Bear markets represent a dreaded period for many market participants, especially newcomers. A sudden decline in value can catch traders off guard and trigger liquidation cascades leading to sudden and sharp price declines in many asset classes. Read on to learn a few strategies explaining how to make the most of bear market conditions.
What are bear markets?
The good news is that bear markets tend to be short-lived. The average length of a bear market is 289 days, or about 9.6 months. That's significantly shorter than the average length of a bull market, which is 991 days or 2.7 years. Technically, bear markets are defined as a 20% decline from near term highs.
Cryptocurrency markets as well as Global equity markets entered into a bear market in in June 2022 with the S&P 500 officially entering a bear market for the first time since March 2020.
Cryptocurrency markets have experienced multiple bear market cycles, most recently being the 2019-2020 bear market cycle.
During bear markets, it's easy for new market participants to lose faith in crypto, while others strategize ways to capitalize on the changing market conditions.
What is a recession?
Another commonly used term related to bear markets are recessions. Unlike bear markets, recessions usually refer to a broader decline in macroeconomic conditions as opposed to bear markets which are specific to stock market chart declines.
Recessions are technically defined by two consecutive quarters of negative economic growth, as reflected in GDP and monthly indicators such as a rise in unemployment. Recessions usually have a negative impact on employment, production, retail sales, and other broader economy productivity indicators.
Like bear markets, recessions range in duration. Recessions are measured from the time of the first negative GDP quarter print. As a result, a recession may be ongoing for a few months but not confirmed until the second quarter GDP numbers are confirmed negative.
There have been 35 recessions in the United States since 1854 up to the most recent recession in 2022. Since 1980, there have been six such periods of negative economic growth that were considered recessions (including the current recession).
Recessions are officially defined as completed when the broader economy starts to grow again (positive quarterly GDP growth), not by a return to an economy's original position.
Are we in a Recession?
Leading indicators were recently revised downwards suggesting that Q2 GDP expectations would likely be negative. Once confirmed, this would constitute a recession defined by two quarters of negative GDP.
Bear Market Opportunities
Regardless of whether the market is in a recession or a bear markets, opportunities for profit or loss exist. Below are a few crypto community member options during a market downturn.
High-value crypto assets like $BTC and $ETH suffer huge losses during bear markets; however, they are most likely to survive the impact and inspire a turnaround (Bitcoin in 2020). The theme with high-quality assets is endurance; therefore, crypto community members should identify established tokens or high-quality digital assets and move their crypto value to these coins that are more stable in a bear market.
Stablecoins can provide relief during bear markets by preserving value. With stablecoins, an important consideration is the stablecoin type. The asset backing a stablecoin impacts it's stability. Digital tokens like USDC, BUSD, and USDT are among the most trusted and popular stablecoins receiving capital inflows as they are fully backed and redeemable for dollars.
Hedge Against Losses with Put Options and Short Selling
Put options allow the crypto community to sell their assets once they reach a predetermined price. The move prevents extreme losses by hedging portfolios against lower prices in a market downturn. Put options act as an insurance contract against losses in portfolio value; if the asset price remains above the option contract, then the initiator loses their premium (the purchase price of the options). However, if the asset drops below the put option purchase value, it will offset any losses from the crypto portfolio.
Like put options, short selling can be used to profit from price declines. Short selling involves borrowing a security and selling it on the open market. You then purchase it later at a lower price, pocketing the difference after repaying the initial loan. Ooki.com makes it easy to open leveraged long or short positions.
Hodling and Dollar Cost Averaging
Crypto community members can also choose to hold their digital assets and wait out the bear market. Although price drops may be scary, reducing any leverage to prevent risk of liquidation, and setting aside capital to dollar cost average dips is another strategy which can be used to grow investor portfolios during bear markets.
It’s Part of the Cycle
There’s no doubt that market downturns test endurance; but it's important to bear in mind that bear markets don’t last forever. Eventually, market cycles will rotate and transition from bear back to bull markets. The strategies discussed above can be useful in helping navigate difficult trading conditions.