How to Invest In Crypto During a Bear Market

How to Invest In Crypto During a Bear Market

It’s a great feeling when you look at your portfolio balance and see the numbers go up. It’s not so fun when you see those dreadful red figures that scream losses.

So how can one invest in crypto during a bear market? In this post, we’ll review what a bear market is, how to make money in a bear market, how long it lasts, and what you can do to make the most out of the downturn.

What is considered a bear market?

The textbook definition of a bear market for stocks is a 20% fall from the recent high.

In crypto, it’s not uncommon for the whole market to go down 40% for a few months, only to surge to new all-time highs in a matter of weeks. This extreme volatility is what makes outsized returns in crypto possible.

Instead, we can use an alternative definition of a crypto bear market: 6 months or more of falling prices without a return to the previous high.

That’s what happened during the great bear market of 2013-2017 and the crypto winter of 2018-2019. Crypto prices remained compressed for many months or even years.

Another defining feature of a bear market is pessimism. Nobody wants to talk about crypto like they do when exchange rates are up. Investors can be traumatized by drawdowns, especially when the drops completely blow past specific support levels.

Can you make money in a crypto bear market?

Yes, it is possible to make money in any market. Even during the bear market, there are many strategies to utilize, including:

  • Short selling: you borrow the asset and sell it, aiming to buy back at a lower price;
  • Buying put options: if the market falls, your profit would be the difference between the strike price and the market price at expiration;
  • Accumulating for the long term: if you think the market will eventually recover, you should keep buying to lower your average entry price. That’s what Stoic’s long-only portfolio does.

The downsides of short selling and put options are that they are active, time-consuming strategies. If the market would turn, your positions would likely be wiped out. In the case of short selling, even a temporary surge can cause a liquidation of your short position.

What investments do well in a bear market?

In the stock market, there are sectors and industries that do well in a bear market because they sell products that people always buy: alcohol, basic staples, pharmaceuticals, and utilities.

Crypto still do not have any clear-cut segments.

Defi, NFTs, Web3 storage, Layer-2, and other so-called “sectors” are more like narratives that help investors make sense of the crypto universe. Tokens with these narratives don’t always trade together like stock market sectors.

Even so, there are correlations between different cryptos and some go up even in a prevailing bear market.

However, it isn’t easy to identify crypto investments that can make money in a bear market.

To catch positive momentum in a bear market, you need to watch volatility, previous returns, correlations with other assets, and many other factors. Stoic’s long-only strategy does this automatically based on quantitative research. Of course, it doesn’t guarantee returns, but the risk/reward ratio is better than just holding BTC or by trading manually.

How do you act during a crypto bear market?

The most important thing is to stay invested.

Once you realize that you’re in a bear market, it is risky to exit completely. The crypto market might turn very quickly. Missing the first few big daily candles can cause a huge difference.

For example, since its inception, Stoic made most of its returns during short periods of massive growth.

crypto trading bot PNL
Stoic PNL

And here’s how the above weeks look in chart format:

crypto trading bot historical performance
Stoic historical performance

The average (and relatively unsuccessful) investor, buys when everybody is greedy and sells when everybody is fearful. This is a bad strategy.

Let’s imagine three hypothetical investors.

  • One investor (let’s call him Bob) got scared and disconnected Stoic in May, right after the double-digit drop. And reconnected it only after seeing solid growth in August. Sadly, this would have meant missing 3 out of 10 of Stoic’s best weeks (07-04, 08-01, 08-15). Acting this way is what an average, emotionally driven investor would likely do.
  • And another investor (let’s call her Alice) after May’s correction added more funds to the portfolio, doubling its USD value. This would have amplified the gains in the three best weeks in July and August.
  • Finally, another guy (let’s call him Vlad because that’s his name) didn’t do anything. Just completely ignored the market, letting Stoic take care of it. This is what you see in Stoic’s demo account.

That wasn’t a bear market, only a correction. But the same dynamic would play out in a full-fledged, multi-year bear market. Only the drawdown would be deeper, the subsequent rally would be higher, and emotions would be stronger.

The takeaway, however, is the same: when prices fall, add more funds (like Alice). Or at least do not panic sell, keeping your portfolio in full auto-pilot mode (like Vlad).

Your turn to build your crypto foundation

If you are not yet using Stoic, now could be a great time. True, the market might fall even lower. But the chances of perfectly timing the bottom are very low.

So the best bet is to enter the market, stay invested, and top up during sell-offs when you have the chance.