Normally, bear markets create a feeling of uncertainty in every investor. Even more so for a newcomer, for whom it can feel like the end of the world. In fact, it may be common knowledge that investors are certain to make profits in bull cycles. While in bear markets like this, an unimaginable amount of pessimism sets in.
Kylin Network co-founder and strategic head Dylan Dewdney told Cointelegraph that the two biggest mistakes investors make when they’re feeling anxious are “first, investing too much, and second, not investing with conviction.”
“You have to find that sweet spot where you have enough conviction in your investments while managing the resources you put into it in a way that makes you feel 100% confident in being patient for a long time. After all, bear markets are where the magic really happens — like buying ether for $90 in December 2019,” Dewdney said.
Traders made nearly 43,000 transactions buying and selling cryptocurrency exchanges in early May, according to data from blockchain analytics firm Glassnode. This made Bitcoin worth a whopping $3.1 billion. But the panic these inquiries caused came from the Terra crash, which caused the market to plummet even further.
Bear markets occur when asset prices generally fall at least 20% from their recent highs. For example, the current bear market has seen Bitcoin (BTC) collapse more than 55% from its November record high of $68,000. Bitcoin is now trading below the $25,000 mark at the time of writing.
Bear Markets: Origin, Severity and Duration
According to Nerdwallet, bear markets are often tied to the global economy. That is, they occur either before or after the recession in the economy. Where there is a bear market, there is either an ongoing economic collapse or an imminent one.
Essentially, a sustained price decline from recent highs is not the only indicator of an ongoing bear market. There are other economic indicators that investors have yet to consider. This is to allow them to know if a bear market is happening or not. Some of the indicators include interest rates, inflation, and employment or unemployment rate, among others.
However, the relationship between the economy and a bear market is even simpler. When investors see an economy shrinking, the general expectation is that soon corporate earnings will also fall. And that pessimism is causing them to sell their assets, pushing the market even lower. As Scott Nations, author of The Anxious Investor: Mastering the Investing Mental Gamesays investors often overreact to bad news.
In any case, bear markets are shorter than bull markets. According to a recent CNBC report, bear markets last around 289 days. However, bull markets can even go beyond 991 days. Additionally, an Invesco data analysis report puts losses associated with bear markets at an average of 33%. As such, down cycles are typically not as effective as the average 159% gain of a bull market.
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While no one knows exactly how long a bear market might last, there are a few tips on how to weather it.
Navigating a Bear Market
As an investor, there is probably nothing anyone can do to prevent an adverse market situation or the economy as a whole. Nonetheless, there are many potentially great steps one can take to protect their investments.
Dollar cost averaging
Dollar cost averaging (DCA) describes an investment strategy in which an investor regularly purchases a fixed dollar amount of a particular asset, regardless of the dollar price of that asset. The strategy is based on the belief that prices will generally pick up pace over time and will eventually trend higher during a bull run.
CoinShares Research Director James Butterfill told Cointelegraph that Bitcoin now has a well-established inverse correlation to the US dollar:
“This makes sense for its emerging store-of-value properties, but also makes it incredibly sensitive to interest rates. What has pushed Bitcoin into a “crypto winter” over the past six months can broadly be explained as a direct result of the Fed’s increasingly hawkish rhetoric. Statements from the Federal Open Markets Committee (FOMC) are a good indicator of this and we can see a clear connection to the release times of the statements and price action.”
When this prudent investment approach is mastered, the investor’s purchase price is averaged over time. That means one can enjoy the benefits of buying the dip while also avoiding investing their entire life savings during the market highs. Because as feared as bear markets are in the investment world, they are also the best times to buy crypto assets at the lowest prices.
Diversify your portfolio
For investors who have a variety of assets in their portfolio, the impact of bear markets may not be as severe. When bear markets are in full swing, asset prices generally fall, but not necessarily by the same amounts. So, this valuable strategy ensures that an investor has a mix of winners and losers in their fortunes during a bear run. Thus, overall losses from the portfolio are reduced to the bare minimum.
Consider defensive assets
During prolonged bear markets, some companies (usually smaller or younger) tire along the way. While other more established companies with stronger balance sheets can withstand the harsh conditions for as long as necessary.
Therefore, anyone looking to invest in company stocks should look for stocks in companies that have been in business for a long time. These are defensive stocks. And they’re usually more stable and reliable in a bear market.
Bonds can also offer an investor some relief during bear cycles. This is because bond prices typically move inversely with stock prices. So bonds are an important part of any near-perfect portfolio and give an investor relatively little trouble enduring the pain of a bear market.
Index funds or exchange traded funds
Some sectors are known to thrive fairly well during market downturns, including the utilities and consumer staples sectors. And more than any other sector, they deserve the name “wealth stabilization”. Investing in the above sectors through index funds or exchange-traded funds (ETFs) can be a smart move. This is because each index fund or ETF holds shares of different companies.
There is no doubt that a bear market will tempt investors to run away and never look back. Their will and endurance are also put to the test. But as history has shown, bear markets don’t last forever, and neither will the current one.
According to the Hartford Funds, more than 26 bear markets have occurred between 1928 and the present. And each of those bear markets was immediately followed by a bull market that generated more than enough gains to erase any losses incurred.
Therefore, it is important to always take your mind off the prevailing recession, especially if you are investing for the long term, e.g. B. for retirement. Eventually, the bull markets that you will observe along the way will outperform the bear markets.
The final decision
As already mentioned, bear markets come with massive risks. But they also offer a good basis for success in the next bull run. However, this depends on good strategic investment planning mixed with patience. That way, profits can be guaranteed when the market finally turns, whether you’re always DCA-ing, diversifying into other assets, investing in ETFs and index funds, or stocks.
Losing money is always a heavy pill, but the best way to weather a market downturn is not to run. Instead, consider the wide range of recovery options and keep calm.
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“While Bitcoin’s price action has been weak in the face of an aggressive Fed, this current disruption in price performance may very well be short-lived. We believe that a Fed policy error is highly likely when bitcoin prices are likely to deviate from growth stocks. Meanwhile, the former should benefit from a dovish Fed and a weaker USD, while the latter underperforms in the face of recession or stagflation,” says Butterfill. He added:
“Unfortunately, although there are many unknowns, we believe that the US and the rest of the world are likely to slide into economic decline in 2023. Maybe it’s stagflation, which then turns into a recession? With the liquidity trap really taking hold of central bankers, we believe bitcoin is a good insurance policy in the face of this monetary policy mess.”