How to Invest During a Crypto Bear Market

2022 has been a bloody year for digital assets. The total crypto market cap has shed over -63%, or $1.4 trillion as the Federal Reserve and other central banks tighten monetary policy to combat record-high inflation. And despite this brutal drawdown, many investors think we’re still in for more pain. 

So how are regular folks like you and me supposed to invest during these trying times? 

On the one hand, some of you are saying: “Crypto is dead. It has zero utility”. At the same time, others are claiming that: “Crypto can’t go much lower based on previous cycles, bro”.

Let’s go over how you can not only make money during this bear market but set yourself up for success when the next bull market comes around. 

Yee-haw.

So you’re looking to get rich in a bear market, huh? Lucky for you, there are well-defined ways to profit during all market conditions.

Only thing is, every bear market strategy has its own risks. So it’s up to you to decide which risks are ultimately worth taking based on your unique profile. As a rule of thumb, the more short-term a strategy is, the more risk it carries. 

With that said, here’s a non-exhaustive list of bear market crypto strategies.

Day trading

Traders take advantage of cryptocurrencies' short-term price changes, which can swing 10%+ in a matter of hours. To pull off this wizardry, traders rely on technical indicators (e.g. MACD, RSI, 200MA) to enter and exit positions. 

Shorting

Shorting involves betting that the price of an asset is going to go down by placing a sell order on the futures market. While this strategy can reward you handsomely during bear markets, it is also the riskiest one because your entire investment can get liquidated if the trade goes against you. Alternatively, you can buy the ProShares Bitcoin Short ETF to go short while removing your risk of liquidation. 

Options

A put option gives you the right, but not the obligation, to sell a cryptocurrency at a fixed price before its expiration date. Put options can be used to hedge against declines in your long-term portfolio. Not to mention, puts are safer than short selling since the most you can lose is a premium.

Yield farming

Yield farming is a way to earn interest on volatile cryptocurrencies as well as stablecoins. This is a common strategy employed by whales as they wait for market prices to bottom in a bear market. During these uncertain times, it’s best to stick to battle-tested DeFi protocols (e.g. Aave, Compound) to minimize your chances of falling victim to unsustainable yields, smart contract hacks and collapsing stablecoins.

Dollar-cost averaging

Most crypto investors shouldn’t try to beat the market by actively trading, as it's a 24/7 job that could wreck your portfolio. The simplest, and surest bear market strategy is to dollar-cost average into blue chip cryptocurrencies like Bitcoin and Ethereum. By buying tiny amounts on a regular basis, you can lower your portfolio’s volatility and make insane gains when the bull cycle returns with a vengeance. 

If you’re looking for an exchange that allows you to execute most of these strategies in one place, Crypto.com is a solid choice. This exchange lets you buy.sell hundreds of assets, earn 10%+ on cryptos, get cash back with a Crypto.com Visa Card and track assets with crypto price alerts. 

Now all of the above-mentioned strategies can be money makers, assuming that cryptocurrencies are still around for the foreseeable future. But to answer that million-dollar question, we have to understand why this bear market is happening, how long it could last and whether cryptocurrencies have enough utility to recover. Read on.

In traditional finance, a bear market refers to a period of time when asset prices fall by 20 percent or more for at least 2 months, with the majority of investors (“bears”) selling. This is in contrast to bull markets, where the majority of investors (or “bulls”) are buying, and market prices are rising. 

Is crypto in a bear market?

Analysts primarily study Bitcoin to determine market sentiment, since BTC is the #1 crypto by market cap and most cryptos are positively correlated to its movements. 

With Bitcoin’s current drawdown at -74% below its 2021 ATH over 300 days ago, we can confidently say we’re in a crypto bear market.

As you can see from the Bitcoin Price Drawdown chart above, this isn’t crypto’s first market crash either. Let’s look at Bitcoin’s cycle lows in various bear markets and some of the events that triggered them.

2013-2015 bear market:

• Cycle high: $1,240 in December, 2013
• Cycle low: $162 in August, 2015
• Catalysts: Numerous hacks and company collapses, including the Silk Road and Mt. Gox

2018-2019 bear market:

• Cycle high: $19,804 in December 2017
• Cycle low: $3,331 in January, 2019
• Catalysts: ICO bubble burst, CoinCheck hack, South Korea trading ban rumors

2021 bear market:

• Cycle high: $64,898 in April 2021
• Cycle low: $28,754 in June 2021
• Catalysts: Tesla suspending BTC payments, China banning cryptocurrencies, Evergrande default

Following a 123-day bull rally, the market went back into a bear cycle in November 2021 and shows no signs of stopping now due to a number of macroeconomic headwinds. 

Why this crypto bear market is different

A recent report by Glassnode shows that the current Bitcoin bear cycle could just be the worst one in history for a number of reasons. 

For starters, this is the first time that crypto has existed in a broader macroeconomic bear-market environment with a potential recession in the books. Aside from the macroeconomic landscape, digital asset prices were also dragged down by the collapse of two $40 billion assets (LUNA, UST algorithmic stablecoin) and the insolvency of crypto lenders and hedge funds (e.g. Celsius, 3AC). 

All this sell pressure culminated in Bitcoin’s price falling below its previous cycle peak for the first time ever in June 2022, and investors collectively losing a record -$4.234B in a single day.

Traditional bear markets may last anywhere from just a few weeks to decades. And as mentioned above, previous crypto bear markets have lasted as long as 410 days. 

But this bear market is unique in that investors have fled from all risk assets — not just cryptocurrencies – due to rising interest rates. Since Bitcoin is now strongly correlated with the S&P 500 and Nasdaq, there are two possible scenarios that would lead to crypto prices bouncing back. 

Either: 1) Stock market prices recover and capital flows back to bitcoin, or 2) Crypto markets decouple from equities and rally in spite of macro conditions.

Crypto bull market catalysts

For the 1st scenario to play out, the Fed would have to turn dovish by lowering interest rates and expanding the money supply. This is in contrast to the Fed’s current hawkishness, where it’s raising rates and tightening its balance sheet to fight a 40-year high in inflation (8.5% in April 2022). As of writing this, economists are expecting interest rates to peak at 3.75% by the middle of 2023. 

While the second bull market scenario might sound like a pipedream, we do have 2 significant crypto catalysts coming up in the near future. The closest one is The Merge, tentatively scheduled for 2022, where Ethereum switches to proof-of-stake and its ETH's inflation rate drops to -1.4%. Some crypto investors expect this supply shock to trigger an ETH rally that could even culminate in Ethereum flipping Bitcoin’s market cap.

The second catalyst is the tried-and-true Bitcoin halving, which is scheduled for April 2, 2024. A halving event is when Bitcoin's inflation rate gets cut in half every four years. Past Bitcoin halvings have correlated with massive BTC price rallies. As an example of this, BTC’s price surged from $8,189 to $64,507 after the last halving on May 11, 2020. 

While nobody can predict exactly when the bear market will end, there are a few things we can say for sure. 

History shows that builders keep on building. In fact, some of the most game-changing crypto tools and services (e.g. hardware wallets, DeFi, Layer 2 scaling solutions) were conceived during bear markets. And as painful as it is to watch your portfolio bleed, bear markets play an important role in cleansing the crypto market of weak projects with ponzinomics and no product-market fit. 

And speaking of product-market fit, any critic that claims crypto still has zero utility is as blind as a naked mole-rat. So far, crypto has given us:

• A hard-capped store of value via BTC
• Instant cross-border payments via cryptos like stablecoins
• Equal access to loans and yield on savings via DeFi
• Monetizing digital collectibles via NFTs
• Remote work and community governance via DAOs
• Crowdfunding through NFT mints and token sales

And there’s still much more to come. Sure, these products still have to work out some kinks. But I, for one, can see the limitless potential.