10 Investment Strategies for Bear Markets

Economists define a bear market as a widespread price drop of 20% or more that lasts at least two months.

Investing in a bear market seems like a bad idea. You make a €1,000 purchase. The next day, it’s worth €998.50. A week later it’s worth €952. Investing during a bear market seems like a good way to lose money.

Many investors lose confidence and rush to sell off their holdings, which pushes prices even lower, extending the severity and duration of the bear market.

Investment advisors say it’s better to adopt trading strategies that minimize losses and take advantage of opportunities that arise only when prices are falling. Here are 10 strategies they recommend.

1. Cover Your Costs

Your top priority should be covering your living expenses. If you’ve been counting on short-term market gains to pay the rent, you aren’t in a position to make sustainable choices as your portfolio’s value plummets.

Advisors advise that you match your lifestyle to your paycheck and that you establish a savings account containing three to six months of living expenses to keep you solvent in case of emergency. 

You should invest only money that you can afford to lose.

2. Diversify

In every bear market, some market segments get hit harder than others. Experts say a diverse portfolio can help you minimize losses and take advantage of gains in growing markets.

In the crypto world, that might mean spreading your investments across large-cap market leaders, fast-growing new cryptos, DeFi-related coins and tokens, cryptos associated with the NFT market, and stablecoins.

Investment advisors say diversification can help cushion your portfolio against losses because some segments will lose less value than others.

3. Don’t Panic

Many investors feel an understandable urge to cash out when prices plummet. But if you sell your crypto at a loss, the statistical, on-paper market downturn becomes a tangible, actual loss of your own money.

Experienced financial advisors say it’s best to take a deep breath and stay in the market. Every bear market eventually ends with a market recovery, and investors who are able to ride out the storm are rewarded with gains in the long run. Individual cryptos may not survive a market downturn, but if your portfolio is diversified and you have nerves of steel, staying in the market can position you to take advantage of profit opportunities as they arise.

4. Avoid Volatility

When prices fall, smart investors turn to assets that retain their value. That’s why investment houses maintain cash accounts. They transfer a portion of their holdings to cash, gold, or another stable asset. Later, when prices drop, they can repurchase their holdings, pocketing the difference as profit.

You don’t have to leave the crypto world to set up a cash account. Stablecoins serve the same purpose, and they allow you to keep your holdings in your crypto account so you can react quickly to market upturns.

5. Make Recurring Buys

Smart investors weather bear markets with a strategy called dollar cost averaging. They make small regular purchases according to a weekly or monthly schedule. This allows them to continue building a crypto portfolio without committing to a single large purchase that could quickly turn into a big loss.

Cost averaging has the effect of smoothing out price volatility. Instead of the risk of buying at a very high or very low price, you build a portfolio gradually according to a time-based average price. As the market recovers, the value of your holdings will rise even though you experienced minimal risk.

With cost averaging, you don’t need to worry about timing the market and predicting whether prices are about to fall further or rebound.

The easiest way to get into cost averaging is Kriptomat’s Recurring Buy program.

6. Identify Growing Market Segments

Some cryptos retain their value even during a severe market downturn. These tend to be coins and tokens that are associated with market segments that are seeing substantial growth.

For example, cryptos that are used in the video game industry and online gambling have performed well despite market slumps. Coins associated with DeFi, fan-based NFT marketplaces, cross-chain communications, and other applications are worth evaluating, especially if you have specific knowledge about the operations of a specific market segment.

It’s also worth analyzing the performance of specific cryptos during previous market swings. Some cryptos have a history of losing more value during bear markets, while others lose less.

7. Favor Large-Cap, Established Investments

The logic behind this strategy is simple. Well-established cryptos have weathered market downturns in the past and regained their value, delivering profits to those who stuck with them.

When a crypto has a large market cap, the price won’t plunge when a few skittish investors sell off their holdings. You can’t say that about newer cryptos with smaller user bases. They are vulnerable to irremediable losses if investors lose confidence in them.

8. Look Beyond Price

While a crypto’s purchase price may drop during a bear market, owning the coins or tokens could still deliver financial benefits. You might stick with a fund in order to earn fees from lending coins to a liquidity pool or staking them to a blockchain consensus network. You might retain a crypto in order to preserve your position in the decentralized autonomous organization that sets policies. You might hold on to particular coins that pay gas fees when you conduct transactions with a DeFi application you rely on.

Bitcoin is a pure currency. Investing in Bitcoin is a simple matter of predicting whether the price will go up or down. But more and more altcoins are associated with key technologies like blockchain oracles, cross-chain commerce, and consumer entertainment. Those cryptos can continue to deliver financial rewards even if their prices go down.

9. Invest in Derivatives

Derivatives are complex financial instruments that allow investors to minimize risk and to make money even when market prices are declining. 

The most common derivatives are futures and options. With both, the investor borrows an asset – Bitcoins, for example – in anticipation of selling it on or before a specified date at a higher or lower price.

Derivatives help minimize risk because if the result of the trade would be a loss, the investor simply doesn’t execute it. The investor loses the fee for purchasing the future or option, but that’s generally a small amount.

Derivative trading has traditionally required the services of a broker, but blockchain-based DEXs that handle crypto futures and options are starting to appear. These financial instruments are not entirely without risk, but they do allow experienced investors to make big profits in falling markets.

10. Be Patient

Researchers say the rising prices of the average bull market last about six years and deliver a cumulative return of more than 200%. Bear markets last 18 months or less, and losses average 39%. 

These figures suggest that if you are prepared to hold your assets for five or 10 years, you can afford to take no action at all during a bear market. Simply wait it out. Prices will rise, your portfolio’s value will be restored, and you will resume earning profits.

Remember, There Are No Risk-Free Investments

Investing gurus recommend the strategies outlined in this article as a way to reduce losses and even build the value of your portfolio despite a market where prices are plunging. None of them work overnight. But if you plan your response to falling prices carefully and commit to a long-term plan, experts say, you could endure and even prosper during a bear market.