It’s no secret that markets are cyclical in nature. Ethereum went through a bearish phase this year, dropping below $2,200 during the last week of January, marking the lowest ETH has fallen since July 2021.
Bear markets are times when cryptocurrency prices drop across the board, and investors start selling their holdings to protect against increased exposure to falling prices. Cryptocurrency markets are notoriously volatile, and due to their speculative nature, are subject to a wide range of factors like sentiment, protocol upgrades, government policy, and regulation.
What’s less known is how to structure your portfolio in a way that takes these cycles into account. Not being prepared for a bear market can result in severe losses that are tough to recover from.
It’s also important to note that bear markets don’t last forever. Cryptocurrencies are still a relatively new technology, and the market is still a developing arena. Although they’re inevitable, bearish conditions tend to fizzle out quickly. Patience can pay off significantly if your portfolio is correctly positioned to take on a bear market.
This article will cover some essential considerations for restructuring your portfolio to ensure maximum success when a bear market hits.
One of the cornerstones of any investment portfolio is diversification – spreading your risk across multiple assets. By diversifying your portfolio, you minimize exposure to volatility and risk.
It’s important to monitor different assets and their movements to ensure you’re adequately diversified. Consider diversifying your portfolio based on the types of cryptocurrencies in the blockchain space. Some include:
- Store of value assets like Bitcoin
- Stablecoins like DAI and USDC
- Smart contract platforms like Ethereum, Cardano, Polkadot, and Solana
- DeFi projects like Aave, Compound, and Yearn Finance
- NFTs and Metaverse projects like Sandbox, Axie Infinity, and Yield Guild Games
The goal here is to hold a wide range of cryptocurrencies that serve different markets so that you are always well-positioned to capitalize on the changing dynamics.
Leverage Flash Discounts
If you have spent any amount of time on Crypto Twitter, you must have come across the war cry of bear market conditions – “buy the dip.” This refers to the act of buying more of a cryptocurrency after it has fallen from a recent high. Bear markets are usually full of dips due to regular market corrections and price retracements, and buying undervalued assets is one of the best ways to increase your portfolio value.
This involves studying charts, paying attention to various technical indicators on different time scales, identifying historical support levels, and placing stop and limit orders to manage risk. A common investment practice is ‘Dollar Cost Averaging‘ (DCA). This involves regularly allocating a fixed amount into an asset to average out the entry price. It aims to protect investors from the harsh effects of market volatility and reduce risk exposure.
For example, if you’d bought 1 BTC in November last year and held on till the end of January, you’d have lost nearly 50% of your investment. However, investing a third of that amount every month between November and January would have cut those losses in half.
Put Your Assets At Stake
The purpose of staking is to provide stability to your portfolio in a bear market. Cryptocurrency prices can fall immensely in bearish conditions, so it’s essential to have the means to generate returns even when the value of your holdings is dropping. Staking allows you to do just that by providing rewards on staked coins.
You will first need to decide what platform to use, as this will determine which coins you can stake. Any Proof-of-Stake enabled blockchain will let you stake its native token, but this can involve high entry costs and exposure to additional risks. Staking pools can help move past the prohibitive staking costs, enabling smaller holders to pool their capital to validate transactions, splitting the rewards. DeFi lending platforms also offer high rates on stablecoins, which tend to be in high demand when markets turn red.
Centralized Finance or CeFi platforms offer slightly lower returns for reliability. Regardless of market conditions, CeFi projects ensure consistent returns on your assets by internally managing funds to manage risk. For example, Phemex’s ‘Earn Crypto‘ platform affords its users up to 8.5% APY on deposits worth up to 1.5 million USDT. Additionally, its ‘Learn and Earn‘ education program compensates users for completing crypto and blockchain-related courses in the form of written articles, engaging videos, and fun quizzes.
Plan For Failure
Shorting or short selling is an investment strategy used when you expect an asset’s price to drop. For example, if you were to borrow 1 BTC at $40,000 and sell it at market value, if the price of Bitcoin dropped to $30,000, you could buy back in at a $10,000 discount, enabling you to pay off your loan and still keep a chunk as profit. This can act as a hedge against your overall long position, keeping your portfolio afloat regardless of what the market’s mood is.
Derivatives markets are also beneficial for these situations. Derivatives are financial contracts that are tradeable and derive their value from an underlying digital asset. Examples include futures, options, and perpetual swaps, with the last one being unavailable in traditional securities markets. Not every cryptocurrency has a liquid derivatives market, but the most popular ones like Bitcoin and Ethereum most certainly do.
Certain exchanges even offer leverage on these trades, allowing you to profit immensely by creating larger, leveraged positions. Phemex, for example, lets traders use up to 100x leverage on its contract products, enabling smaller investors to make outsized returns from accurately predicting market movements. With their inverse contracts, Phemex even allows traders to settle profits in USD or crypto, based on preference.
Trap the Bear, Ride the Bull
It’s crucial for investors to always be prepared for a bear market, especially with how volatile crypto assets can be. This includes having a well-diversified portfolio that can stomach fluctuations in the value of their holdings. During bear markets, it’s also vital not to panic and sell at a loss. Even the sharpest drops eventually tend to stabilize unless there are fundamental reasons not to. By preparing for volatility, investors can minimize losses and maximize returns. Remember, do your own research before investing in any asset class.