Bear markets can be challenging for crypto investors, particularly novices. There are strategies available that may assist during such times; the following six portfolio management approaches should help when facing such an environment.
Move Into Reputable Stablecoins
As an investor, you can protect the value of your crypto portfolio by diversifying into stablecoins tied to US dollars if necessary. Stablecoins typically maintain a “stable” price relative to fiat currencies like dollars; their prices don’t usually experience drastic swings like many crypto assets do; as long as they function as intended and maintain a relatively consistent value, stablecoins will help protect your portfolio’s worth.
USD Coin (USDC), Binance USD (BUSD), and Tether (USDT), among the top stablecoins, offer investors the ability to protect the value of their crypto assets with their US dollar backing at 1:1 ratios.
Allocate Towards Bitcoin & Buy the Dips
Bitcoin is the longest-established cryptocurrency. Over its existence, it has likely gained greater trust than any other coin and therefore its price doesn’t fluctuate as drastically during bear markets.
Let’s review some statistics.
At the time of this writing, bitcoin had fallen 68.7% since reaching an all-time high (ATH) of roughly $68,000 in November 2021, according to coinmarketcap. Although this might seem like a drastic decrease, other cryptocurrencies have fared much worse after reaching their ATHs; Ripple was down 91%, Dogecoin 90.7%, Polygon 72.1%, Litecoin 86.33% and Tezos 82.22% (Ripple: 90 – 72-1; Dogecoin 90.7%); Tezos was even lower!
You could decrease losses by shifting some or all of your altcoin portfolio into bitcoin if it appears unlikely they will recover any time soon. When bull markets do return, however, you could earn substantial returns by shifting back into altcoins you prefer and purchasing more BTC now that prices have fallen–this strategy could pay dividends when BTC hits $70,000+ later on!
Switch IntoThe Highest Quality Assets
Bitcoin has already demonstrated its superiority over other cryptocurrencies during the crypto bear market, making it an asset with significant potential value. But it’s not alone – other cryptocurrencies provide options too!
Ethereum, the second-largest cryptocurrency by market capitalization, is widely considered to be a high-quality asset by crypto investors. Because ETH has long been established and widely utilized within decentralized finance (DeFi) and non-fungible token (NFT) environments, its reputation among investors is strong; indeed it had only fallen 65.1% at time of writing making it one of the few altcoins whose price had decreased less than bitcoin’s.
BTC and ETH are also more liquid than low-market cap crypto assets, providing investors with greater liquidity by making it possible to sell these high-quality digital assets on any cryptocurrency exchange with limited slippage risk. Slippage occurs when there is a difference between what an investor expects to pay or receive when trading and the actual price that their order was executed at – also known as slippage risk.
Hedge Your Portfolio With Crypto Derivatives
By investing in cryptocurrency derivatives like bitcoin futures and options, you may be able to protect your crypto asset portfolio against further value declines. Hedging is the practice of investing in financial derivatives in order to minimize risk in an investment portfolio.
Sell Bitcoin Futures
A BTC futures contract is an agreement between two parties to buy or sell BTC at a specific future time for a set fee, providing investors the ability to speculate on its price without physically owning any digital assets themselves.
BTC futures contracts offer a great way to protect your cryptocurrency portfolio against decline. Should cryptocurrency prices drop during your contract period, losses would be offset by profits from short BTC futures positions you hold short. Since digital assets tend to move together closely with BTC prices, this hedge strategy offers investors peace of mind when asset prices move together; when such correlation exists it is known as strong correlation.
Imagine you want to safeguard half of your portfolio against a three-month decline by shorting BTC futures on Binance for $21,000 with an agreement to buy back at that same price after three months have passed. Should Bitcoin and the entire crypto market decrease by 25% over this timeframe, purchasing its futures contract for $15750 should allow you to short it at $21,000 at which point it would earn $5250 profit and cover half the losses you incur due to crypto market downturn.
Buy Bitcoin Put Options
Investors can purchase put options as a hedge or to speculate on future price movements for cryptocurrency holdings by purchasing put options at specific strike prices in the future. Such crypto derivatives give investors the right but not obligation of selling a certain number of BTC at specific points in time – giving them control of future price dynamics through options contracts with no commitment required from sellers!
If you’re concerned that the value of your cryptocurrency portfolio could decrease by 50 percent over three months, consider purchasing a bitcoin put option at $10,500 as its strike price. This price represents half the current BTC price at $21,000 and requires investors to pay a premium (the cost of an option contract).
Within three months, if the crypto market and BTC decline by more than 50 per cent, you will have made money. Otherwise, any premium paid will be lost as predicted and you may incur further loss of investment.
Practice Tax-Loss Harvesting
Investors can reduce capital gains tax during a bear market by selling investments at a loss and quickly repurchasing them at reduced prices – this practice will allow you to minimize capital gains tax liabilities.
Investors may only realize capital gains or losses when trading or spending cryptocurrency in countries where cryptocurrencies are considered capital assets and therefore subject to capital gains taxes. This strategy may be employed.
HODL & Wait It Out
Investors utilizing the HODL strategy often hold onto their crypto assets as they wait out the bear market, hoping that once it ends their portfolio assets will rebound and reach all-time highs again in due time.
After an ongoing crypto bear market, certain digital assets could reach new highs. If history repeats itself, this strategy might work. When the crypto winter of 2018 began and ended in 2020, Bitcoin’s price rose threefold despite an extended bear market period. If history repeats itself, this strategy might work effectively.