Crypto Bear Markets: Risk-On or Risk-Off?

Crypto bear markets are not fun. Exchanges face illiquidity, projects struggle to raise capital, altcoins fall over 50%, and investors make absolutely no money. Bear markets are a representation of winter, a period during which nothing grows. But during winter, we rest and prepare for the next season.

Bear markets are designed for accumulation and preparing for the next bull market. Digital assets have a rich history of rising back up after losing most of their value. People like to chant “Bitcoin is dead,” but the truth is far from it – and many have been proved wrong on multiple occasions for believing crypto is in the gutter. 

Today’s article tackles the question of investing during a bear market. Should you invest during these troublesome times, and if so, how should you go on about it? But before exploring the why’s and how’s, let’s first take a look at what a bear market is in the first place. 

What Is a Bear Market?

A bear market is a period in a financial sector during which assets lose value and trend down. There is little to no activity and investors either sell what little money they had made in the bull market or put their investing activity on hold. The negative pressure enforced by selling pushes companies to decrease production due to lack of demand and to lay off employees. 

Markets move in cycles of growth and shrinking. Bear markets take place after a long period of growth in which investors add a ton of speculative value to assets. Once growth stagnates and investors start to take profits, assets plunge down and investors prepare for a long trend down.

What are Bear and Bull Markets?

You can determine the state of the market, and its cycle, by reading charts and analyzing the trend. The image below shows the Bitcoin (BTC/USDT) chart. By drawing trend lines you can tell that the cryptocurrency now experiences a prolonged period of downward movement following a short bull market.

The trend lines determine that Bitcoin’s price action makes lower highs and lower lows after November. Such price action indicates that Bitcoin is in a bear market. Bitcoin must stop falling down and enter an accumulation zone – in which price moves horizontally – to end the bear market and prepare for another bull market. 

Altcoins are also currently in a bear market. Most have falled up to 90% from their all time highs. Take Chainlink for example, which is down 89% from an all time high of $52. Even Ethereum, the second largest cryptocurrency, is down a horrifying 76% from all time highs. 

Should You Invest During a Bear Market?

Investing during a bear market is tricky. How would you even know that the market is not ready to fall down another 20%? Crypto’s most recent FTX drama and insolvency crisis have shown that there is still trouble looming in the crypto industry. More companies might go down, and there is no way of knowing if there will be new interest for investing after the bear market.

It takes a lot of time for assets to fall back to their normal market price, and for speculative value to completely disappear – leaving only prices supported by fundamental value. But hey, if you’re still interested in being a part of the market, you’re going to need to buy at some point.

Previous market cycles can offer you help with understanding where the market is and if it’s a good moment to step in. Here is a Bitcoin chart dating back to 2017. The crypto asset entered a parabolic bull market, entered a downtrend that lasted longer than a year, and then marked the last phase of the bear market by entering an accumulation phase. 

During this phase, Bitcoin’s price moved horizontally for almost half a year. The asset’s price moved within a small price zone with little to no volatility. But once institutional and retail players finished slowly accumulating the asset, Bitcoin finally began to trend up.

The accumulation phase was the best time to buy Bitcoin at the time. The asset fell down tremendously and moved within a tight range without any discernible pressure from either sellers nor buyers. The market’s structure was shaped in such a way that big buyers had the opportunity to invest large sums of money without moving the market too much.

Accumulation zones are perhaps the best spots to invest. They allow you to take on risk and invest at a point where sellers are exhausted. These zones often take place at price levels that have historically attracted a high level of liquidity and volume, making them ripe to act as support levels for the accumulation zone. 

Is the crypto market in an accumulation zone right now? There’s no way to tell. Industry news is causing havoc and pushing investors to lose faith. Although Bitcoin has fallen considerably low compared to its heights, there is still room left for the asset to reach a ‘final’ bottom. I recommend keeping a close look at the charts for the chance of another accumulation zone appearing. 

The Flipside: Why Bear Markets Are Not That Bad

Bear markets are catastrophic. They affect individual investors, and the industry as a whole. However, bear markets also offer opportunity. When assets go through a bubble and lose most of their value, you gain the chance to dip back into the market without exposing yourself to too much risk. And what’s more important for an investor than managing risk?

A Risk Management Guide for Crypto Traders

When you look at an asset’s chart you see a series of support and resistance levels. These price levels determine how the asset might behave when approaching either level. Support levels keep assets from falling lower, while resistance levels prevent assets from growing in value. Both play an important part in shaping the asset’s price action.

From the perspective of a buyer, support levels are the best area to deploy wealth. And guess what? There are more than enough support levels within a bear market. 

What I’m trying to say is that buyers face less and less risk the more an asset’s price drops. Just like how prices can’t go up forever during a bull market, so can’t they fall down forever during a bear market. Both market cycles exhaust one side of the market. 

You might not strike at the perfect moment. Hell, the asset might drop another 20% right after clicking the buy button. But at the end of the day, you have bought much closer to the bottom than a person who bought at the beginning of the bear market. You have lower exposure to risk, and it might take less time for you to be back into profit.

Think of the COVID crash of March 2020. The entire market gazed in awe as Bitcoin crashed to $3,000. There was almost no buying pressure on exchanges, and investors saw their portfolios turn to ashes in the span of days. But what happened next? The crypto market recovered and those who bought at the worst time made the most money.

Conclusion

Bear markets are environments where you want to take a risk as a buyer and deploy your capital. Once assets return to their fundamental value and the speculative value wears off, sellers are too exhausted to continue selling, and the asset finally reaches an equilibrium.

Once you see that the market formed an accumulation zone, feel free to dip back into the market. Demand and supply are low enough to create a ‘boring’ market with little to no volatility. But the lack of volatility acts as a good indicator that the bear market is coming to a close.

Buying in a bear market might seem like the worst decision to make. After all, asset prices are collapsing and entire companies are shutting down. There is little to no incentive to participate in a market that looks like it is going to die off. But hasn’t that historically been the best time to buy?

In the end, you only have two choices to make: buy when the market is grim or buy when the market is appearing to make a recovery. Whatever you choose, you might end up buying back at a good moment. It may sound like contrarian investing, but there’s really nothing wrong with buying an asset when it is held back by strong support. After all, you’re supposed to buy at support levels and sell at resistance levels.

As always, have good risk management in place no matter when and where you invest. Make sure that you always invest an amount that will not affect your quality of life. In other words: make sure to invest only what you can afford to lose. That way, it won’t matter whether you’re buying Bitcoin at $20,000 or $10,000. 

“Buy when there's blood in the streets, even if the blood is your own.” — Nathan Rothschild