Bear Market Crypto Strategies

In June 2022, the S&P 500 entered its first major bear market, excepting the very brief bear market of 2020, in 13 years. Bitcoin’s original ethos of “digital gold” implied a lack of correlation to traditional markets. Yet crypto, the S&P 500, and Nasdaq appear interlinked regardless. So, what are the possible bear market crypto strategies available to investors today? 

First, we must understand the relative youth of cryptocurrencies as an asset class: 13 years. Analysts focusing upon traditional asset classes benefit from over a century of modern data concerning stocks, bonds, funds, and so forth. However, every year brings something new for crypto. 

Second, a traditional bear market should not in theory translate to a “crypto bear market.” Yes, so far, it does. What causes such a bear market, then? 

Third, what bear market crypto strategies are available to us? Usable data and advice feels limited. There remains a handful of globally minded, professional advisors specializing in digital assets. Fortunes continue to be made with crypto, and there are relevant tips for all of us. 

This article delves into crypto bear markets, their possible causes, and the strategies for coming out on top. Let’s get to it. 

Traditional vs. Crypto

Investopedia describes a bear market as “a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.” 

Typically, the focus is upon an overall market or index, such as the S&P 500 and Nasdaq. They may precede or associate with a larger economic recession, either domestic or global.

Source: Practical Wisdom – Interesting Ideas

For understanding digital asset markets and bear market crypto strategies we can use the definition found on Coinbase’s website: “Bear markets are defined as a period of time where supply is greater than demand, confidence is low, and prices are falling.” 

One clause trumps the three, “confidence is low.” Despite the original premise of digital gold, the truth lies closer to the idea of risk-on investing. Confidence, another way of saying “investor sentiment,” dictates the general trend in prices that we arguably have a market dominated by the style of growth investing

This runs similar to investopedia’s definition, excepting two key details: (1) 20%, and (2) the implicit reference to an overall market index. An overall market index, such as the S&P 500, contains growth and value securities, making it a broad index. 

Deteriorations in economic conditions translate to central bank decisions, and both translate to bear markets. The correlations between economics and traditional assets remains clear. For example, a sharp drop in the savings rate implies a further decline in luxury or inelastic spending. The correlations between economic indicators and digital asset markets feel remarkably less clear. 

What Causes a Crypto Bear Market? 

If we assume that digital assets markets, given their relative newness to the world, reflect the growth investing style, then we can reasonably speculate towards their origins. 

Excessive Leverage

Defined as open interest divided by the value of relevant reserves, the estimated leverage ratio provides a glimpse into traders’ appetites. For Bitcoin, this reached a new high in January 2022 and offered a long-range warning signal. 

Interest Rate Hikes

Like gold, major cryptos are inversely correlated to real interest rates. As the Fed funds rate stuck to 0.25% in 2021, Bitcoin soared 60% and Ethereum 399%. Yes, you read that correctly. 

Yet excessive growth begs excessive increases in prices. Inflation is a sharp, possibly deadly, double-edged sword. The post-industrial economy relies upon inflation to encourage demand and innovation in tandem, yet too much eats away at savings, wages, and sentiment. 

Traditional Asset Losses

By examining similar growth and alternative sectors, analysts can forecast what’s likely to happen to cryptos. 

Bitcoin’s price peaked at nearly $70,000 in November 2021, when the Russell 2000 (a small-cap index) also peaked at nearly $2,500. The patterns have since then moved oddly in step. 

Technical Troubles

Bitcoin, Ethereum, and altcoins remain famous for their volatility–perhaps much more so than for their mystery. 

In volatile markets, technical indicators guide traders on how to act and react in the short-term. For example, a “death cross,” or when a 50-day moving average falls below a 200-day moving average, suggests selling immediately. 

Bear Market Crypto Strategies

Before we delve into general tactics for managing a crypto bear markets, there are some fundamentally oriented pieces of advice to consider: 

  1. Take the time to understand your favorite coins’ protocols; these reflect their competitive edges
  2. Research and form an opinion on the major “proof-of” systems, such as work, stake, or hybrid
  3. Determine your investing time horizon and maximum allowed drawdown (loss)

And with that said, here are three strategies to maximize returns and minimize losses in a crypto bear market. 

Dollar-cost averaging. Gauging the specific bottom of a bear market remains a virtually impossible feat even for veteran analysts. However, data from a 60- or 90-day period may provide the grounds for an educated guess. Dollar-cost averaging here means to purchase equal dollar allotments of cryptocurrency at regular time intervals, often weekly. 

Staking. Not the same as lending for interest, staking refers to supporting the protocols of blockchains using the proof-of-stake system. By depositing or staking your coins, you become a validator (i.e. verifier) for that blockchain and effectively work for that blockchain. Staking represents your yield and paycheck. 

Diversifying. With digital assets, it pays to understand the different possible protocols and uses for blockchain technology. Bitcoin is the standard proof-of-work cryptocurrency and maximizes security through required energy power (to solve the next hash puzzle). After the upcoming Merge, Ethereum is to use proof-of-stake, or the energy-conscious system of randomly chosen validators who stake their holdings. 

While it’s always recommended to sit down with a professional advisor well-versed with digital asset markets, a blended approach is a good place to start. Identify your time horizon and risk tolerance, and then determine what you want to buy through dollar-cost averaging, what you would like to stake, and which blockchain protocols may lead the next bull market. 

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group,

The co-author of this text, Conor Scott, CFA, has been active in the wealth management industry since 2012, continuously researching the latest developments affecting portfolio management and cryptocurrency. Mr. Scott is a Freelance Writer for Deltec International Group,

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.