Bear markets represent the most feared phase of any investment cycle, but there are several ways to stay on top and ride out the storm.
Typically, bear markets make every investor feel insecure. Especially for a beginner, for whom it may seem like the end of the world. In fact, it may be common knowledge that investors are bound to make a profit in a bullish cycle. There is an unimaginable amount of pessimism in these bear markets.
Kylin Network co-founder and strategic head Dylan Dewdney told Cointelegraph that the two biggest mistakes investors make when they’re anxious are “one, investing too much, and two, investing without conviction.”
“You have to find that middle ground where you are confident enough in your investment, managing the resources you put into it in such a way that you feel 100% sure to be patient for the long haul. At the end of the day, it’s really the magic that happens in bear markets — like buying Ether for $90 in December 2019,” Dewdney said.
In early May, traders made about 43,000 buy and sell requests on crypto exchanges, according to Glassnode, an analytics company. This made bitcoin worth a whopping $3.1 billion. But the panic caused by these requests was caused by the collapse of Terra, which led to an even greater fall in the market.
Bear markets occur when asset prices typically fall by at least 20% from their recent highs. For example, in the current bear market, Bitcoin (BTC) has crashed more than 55% from its all-time high of $68,000 in November. At the time of writing, Bitcoin is trading below the $25,000 mark.
Bear Markets: Origin, Severity, and Duration
According to Nerdwallet, bear markets are often linked to the global economy. That is, they occur either before or after a recession in the economy. Where there is a bear market, there is either an ongoing or impending economic collapse.
In fact, a steady decline in price from recent highs is not the only indicator of an ongoing bear market. There are other economic indicators that investors have yet to consider. This should let them know if a bear market is happening or not. Some of the indicators include, among others, interest rates, inflation, and employment or unemployment rates.
However, the connection between the economy and the bear market is even simpler. When investors see a downturn in the economy, they usually expect corporate earnings to drop as well. And this pessimism makes them sell their assets, pushing the market even lower. According to Scott Nations, author of The Anxious Investor: Mastering the Mental Game of Investing, investors often overreact to bad news.
In any case, the bear market is shorter than the bull market. According to a recent CNBC report, bear markets last for about 289 days. However, bull markets can even go beyond 991 days. In addition, Invesco’s data analysis report estimates bear market losses at an average of 33%. Thus, down cycles tend not to be as effective as an average 159% gain in a bull market.
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While no one knows exactly how long a bear market can last, there are some tips on how to survive it.
Navigating a Bear Market
As an investor, there is probably nothing anyone can do to prevent an unfavorable market situation or the economy as a whole. However, there are many potentially important steps you can take to protect your investment.
Dollar Cost Averaging
Dollar Cost Averaging (DCA) describes an investment strategy in which an investor regularly buys a fixed dollar amount of a particular asset, regardless of that asset’s dollar price. The strategy is based on the belief that prices tend to gain momentum over time and will eventually rise during a bullish move.
CoinShares research lead James Butterfill told Cointelegraph that bitcoin now has a well-established inverse correlation with the US dollar:
Symbolic bear and bull in front of the Frankfurt Stock Exchange. Source: Eva K.
“That makes sense for its new value store properties, but it also makes it incredibly sensitive to interest rates. What pushed Bitcoin into a “crypto winter” over the past six months can be largely unraveled.