Bear market environments are difficult for investors of all backgrounds to navigate, let alone those who are new to buying and selling crypto. The prolonged downward trends, volatile investor sentiment, and choppy price action that comprise bear markets are difficult to predict. Understanding the most effective tools available and what they afford investors to understand and accomplish is the first step in navigating the uncertainty of a bear market. Broadly, these tools can be broken down into three categories: fundamental tools, analytical tools, and yield generating tools. The combination of these categories can add clarity through turbulent market conditions and preserve capital through times when wealth is otherwise being destroyed.
Fundamental tools are intangible and serve as the base for how crypto investors should approach any market condition; bull, bear, or sideways. These tools include not over investing, having conviction, and maintaining a low preference.
The number one rule of investing is to never sacrifice more than you can afford to live without. This principle is especially critical to effectively navigating bear markets. Over investing is typically the result of chasing opportunities as opposed to being patient and finding the ones that best suit an investor’s strategy. Sometimes, as is the case with bear markets, preserving capital and not being left overexposed to the market (over investing) is the best strategy.
Having conviction is rooted in having a strong understanding of the function and purpose of the assets an investor’s capital is being allocated to. It is a necessary component to investing in crypto independent of the market’s condition. In crypto, conviction is rooted in understanding the fundamental role and function of a token or application investors buy into or interface with. Investors can build conviction by doing direct or indirect research on individual assets/ applications and tracking them for a period of time before buying. Allocating capital to assets in which an investor has conviction in bear markets is crucial. It minimizes making blind bets and allows the investor to stay focused on what he or she understands best.
Time preference refers to the timeline an investor places on realizing their profits. Investors with a low time preference are focused on making gains over extended periods of time (months or years), while investors with a high time preference are focused on making gains in the immediate term (days and weeks). Keeping a low-time preference is important in crypto bear markets. Blockchain is a rising technology; the path people take to learn/ understand and adopt it isn’t linear and is very difficult to predict in shorter time frames. A strategy supportive of low-time preference allows investors to keep skin in the game while the next wave of adoption (bull cycle) builds and dislocations between price and value exist. Time preference and conviction have a close relationship. Developing a tolerance for a low-time preference approach stems from having confidence in the bets an investor is making.
Analytical tools are quantitative points that can be used to assess the state of a bear market and when it might be transitioning to a bull cycle. The openness of the networks that make up cryptocurrencies introduces a suite of metrics that are exclusive to the asset class. These metrics are categorized as on-chain data, or data derived from the use and function of a blockchain network. These metrics can be more effective in navigating bear markets than price-derived analytical tools, like technical analysis, as the price is a reflection of their oscillation in some cases.
This data sheds light on network health, user behavior, and supply landscape.
Examples of network health data include hash power, in the case of proof-of-work (PoW) networks, and network staking data, in the case of proof-of-stake (PoS) networks. Both of these metrics add color to the state of the entities that are upholding a network. Prolonged periods of decline in these points suggest there is capitulation and pessimism among these entities and this is characteristic of a bear market, or a bull transitioning into a bear. Rising values suggest these entities are optimistic which is characteristic of a bull market, or a bear transitioning into a bull.
An example of user behavior data includes active addresses, and these are defined as unique addresses that are actively sending and receiving coins on a network. A declining number of active addresses suggests that fewer users are using a given network, which is typical of a bear market. However, the opposite is true of bull markets. Other related metrics such as, accumulation trend score and entities net growth, offer additional insight into general user behavior and the behavior of entities with large holdings.
Network supply metrics are among the most influential points to observe when assessing the state of a coin’s market. These metrics offer insight into how users are spending, or holding their coins, and supply liquidity. Understanding if holders are hodling or spending makes a difference in understanding the state of a bear market, and when a bottom may be forming. Metrics such as exchange balance (amount of a token that is left on exchanges), and illiquid supply shock ratio offer additional perspective on reaching conclusions about the state of a token’s supply.
Rewards generating tools
Generating rewards on investments is the best way to navigate bear markets and preserve wealth through prolonged periods of uncertainty. Recent developments in the space have made generating rewards simple and effective to passively manage risk and let holdings work for the investor.
Staking is a popular option for rewards generation. CEX.IO offers a staking product that allows users to generate rewards on their holdings in a few simple clicks; no technical understanding of a token or its network is required. CEX.IO’s staking product further mitigates risk for investors by eliminating the lock-up period that is typically associated with staking, and automatically staking holdings that have the support. This allows investors to earn a reward on their holdings and trade them with no limitations and minimal effort. The following steps outline how to stake on CEX.IO:
- Sign in to or create your CEX.IO account.
- Navigate to Earn under the Products menu in the top left of any page.
- Select Add Funds or Buy to stake a token you don’t already hold with CEX.IO. Tokens that are already owned will be automatically staked if it is supported.
The impact of staking with CEX.IO
Quantifying the impact of generating rewards adds color to its role in protecting investors through bear markets. The same analysis highlights the benefits it can have on investors who have conviction and hodl through bear markets.
Insulation through bear markets: the reward generated from staking during bear markets dampens losses. For example, an investor stakes 100 coins for a full year at an average annual percentage yield (APY) of 8%. The investor has 108 coins at the conclusion of the year. Over this period, the USD value of the token dropped 15% from $10 at the time of purchase to $8.50 at the end of the year. The yield generated from staking protected the investor from a 15% loss. Instead he or she would have lost 8.2% if he or she decided to sell at the end of the one-year period.
Benefiting investors with conviction: the investor had conviction in the bet he or she was making and decided to hodl and stake through the bear market, which lasted for two full years. Over the first year, they earned an average APY of 8% (end balance of 108 coins). In the second year, the average APY dropped to 5% as more users decided to stake on the network (end balance of 113.4 coins). As the bull cycle started, the coin he or she was staking appreciated from $10 at the initial buy-in to $15. A 50% increase. However, because the investor had conviction and decided to continue staking, they were able to realize a 70.1% gain.
CEX.IO’s automatic stake feature lets investors further dampen the impact of bear markets or accelerate rewards after hodling by staking the rewards they earned. It gives CEX.IO users an advantage over investors on other platforms. Staking rewards are typically not added to the investors’ staked balances and thus do not earn rewards. This is important to keep in mind to maximize the impact of having conviction and staking through periods of uncertainty.
Staking also benefits the underlying network of the token and the composition of the token’s supply. It adds to the security of the blockchain as holders contribute coins to the nodes that validate on-chain transactions. Coins allocated to validating transactions are locked up, which disallows them from being spent or converted into fiat or other cryptocurrencies. This adds to supply illiquidity that can push prices up at a greater rate as demand increases.
The nature of cryptocurrencies and blockchain as disruptive and evolving technologies make their growth largely cyclical. Bear markets are inevitable, and have historically lasted for several year periods. Combining these baskets of tools allow bear markets to be used as a time of opportunity, as opposed to a period of fear. These tools can even be leveraged when the market is flourishing and investor sentiment is positive. They allow for constant learning and experimentation, which are integral to successfully navigating and taking full advantage of the cryptosphere to build wealth.