Generally, bear markets bring a sense of uncertainty to any investor. Even more so for a newcomer, for whom it can feel like the end of the world. It may also be common knowledge that during bull cycles, investors are sure to make profits. Whereas in bear markets like this, an unimaginable amount of pessimism sets in.
Dylan Dudney, co-founder and strategic lead of Kylin Network, told Cointelegraph that the two big mistakes investors make are feeling anxious “one, over-investing and two, not investing with confidence.”
“You need to find that sweet spot where you have enough confidence in your investments, while managing the resources devoted to them so that you are 100% comfortable with being patient over the long run. Ultimately, a bear market is where it is. That’s where the magic really happens — for example, buying Ether at $90 in December 2019,” Dudney said.
According to data from blockchain analysis firm Glassnode, traders placed about 43,000 buy and sell requests on crypto exchanges in early May. This brought the value of bitcoin to $3.1 billion. But, the panic caused by those requests was triggered by Terra’s crash, which saw the market fall even further.
A bear market occurs when there is a general decline of at least 20% in asset prices from their most recent highs. For example, Bitcoin (BTC) is down more than 55% from its November all-time high of $68,000 in the current bear market. At the time of writing, bitcoin is now trading below the $25,000 mark.
Bear Markets: Origin, Severity and How Long They Last
According to Nerdwallet, bear markets are often associated with the global economy. That is, they happen before or after the economy goes into recession. Where there is a bear market, there is either an ongoing economic downturn or an imminent one.
Essentially, a sustained price drop from recent highs is not the only indicator of an ongoing bear market. There are other economic indicators that investors should still pay attention to. This enables them to know whether a bear market is in play or not. Some indicators include interest rates, inflation and the rate of employment or unemployment.
However, the relationship between the economy and a bear market is simpler than that. When investors see that an economy is shrinking, there are widespread expectations that corporate profits will soon begin to decline as well. And, this pessimism brings them to sell their assets, thus, pushing the market down even further. Scott as Nations, author of The Concerned Investor: Mastering the Mental Game of InvestingSay, investors often overreact to bad news.
In any case, bear markets are smaller than bull markets. According to a recent report by CNBC, the bear market lasts for about 289 days. However, the bull market can also go above 991 days. Additionally, an Invesco data analysis report placed losses associated with bear markets at an average of 33%. Therefore, down cycles are usually not as effective as the bull market’s average profit of 159%.
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While no one knows for sure how long a bear market can last, there are some tips on how to fix it.
Navigating a Bear Market
As an investor, there is probably nothing one can do to prevent adverse market conditions or the economy at large. Still, there are several possible steps to take to keep your investment safe.
dollar cost averaging
Dollar-cost averaging (DCA) describes an investment strategy in which an investor buys a fixed dollar amount of a certain asset regularly, even though that asset is priced in dollars. The strategy is based on the belief that over time, prices will generally pick up momentum and eventually move upwards during a bull run.
CoinShares head of research, James Butterfil, told Cointelegraph that bitcoin now has a well-established inverse relationship with the US dollar:
“This makes sense because of its emerging store of value characteristics, but it also makes it incredibly sensitive to interest rates. The bullish response from the Fed has been cited as one of the reasons that pushed bitcoin into a ‘crypto winter’ over the past six months. Can be explained as a direct result of increasing rhetoric from the Federal Open Markets Committee (FOMC) statements are a good indicator of this, and we can see a clear relationship between the timing of the statement’s release and the price moves.
When this prudent investing approach is mastered, the investor’s purchase price averages over time. That is, one can enjoy the benefits of buying dips and also avoid investing all their life savings during market highs. After all, as dangerous as bear markets are in the investment world, they are also the best time to buy crypto assets at the lowest prices.
Diversify your portfolio
For investors who have a wide variety of assets in their portfolios, the impact of bear markets may not be as severe. When a bear market is in full swing, asset prices typically fall but not necessarily by the same amount. Therefore, this valuable strategy ensures that an investor has a mix of winners and losers in his assets during a recession. Thus, the total loss from the portfolio will be reduced to the absolute minimum.
Consider defensive assets
During prolonged bear markets, some companies (mostly short or short) get exhausted along the way. Whereas other more established firms with strong balance sheets can face harsher conditions for as long as necessary.
Therefore, anyone investing in company shares should go for the shares of companies that have been in business for a long time. They are defensive stocks. And, they are usually more stable and reliable in a bear market.
Bonds can also provide some relief to an investor during a bear cycle. This is because bond prices typically move inversely to stock prices. Therefore, bonds are an important part of any near-perfect portfolio, relatively reducing the pain of a bear market to an investor.
index fund or exchange traded fund
Few sectors are known to grow reasonably well during market downturns, including the utilities and consumer goods sectors. And more so than any other sector, they can perform to earn the name of “stabilizing assets.” Investing in the sectors mentioned above through index funds or exchange-traded funds (ETFs) can be a smart move. This is because each index fund or ETF holds shares in different companies.
There is no doubt that a bear market will drive investors to run and there is no looking back. Their willpower and stamina will also be tested. But, as history has shown, the bear market does not last forever and will not be the present.
According to the Hartford Funds, there have been more than 26 bear markets between 1928 and now. And, each of those bear markets was immediately followed by a bull market, which brought more than enough profit to make up for whatever losses it may have suffered.
Therefore, it is important to always keep your mind away from the current recession, especially if you are investing for a long term, like retirement. Eventually, the bull markets you’ll see along the way will overtake the bear markets.
As mentioned earlier, there are massive risks that come with bear markets. But, they also provide a good foundation for success in the next bull run. However, it is dependent on good strategic investment planning mixed with patience. Therefore, profits can be ensured when the market finally turns, whether you are always DCA-ing, diversifying into other assets, ETFs and index funds, or investing in stocks.
Losing money is always a tough pill to swallow, but the best way to survive a market downturn is not to run. Instead, focus on the wide range of recovery options and stay calm.
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“While bitcoin’s price performance in the face of an aggressive Fed has been weak, this current gap in price-performance could very well be short-lived. We believe a policy mistake by the Fed is highly likely where bitcoin will lose money. Price growth is likely to diverge from equities. Meanwhile, the former is likely to benefit from a weaker Fed and a weaker USD, while the latter could underperform in the event of a recession or stagflation,” says Butterfil. He added:
“Unfortunately, we believe an economic downturn in the US and the rest of the world is likely in 2023, although there are many unknowns. Perhaps it will be stagflation that then turns into a recession? As the liquidity trap really takes hold of central bankers “We believe bitcoin is a good insurance policy against this monetary policy mess.”