What goes up, must come down. Newton’s third law of motion may not have been made to describe modern crypto markets, but it hit close to the point. Eventually, you’ll log into your investment platform of choice and find that things in the financial world have taken a downturn you didn’t expect, and at that point it might be too late to prevent losses. Before you get too worried about losing your hard earned investments, we need to define the issue.
What is a Crypto Bear Market, and Should You be Scared?
In short, no. A bear stock market is usually seen as when stocks have fallen down 20 percent or more among major market indexes, such as the Dow Jones Industrial Average or the NASDAQ Composite, over a period of roughly two months. It’s much the same in the cryptocurrency market, but less defined. Bull markets are the exact opposite, with prices rising at a steady pace with lower volatile fluctuations.
Bear Tongue – Image by Jim Bauer
While being in a bull market is usually preferable, bear markets have always been part of the way markets function, and this holds true for crypto markets as well. Since 1928, there have been 25 bear markets in regards to stocks, lasting on average around 10 months, meaning these downturns occur on average once every 3.9 years (Hartford Funds). Bull markets follow bear markets and usually last upwards of 28 months, with the current bull stock market being over 10 years old.
So, no reason to panic. But that doesn’t mean you shouldn’t be preparing. There are many things you can do to mitigate losses (and instead make profit) in a crypto bear market.
To help mitigate larger losses, it’s not a bad idea to make use of stop-loss orders. In fact, they should be the backbone of most of your trading in a crypto bear market. Using these orders, a buyer is able to limit the losses they take when the price falls by setting a lower limit, after which they sell the coin. This lower limit is set to be a specified percentage below the price at which it was bought, the idea being that once the value has reached this lower limit, the price is likely going to plummet further.
Besides the typical stop-loss order, you could opt for a trailing stop-loss. Where a normal stop-loss is set according to the price the coin was bought at, a trailing stop-loss instead has its lower limit dynamically set a percentage or specific amount below the current market value, meaning a buyer is able to retain more of the value the commodity accrued while they held it.
If you don’t set stop losses, you’ll be in for a bad time in the event of a downturn. Your capital may become stuck in the market, meaning you can’t cash out and diversify your portfolio. During a crypto bear market, holding a plummeting crypto isn’t going to do you any good.
Take-profit orders, also referred to as targets, are kind of like the opposite of a stop-loss order, and they are the way you should want to exit a trade. A target provides an upper limit on the value you want to sell the currency at. This limits the buyer’s risk of missing a good exit time.
We, as humans, can have a hard time selling something that’s still going up in value. But it’s important to remember one thing. Namely that no matter how well a coin performs at any given time, and no matter how long it has performed well, the price will eventually fall. This is especially true in a crypto bear market. In a crypto bear market, even sizeable increases in value can often be temporary.
As with stop-losses, take-profit orders have a trailing variant utilizing bots. This allows you to delay selling as the price raises and only execute the sell when things are actually going into a downturn.
Strength in Numbers
One mistake newer traders often make is trying to navigate the market on their own. They’ll often think of crypto trading as a zero-sum game, where they can’t win unless everyone else is losing. This isn’t necessarily how it works and sticking rigidly to this mindset means going up against experienced traders, who make ample use of analysts and bot systems to optimise their trades, by yourself. Not exactly a recipe for success.
What I’m getting at is that you should have a support system. Mentors and communities of like minded peers who can help you make the best choices you can make by helping you get informed about essential events, or bouncing around predictions, ultimately making you a more effective trader.
Using Your Tools Effectively
So you know what stop-losses and take-profits are, but it can be hard to know where to set them. Without setting them in a smart way, there obviously won’t be as many benefits to using the orders.
One important note is that most investment platforms won’t allow you to set both a stop-loss and take-profit at the same time. To get real use out of the tools we’ve been discussing, you’ll need to start evaluating your investments by using historic trading data to determine current and likely trends. This is a process known as technical analysis, and it’s a central skill in trading. This is how you’ll judge how bullish any particular crypto is at current, and you can then set your stop-losses and take-profits effectively.
Crypto markets, like so many others, can be volatile and confusing places. When you don’t know how to protect yourself, it can seem too easy to lose the money you invest. But though you may not be able to invest risk free in a bear market, you’re sure to be able to mitigate your losses. At least if you use some of the tips we’ve touched on!
This article is not financial advice. The content above is strictly the opinion of the author. Do thorough research before investing in any asset.
The views, the opinions and the positions expressed in this article are those of the author alone and do not necessarily represent those of https://www.cryptowisser.com/ or any company or individual affiliated with https://www.cryptowisser.com/. We do not guarantee the accuracy, completeness or validity of any statements made within this article. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author. Any liability with regards to infringement of intellectual property rights also remains with them.