Two ways to invest during a bear market
The market is still down 15% in a month, 31% in six months, and 62.6% in a year. There’s no denying that crypto is still in a bear market, with platforms like Terra and FTX collapsing this year and trading volumes falling from over $300 billion per day in early 2021 to around $50 billion (and lower) in the second half of 2022.
While bearish conditions reduce the likelihood of easy and large gains, traders and analysts are increasingly providing advice to their followers on how to survive the crypto bear market. They reduce the chances of the average trader losing money by doing things like spreading risk/opportunity across a diversified portfolio and dollar-cost averaging.
Diversification
Diversification is useful in both bull and bear markets, and it is always recommended for traders who want to spread their risk and potential rewards.
Of course, the definition of “diversification” varies from trader to trader. For some, this means having a diverse portfolio of cryptocurrencies (and other assets), whereas, for others, it simply means not putting all of their money into a single coin.
CNBC’s Ran Neuner recently provided an example of a $1,500 portfolio spread across 15 different cryptocurrencies. It operated on the principle of allocating more money to the fundamentally strongest coins, while also ensuring a good balance across the various sub-sectors of the cryptocurrency market, and included Bitcoin (BTC), Ethereum (ETH), and Arweave (AR).
While many investors may not want to complicate things by running 15 different trades at once, the basic principle is sound. This is because bear markets tend to hit some coins harder than others, making it difficult to predict which coins will emerge more strongly into an eventual bull market and which will languish.
Dollar-Cost Averaging
DCA is a trading strategy that involves buying and selling the same amount of an asset at regular intervals over a set time period. This trading method disregards short-term price changes, allowing investors to reduce the average cost per share and hedge against high market volatility, which is especially evident in crypto markets
DCA differs from lump sum investing, a separate strategy that involves buying or selling an asset in a single transaction. Unlike DCA, lump sum investing requires investors to monitor the market constantly and buy assets at a potential low or sell them at a potential high. Instead of focusing on market timing, DCA seeks to reduce long-term investment costs.
However, in crypto, DCA has a slightly different meaning than traditional assets. While the DCA can be used to buy and sell securities, Bitcoin investors typically use it to accumulate digital asset over time rather than sell it.
The Advantages of Dollar Cost Averaging
Above all, purchasing cryptocurrency using the dollar-cost averaging strategy can provide investors with peace of mind that they would not have if they tried to time the market. Again, the goal is to accumulate more cryptocurrency, particularly Bitcoin, by purchasing it in a systematic manner without being concerned about price fluctuations. Price decreases enable DCA investors to buy more Bitcoin for the same dollar amount.
This stands in stark contrast to investors who purchased a large number of Bitcoin near its peak in 2021, believing it would continue to rise. Instead, market volatility drove crypto prices to multi-year lows, causing many investors to panic and sell their Bitcoin holdings for $20,000 or $30,000, resulting in massive losses.
According to equity investing research, those who make poor trading decisions are primarily retail investors who monitor prices and trade frequently. The DCA’s systematic approach frees stock and cryptocurrency investors from constantly monitoring prices and attempting to buy low and sell high.
The DCA strategy may be especially useful for cryptocurrency investors who lack the experience and knowledge to identify the best times to buy. It’s also a tried-and-true method for long-term investors who don’t want to check prices every couple of hours.
Above all, given the market’s rampant volatility, DCA could be especially useful in crypto trading, where market timing is becoming increasingly difficult. Remember, the main goal is to accumulate wealth over time through systematic means.