LearnAcademyInvestment fundamentals: Strategies in practiceLesson 4: Investment Strategies for Bear Markets
Lesson 4: Investment Strategies for Bear Markets
After completing this lesson, you will be able to:
Explain what a bear market is.
Identify the most common mistakes investors make in bear markets.
Understand what kinds of investment strategies have proved successful in bear markets.
Know what a derivative is.
Understand the role of derivatives in bear market investing.
Welcome to the fourth lesson in Kriptomat’s guide to fundamental investment strategies. This lesson is about investing in bear markets.
Let’s start by getting clear on what makes a bear market.
- Economists say a bear market happens when a widespread price drop of 20% or more is sustained for at least two months.
- The bear market is the opposite of the bull market, in which prices are rising.
- One way to remember which market is which – think of how the animals attack. Bears swat their enemies downward, while bulls use their horns to throw them upward.
It is natural to panic when prices fall. Generally the value of your portfolio falls during a bear market, which puts your financial goals at risk. Financial experts say investors make five common mistakes during a bear market.
- Mistake number one: Selling at a loss. Remember, fallen prices can (and generally do) rebound eventually. Selling turns your investment into a loss – period – no matter what the market does next. If you’re selling off your holdings to exit the market, you’re missing an opportunity to buy at low prices.
- Mistake number two: Inadequate cash reserves. Keep cash on hand for unexpected expenses like auto repairs. If you have to sell investments to pay for those expenses, you’ll be selling at a loss. You’ll have less crypto in your portfolio to benefit from the eventual recovery.
- Mistake number three: Listening to doomsayers. Whenever the market takes a downturn, opinion columnists exaggerate the bad news and forecast a crypto catastrophe. Do your own research and don’t let your investment decisions be guided by a single point of view.
- Mistake number four: Obsessing on prices. If you’re constantly checking prices throughout the day, you’re feeding anxiety, and that can lead to a panic sale in response to a market drop. Experts say you should stick to your investment strategy without obsessing on prices.
- Mistake number five: Discontinuing cost averaging. Cost averaging becomes more effective and powerful during bear markets because you acquire more coins and tokens for the same amount you are investing every week or month.
Most financial advisors recommend cost averaging during bear markets
- Cost averaging is a long-term strategy that helps you profit by purchasing crypto at the bear market’s low prices.
- Since you’re investing the same amount of money each month, you acquire more crypto when the price is low – so you’ll have more tokens that rise in value when the market recovers.
- Your portfolio value may fall during the bear market, but assuming there is a recovery eventually, it will regain its value.
Crypto derivatives help turn the market’s bad news into profits
- Crypto options and futures allow you to specify the price at which you will buy or sell a certain amount of a particular cryptocurrency in the future.
- For example, when the price of Ethereum is 2,000 euros, you might purchase a contract to sell 10 Ethereum for 1,900 euros each in 30 days. If the price drops to 1,800 euros, you make 1,000 euros – 100 Ethereum per coin – as profit.
- In most cases, you don’t have to own the crypto – Ethereum in this example – to exercise the contract. Exchanges conduct the transaction on a net profit or loss basis.
- Futures and options allow investors to leverage their funds, taking advantage of market movement without owning or buying the full amount of crypto. Other leveraged products in the crypto world include margin trading, leveraged tokens, and perpetual contracts.
Financial experts also recommend diversification to minimize the effects of a bear market
- A broad downturn could slash the value of some cryptos while prices rise for others.
- Stablecoin prices don’t change compared to the indexed fiat currency. That means you can use stablecoins as a crypto savings account that lets you purchase conveniently when the opportunity arises.
- Stablecoins are even better when they’re earning a high annual percentage yield as part of Kriptomat’s innovative KriptoEarn service.
- Well-established cryptos with high market capitalization are less likely to sustain large losses than smaller cryptos that are new to the market.
So – what did we learn?
- Selling into a bear market locks in your losses and can extend the bear trend.
- The crypto that remains in your portfolio still has a chance to recover its value.
- Cost averaging, derivatives, and diversification can lead to profits during bear markets.
That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!
What is a bear market?
A widespread price drop of at least 20% for two months or more.
A market of honey and bee stings recognizable by big winners and big losers.
A market of stable prices as if market dynamics are hibernating for the winter.
A market where big losses are predicted, but prices remain mostly stable.
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Which of the following is NOT a common bear-market investing mistake?
Obsessing on prices.
Cost averaging.
Minimizing cash reserves.
Selling off cryptos whose prices have fallen.
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Which of the following is NOT a recommended investment strategy for bear markets?
Cost averaging
Options and futures
Trading for short-term gains and losses
Portfolio diversification
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How do options and futures work?
Investors specify the value of future trades, but not the precise cryptos.
Investors promise to buy or sell a specified amount of crypto at a specified date.
Investors have the option of 'turning back the clock' and reversing transactions under certain conditions.
Investors set aside funds that they have the option of investing at a future date.
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How can investors profit in a falling market?
Sell early to minimize losses.
Minimize cash reserves.
Save cash and make no purchases until prices have recovered.
'Bet against the market' with options and futures.
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Kriptomat Academy content is informative in nature and should not be considered a personalised or any other investment recommendations or advice.
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