Surviving a Crypto Bear Market

The crypto markets have been extremely volatile lately, and it’s during times like these that it’s important to pay attention to your own investment psychology.

I remember going through my first bear market in 2017 and it shook me hard. But the crypto landscape has changed and expanded a lot since then, and in this latest downturn, I’m not as fazed. Today, I’ll be sharing some tips on how to adjust your own mindset to survive a crypto bear market and come out the other side stronger.

Do You Have Long-Term Conviction?

For starters, in case it wasn’t clear before, we must accept that we are in a crypto bear market. Sometimes it’s unclear what’s considered a bear market, but there is a literal definition we can use: a bear market is defined as a 20% drop from recent highs. So, given that the crypto markets have dropped more than 40% from $2.9TN to $1.7TN, we are for sure in a crypto bear market.

After accepting this fact, you need to ask yourself one question: do you believe in crypto’s long-term viability? Because, if you don’t, you will have weak paper hands and you’ll most likely sell at losses and/or buy back in later when things are hyped and near their highs.

Personally, I believe the crypto market has seen tremendous gains because crypto projects allow for the “economic pie” to be more evenly distributed. Before, centralized companies like Facebook and Google would take all the ad revenue from users (with the owners and CEOs on the top taking most of those gains). But, crypto provides an easy way for wealth to be distributed to all stakeholders as projects are built out. And while I don’t think everything in the world needs to be decentralized, the fact that crypto helps even out the playing field is why I believe the crypto space has been able to reach a product-market fit that is fueling adoption.

Some examples of this decentralization include NFTs, play-to-earn games, and decentralized finance protocols (DeFi).

· NFTs allow creators and artists to control the money they earn from their content.

· Games like Axie Infinity allow people to own their digital assets and trade them, and this in my mind is the future of gaming.

· DeFi protocols help you build a financial institution that removes the control banks have on your money. By eliminating the “middleman,” you retain custody of your assets and can safely earn annual yields ranging from 5% to 20% or more. A big improvement over the typical 0.5% return you would get at a regular bank.

These 3 use cases did not exist back in 2017 and the crypto industry is just getting started. Since we’ve seen so many positive developments already, I believe strongly in crypto’s future. But, this doesn’t mean you can just blindly invest — fundamentals, the right mindset, and strategy are still important.

My Investment Strategy

It’s easy to make investing more complicated than it needs to be because there’s so much to consider. To avoid overcomplicating things, I simplified my strategy into 3 steps.

For each step, I’ll include a quote from a legendary investor so you know these are time-tested principles.

1. “Everyone has the brainpower to make money in stocks. Not everyone has the stomach.” — Peter Lynch

Anyone who looks at a zoomed-out chart of Bitcoin (BTC) or Ethereum (ETH) can see that just buying and holding can get you far. With crypto, your assets can increase 5x to 20x in a brief period. But this comes with a tradeoff — you must be willing to handle massive volatility and stomach your portfolio dropping by as much as 50% to 80%.

That’s why the core of my strategy is to dedicate time to research and choose the right projects. If you have confidence in your research and investment process, you’ll be a lot more comfortable handling extreme volatility and portfolio drops.

2. “Though tempting, trying to time the market is a loser’s game. $10,000 continuously invested in the market over the past 20 years grew to more than $48,000. If you missed just the best 30 days, your investment was reduced to $9,900.” — Christopher Davis

I’ve truly accepted that you cannot “time” the markets. Instead, I focus on dollar-cost-averaging into good projects.

One problem with market timing is that you’re more likely to make more poor decisions. If you just dollar-cost average, then you have one simple job: buy low when you can. But, when you try to time the market, you must constantly try to sell at a higher price and buy back at a lower price.

Imagine a situation where, after you sell, the price for a project you truly believe in increases. Do you wait or buy back in at this higher price?

The difference between one and two decisions may not sound like much, but experienced traders know that constantly buying and selling often leads to reduced gains.

As a result, the second part of my strategy is to accept that I can never time the market; instead, I dollar-cost average into good projects.

3. “The intelligent investor is a realist who sells to optimists and buys from pessimists.” — Benjamin Graham

I want to explore the buying side and the selling side of this quote separately.

For the buying side, during a bear market, you must trick your mind into becoming excited about the discounted buying opportunities. A huge portion of investing truly is a mind game and the saying “be greedy when others are fearful and fearful when others are greedy” certainly applies here. In my view, bear markets are actually beneficial because they reduce froth and allow for buying opportunities.

As for the selling side, I do think it’s important to buy good projects, hold onto them, and dollar-cost average down, but I do think there are important times to sell as well.

I can think of two good reasons:

1. Your investment thesis has changed.

If new reasons threaten your initial thesis, then it makes sense to sell. For example, if a new dominant competitor comes in or developers are fleeing from a project, then your money is probably better elsewhere.

For example, I was super bullish on Solana (SOL) for most of 2021, but the network has seen some issues recently with congestion and caused me to reduce my allocation. Instead, I’ve been putting more into Terra (LUNA) and Cosmos (ATOM). During bear markets, I try to not sell into cash, opting instead to switch out of lower conviction projects into higher conviction projects. This way, I’m always invested and gain the benefits from a market rebound.

2. Opportunity cost

If you don’t free up cash, you can miss out on potential gains from a new project or asset you may discover. To get a better sense of how I should allocate my portfolio, I like to rank my projects according to upside and risk every week. Oftentimes, I don’t make any changes, but it still forces me to consider things such as the market cap and the potential gains of a project.

Also, to slowly accumulate cash for other investments, it’s a good idea to set a price target for your projects and dollar-cost average out of your positions.

Summary

To survive a crypto bear market, the first thing you need to ask yourself is if you believe in the long-term viability of crypto. If you do, then the following principles are important to keep in mind:

1. Thoroughly research projects so you can stomach massive amounts of volatility

2. Dollar-cost average into good projects and don’t try to time the markets

3. Trick your mind into seeing bear markets as good opportunities

Bear markets are scary, but in the end, there’s always a bull market. With crypto, those bull markets come roaring back quickly and fiercely, so make sure you don’t miss out when things turn back from red to green.