Recently the price of Bitcoin suddenly dropped by 20%, making the whole cryptocurrency market bleed. People started talking about a new bear market – “Fasten your seat-belts we are approaching the crypto market crash.” But thankfully that wasn’t the case and coins restored their positions in a few days.
This is a common situation when bears enter the market. FUD rises on social networks and panic sentiments force traders to sell crypto. These actions only dramatize the situation so the fall may be rapid and you’d do well to go through this not losing your nerves.
Today we will discuss what you should do to survive a bear market and how to save capital during the crypto crash.
What is a Bear Market
A bear market in crypto is a situation when the price of coins goes down and other traders reinforce this trend by actively selling the currency. In this way, a stable downtrend is formed. How long does it usually last? No one knows. The previous crash in crypto started in December 2017 and lasted for almost a year and a half. For this period Bitcoin dropped six times from $20000 to $3200 affecting other coins too. Altcoins still depend on Bitcoin’s value so you can easily track market crashes via Bitcoin price cycles.
Bear Market vs Bull Market in crypto
A bull market, on the contrary, is a situation when the prices go up sharply during a certain period of time. The growth gives a sense of optimism and people start trading more. It catalyzes the price to rise more.
A bear market is generally associated with fear and uncertainty. It leads to a massive sell-off which only hurts the prices more. As a result, the price decreases generating more FUD. The number 1 rule for every trader is to avoid emotions and be cold minded. However, people often forget about rational thinking.
Why the crypto market crashes
Cryptocurrencies are well-known for their volatile nature. To many people, their behavior seems unpredictable and chaotic. One day the prices sharply go up and you imagine a new Lambo, and then suddenly the whole market is falling. Your portfolio costs a few bucks and instead of a new car, all you can afford is fried chicken wings.
There are too many factors that can trigger a crypto crash: political background, recent news, stagnation and uncertainty after a pump. However, each time the market manages to restore – the growth follows the crash and then goes back to stable (for crypto) positions.
Cryptocurrency Bear Market vs Correction
Sometimes it can be difficult to identify when it’s a bear market and you can easily confuse it with corrections. However, corrections have a short time-frame and end within a few days or months, while a bear market can last for years. At the same time, corrections can trigger panic, which can turn into a bear market.
This scenario is especially relevant for young markets like cryptocurrencies having unstable assets. If rallies are slow or buying volume is decreasing, then it could be a good sign that more bad news for traders is on the way. Most cryptocurrency assets still depend on the price of Bitcoin, so its price movements are the benchmark of the market.
How to survive a Bear Market
What it feels like during the market crash
Be ready for the worst
A well-known rule among traders is to not panic during such market behavior. You should always be ready for a price fall because it is inevitable and this is how it works. A stock trader from Romania, Vlad Gubernat, brings this idea to a new level and says that you should be prepared for the worst outcome. He urges getting rid of rose-colored glasses and coming to terms with the fact that sooner or later a market storm will take some of the trader’s money away. To survive this loss in the future, the trader needs to discard all false expectations about trading in advance. Even though he talks about stocks, this idea is relevant for cryptocurrencies too.
If you expect drawdowns to be no more than 10% and last no more than a month or two, you’re deluding yourself and probably shouldn’t be trading.
Market crashes and losses are a natural phenomenon that should not put an end to traders’ intentions to make money on the exchange. For example, Gubernat cites the Warren Buffett Berkshire Hathway fund, whose stocks have survived two drawdowns since 1980 – 37% and 50%.
Think long term and HODL
The key task of the trader is to save his capital during a falling market. Contrary to popular belief, successful traders are not those who make the most money in a growing market, but the ones who lose the least in a falling.
Trying to manage risks at the moment when everything is falling is like being late for an evening party. You need to prepare for such situations in advance (and you need to know how) to be fully armed during the next bull rally and correction.
Take your time and learn more about Technical and Fundamental analysis, read books to level up your financial and trading skills, and research more decent projects to expand your portfolio in the future.
Buy no more than 1% of your capital
Let’s take a look at the bearish trend from a different perspective. A crash is a sale with huge discounts, basically Black Friday for the crypto market. So you can buy some Bitcoin, Ether or another prospective coin at a low price and benefit from it in the future.
Black Friday – Cryptocurrency Style | Source: Reddit
But you should be rational, don’t rush into buying huge amounts – Buy no more than 1% of your capital. American financial expert Stephen Burns pays special attention to safety during the drawdown and notes that traders who pursue high returns should always be prepared for a market crash that could eat half of their regular income.
According to Burns, the surest way to avoid this situation is to be moderate and disciplined and risk no more than 1% of your capital in a single transaction. Avoid the temptation to buy a large sum to compensate for losses. It usually only makes the situation worse.
Can I make money during a bear market?
Some traders manage to make money on the falling market, but it requires a lot of skill and nerves because the risk of losing everything is very high. These masters usually apply short term strategies and do day trading to make small profits for their portfolio. This tactic can double the size of their portfolio or wipe away all of their money, leaving them with empty pockets.
The best thing you can do is save your capital. If you are savvy enough, try to diversify and rebalance the portfolio. There are plenty of strategies on the net – you can change a portfolio each day, each month, add various coins less hurt by the downtrend, etc. It may help to decrease the risks when the market takes another downward turn.
When does a crypto bear market end
In traditional stock markets, traders consider the end of a bear market when the decline exceeds 20%. However, our industry has got used to such economic slowdowns. Cryptocurrencies experience more radical falls, more than 70%, that can last for more than a year.
When your shiny coins are down | Source: Reddit
As we’ve already mentioned, altcoins are still connected to Bitcoin, which leads most of the price movements. Follow the BTC price to understand how the market reacts and find out the possible price trend. It will take some serious price action and positivity here for the cryptocurrency bear market to end.