The educational guide “How to Protect Crypto-Assets in a Bear Market” was created in collaboration with Caleb & Brown. Caleb & Brown is the world’s leading cryptocurrency broker.
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Something unique is happening in financial markets in general, much to the chagrin of investors of all asset classes of all types.
For the first time in history, the so-called “cryptowinter”, or the cyclical declines experienced by the cryptocurrency market, is occurring at the same time as a global bear market. Although bear markets occur cyclically across all asset classes, this double whammy may prove particularly penalizing for investors after the big bull market of 2021, in which many portfolios rose at breathtaking rates. .
In 2021, the price of Bitcoin (CRYPTO:BTC) reached an all-time high of $69,044.77 (a 120% increase from its January 1 closing price), and the price of Ethereum (CRYPTO:ETH) hit an all-time high of $4,868 (a 500% rise from its January 1 closing price).
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To put that into perspective, the annual return of the Nasdaq Composite Index in 2021, since its first day near its annual high, was 27%. The Nasdaq Composite Index includes nearly all stocks listed on the Nasdaq Capital Markets stock exchange. Along with the Standard & Poor’s 500 and the Dow Jones Industrial Average, it is one of the main benchmarks for economic performance.
Despite their astronomical gains in 2021, bitcoin and ethereum have almost returned to their pre-2021 price levels. And instead of finding refuge in the stock market, investors looking to recoup their losses by diversifying into cryptocurrencies or by giving up altogether, find themselves in the same situation. The 2022 bear market even sent down usually high-performing tech stocks, such as Apple Inc.(NASDAQ:AAPL), Netflix Inc. (NASDAQ:NFLX) and Tesla Inc. (NASDAQ:TSLA), with painful declines of 27%, 72% and 45%, respectively. Many experts believe that a number of macroeconomic factors have contributed to this decline, including runaway inflation, a European war, an excessive increase in the money supply and the impact of the pandemic.
In these hostile conditions, the primary prerogative of the astute investor and trader is survival, and the first step to survival is to identify and understand the threat. With history as a guide, investors can learn the characteristics of crypto winter and bear markets (the two big bulls of 2022) and discover a way to stay afloat.
So what does history tell us?
Cryptowinter Vs. traditional bear markets.
When comparing the cryptocurrency and stock markets, a clear distinction can be made in the nature of their declines. For one thing, cryptowinters, as cryptocurrency bear markets are often called, occur with a much higher frequency, experience much larger price swings, and happen much faster than those in the stock market. The same goes for crypto bull markets, which present some of the best investment opportunities in the world. Professional investors see this volatility as an opportunity, turning what some consider a “mistake” into tools for income generation and portfolio hedging.
These crypto winters are often preceded by macro events such as rising inflation, nationwide cryptocurrency crackdowns, and regulatory difficulties. Macroeconomic events also spearhead bullish crypto markets. In 2021, experts believed that the arrival of commission-free brokers, the proliferation of cryptocurrency exchanges, the explosion of online spending due to quarantine measures and the release of stimulus checks could have been the perfect cocktail. for a major rise in stock markets and cryptocurrencies. The argument that cryptocurrencies are generally more volatile and faster than those in the stock market is supported by an inspection of bitcoin’s down periods, which is often used as a market indicator. More precisely :
- Between December 16, 2017 and February 6, 2018, the price of bitcoin fell by around 70% in 52 days, from $19,700 to $5,900.
- Between June 26, 2019 and March 13, 2020, the price of bitcoin fell by around 70% in 261 days, from $12,900 to $3,900.
- Between April 14, 2021 and May 19, 2021, the price of bitcoin fell approximately 53% in 35 days from $63,500 to $30,000.
- During the current cryptowinter, the price of bitcoin fell around 74% in 227 days from $67,000 to $17,500.
Imagine that you represent all the declines of the S&P 500 since 1956.
By comparison, according to LPL Research, the S&P 500 has seen 15 bear markets since 1956. During that time, the average length of a bear market is 334 days (11 months) and the average decline is around 30%. . While it is true that at certain periods in history losses have exceeded 30%, notably during the crashes of 1957, 2000 and 2007, these are extreme cases.
Image showing the fall of BTC from 2012. Taken from TradingView. Image showing SPY’s 20% decline in 2018. Taken from TradingView.
Bear markets for cryptocurrencies, or cryptowinters, are much sharper and steeper than bear markets for more traditional asset classes. The smallest cryptocurrency drop mentioned above is 53%, while the shortest bear market is one month.
In fact, using the arbitrary 20% threshold for a bear market with bitcoin would have produced a number of erroneous bear market attributions, especially early in its history. For example, on January 4, 2017 and January 12, 2017, the price of bitcoin fell 35% in eight days. In the stock market, that would have been staggering. In the case of bitcoin, this decline was completely erased within a few weeks and then led to a 275% rally from the May lows of the same year.
Sharp drops in the cryptocurrency market can scare off investors, but it’s important to note that the reverse is true on upswings. As the year 2021 has demonstrated, even during large bull runs in the stock market, bull runs in crypto tend to be more extreme. It’s a hallmark of a nascent and exciting asset class that is just beginning to develop the right infrastructure for mainstream adoption. In other words, it is a characteristic of an emerging market rather than an abrasion of the asset.
It is no exaggeration to say that the cryptocurrency market can offer some of the best investment opportunities in terms of percentage return and the time it takes for that percentage to materialize. However, due to its volatility, proper risk management is required to approach this class effectively. For the layman, this skill is best learned with the help of professionals.
What to do in survival mode?
It is important to note that both bitcoin and the S&P 500 have survived each of their “catastrophic” crashes throughout history. Many investors have used cost averaging (DCA), hedging and diversification as countermeasures throughout historical bear markets, allowing them to preserve capital for the next bull market.
While this situation brings hope, it should not lead to complacency. In his book “The psychology of money”, Morgan Housel said: “The challenge for us [los inversores] is that no amount of study or open-mindedness can truly recreate the power of fear and uncertainty. [experimentados en los mercados bajistas] “.
While identifying and knowing the threats to your investment portfolio is essential to gaining the confidence you need to weather poor market conditions, professional help often makes this process easier. Offering investors immediate support and attention is a core EU value. Caleb & Brownthe world’s leading cryptocurrency broker.
Armed with in-depth knowledge of the cryptocurrency markets, Caleb & Brown’s brokerage professionals provide the education and expertise to help their clients make the right decisions when their wealth is at stake. Their team of professionals experienced in crypto helps investors fight bear market conditions, avoid catastrophic decisions, and give their clients the knowledge they need to preserve their capital. Moreover, they are always available.
With crypto wintering and a bear market knocking on investors’ doors, help from the pros has never been more important. With professionals on their side, investors are much more likely to learn how to preserve their capital and deploy it in a timely and efficient manner in preparation for the next bull market.
Photo presented by Hans-Jurgen Mager on Unsplash
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How to survive the cryptocurrency winter and the bear market? – Info Lakoom
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