling small amounts over regular intervals), which could help a crypto buyer completely avoid trading with their emotions, or having to stare at the charts 24/7.
Remember: It’s very easy to get carried away while holding volatile assets like cryptocurrencies. Trading can be a very high-risk activity, and especially in a bear market, and investors should aim to set goals that balance minimizing potential losses with achieving potential gains.
#3 – HODLing and long-term thinking
While the saying that “it’s not a loss until you sell” is only partially true, it does carry some weight. If the value of your assets has gone down since you bought them — called unrealized losses — they are only realized once they’re sold for less than your purchase price.
- Through the years, Bitcoin has consistently trended upwards over the long term. Even if prices are falling due to a temporary market correction or a longer bear market, history shows that prices are likely to recover eventually due to economic drivers like scarcity. Many people believe that this limited availability will cause the price of cryptocurrencies like Bitcoin to continue to rise over time. If your investing timeframe is on the longer side (years instead of weeks or months) negative price movement can be viewed as being temporary.
- Holding for long periods has to date been a proven strategy, with Bitcoin emerging as perhaps the most successful major asset of the last decade.
Remember: In countries such as the US, holding cryptocurrencies for longer periods of time can also be beneficial in terms of taxation. For example, holding for one year or longer may be more favorable than selling in the short-term.
#4 – Be ready to ride out the dip or take profits
One of the safest options for avoiding crypto volatility and protecting yourself during a market dip is to convert some of your volatile crypto holdings for more stable assets. This can help an investor ‘lock-in’ their balance and reduce their risk and need to actively manage their portfolio and stress levels in a cryptocurrency bull market.
- Stablecoins like USDC aim to maintain their value at a fixed price — and by converting part of your portfolio into stable-value assets, you lower your exposure to price changes while the markets are in a lull.
- But also remember that selling everything at once, called capitulation, can easily cause crypto holders to lose out if the market suddenly rebounds. This is why it is so important to map out an idea of what level of profit and loss you would be comfortable with before you’re forced to make decisions under pressure.
Remember: Many investors today choose to move in and out of stable assets as part of a larger withdrawal and buy-back strategy, which can help gradually grow their portfolios if the timing is right. This isn’t easy though, and even the most experienced investors often fail to time their entries and exits correctly. (Again, for many investors, dollar-cost averaging can be a good way to avoid even attempting to time the market.)
#5 – See the opportunities
Even when the crypto markets are falling, there are opportunities if you know where to look. Where others see a dark and cold crypto winter, keen investors see a new window of opportunity to get their favorite assets at a discount and turn a profit.
- “Buying the dip” is a popular way for traders who felt priced out of previous gains to get into the market or increase their positions.
- Even within a downtrend, there will still be small peaks and valleys as the market fluctuates. Traders that have brushed up on their technical analysis skills can stand to benefit here, using that knowledge to predict these short-term movements and capitalize on them by buying the short-term lows and selling the highs.
- Short selling, or betting that an asset’s value will fall, can also be a good strategy to turn a profit during dips.
- Activities like staking and DeFi yield farming can further help level out returns and provide support to make sure your actual crypto balance is always growing, even in a bear market or downtrend.
- If you believe an asset will eventually be worth more, dollar-cost averaging works whether markets are up or down! In fact, you get more crypto for your dollar during down cycles.
Remember: These kinds of activities (with the likely exception of DCA) are not for the faint of heart, and may actually result in significant losses — or at the very least greatly increase the amount of time you spend in front of a screen watching stressful price charts.
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