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Investing During A Bear Market: How To Not Lose Your Money In Crypto

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7 investment strategies to have during a crypto recession.

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One Button Capital
July 24, 2022
Jul 24

If you are reading this article, then you most likely hold some kind of digital currency in some form. The question that concerns every crypto investor, especially in the current market conditions, is the topic of investing during bear markets and what to do and not do during this period.

  • How not to lose money when everything is bleeding?
  • What can I do to prevent my portfolio from being down more than -80%?
  • I bought my Bitcoin at $60k. What should I do?

These are just a couple of the everyday questions that an investor has on his mind. The reality is that it takes guts to stay true to your strategy when the market is dropping every day. But more importantly than that, you need to have a strategy, to begin with. And many people who are new to crypto do not have one.

Let’s analyze the most popular investing strategies during bear markets and see what works.

Things That Don’t Work Well

Stablecoins (some of them)

A common idea during bear markets is to keep your portfolio in so-called stablecoins. While a very good strategy on the surface, 2022 has thought that nothing can be 100% reliable.

While many stablecoin projects look very solid and even promise annual interest if you stake them, the two big algorithmic stablecoin crashes of the last two years prove otherwise.

The infamous de-pegging of Terra’s stablecoin in UST. Source: Coinmarketcap

Imagine if you took a two-day vacation with no internet connection. Boom, 90–99% of your portfolio is gone just like that. Reddit is full of real-life examples of people that lost all of their savings during the Terra downfall.

Some people may have forgotten but in 2021, something similar happened with a project name Titan, which also had its own algorithmic stablecoin — Iron.

The de-pegging of algorithmic stablecoin Iron. Source: Tradingview

A well-known entrepreneur Mark Cuban was exposed to the Titan crash, which made headlines across all crypto news websites and proved that no one is safe from rug pulls.

Shifting to Stocks

Some investors might think that while crypto is not looking good at a given moment, it may be a good idea to convert it into stocks and bonds. But they are in for a big surprise when they look at the reality.

In 2022 the S&P500 which is the second most widely used index to evaluate the US stock market report after the Dow Jones fell by almost a quarter.

S&P500 (-23.04%)

The NASDAQ index is down by -31.81% as well since the beginning of the year.

NASDAQ (-31.81%)

Some individual stocks like Netflix are down more than -70%, so even in this market Bitcoin might seem like safe heaven in contrast to the stock market.

NFLX (-71.23%)

Additionally, as we analyzed in our May Report, then you recall our research on the lost power of money, which shows the depreciation of money and its impact on the true value of stocks. While an asset may be up by +250% in the last 20 years, the real purchasing power would result in a much lesser gain.

Looking at the adjusted graph with the M3 (total money supply) taken in mind, we can see that the recovery in 2008 was twice less impactful as we thought, and we are just reaching those levels now.

How about Bonds?

In the USA
Investors clamored into the safety of U.S. government bonds, sending the 30-year Treasury bond yield below 2% for the first time ever and the 10-year Treasury note yield below 1.5%, a three-year low.

Furthermore, some experts have analyzed that the Bonds market is directly manipulated by the FED, making it an unreliable investment for regular people.

The U.S. treasury rate went down by over 90% between the 1980s and 2020s.

Outside of the USA
International bonds issued in countries outside of the United States carry a substantial risk as well. Interest rate risk, inflation risk, and currency risk are a couple of examples that can negatively impact international bonds as the issuing country usually has a weaker economy than that of the USA.

A chart from BofA, showing that in the 2020s we are at an all-time low in global bond yields.

In addition to the poor overall performance, international bonds have a higher liquidity risk compared to USA bonds. That is because it can be difficult to find a buyer for an international government or corporate bond.

‍Investing in Funds

Another idea that you might think of as an investor: “Why don’t I just give my money to professionals to manage? They would for sure do better than I would in investing.” Sounds like a good idea right? But there is another surprise: most of the funds and professional institutions fail to outperform Bitcoin.

“While different strategies have yielded different levels of performance, neither was able to outperform BTC itself.” Source: PWC 3rd Annual Crypto Hedge Fund Report

Money managers can come in many different forms, like mutual funds, hedge funds, or very niched down-crypto funds, but according to the latest research, crypto hedge funds didn’t beat the Bitcoin returns over the last few years. What is more, during bear markets they are almost fully correlated to the performance of the asset, meaning that you gain less during bull runs, but you lose the full amount when the markets are going down.

Going Short

This is a more advanced strategy that people with a trading background will be familiar with. Shorting the market has you betting against the market performance, or in other words, you make money when the market price drops. A strategy that, once successful, can make headlines in Hollywood (See: The Big Short), but in reality, it is a very risky investment approach.

Timing is very crucial when shorting the market, and that is almost impossible for a human to do. Many people that formerly waited for crypto to drop have observed their targeted assets increase by 10–20–30% a day. Imagine the same scenario, but with you shorting the market. Apply leverage to trading, and you are easily liquidated in several hours of a bullish day.

It is impossible to know when crypto will crash, even during a bear market like this. A big percentage of short traders lose their money because of their unlucky entries because of the news that pumps different assets.

Things That Work

Here is a list of things that we at One Button Capital see working well in the bear market. Note that this is not financial advice.

Dollar-Cost-Averaging (DCA)

DCA is a favorite investing strategy for several household names, including Warren Buffet. It is a proven method to generate profits over the long run for people who want to accumulate large sums of a given asset. The good thing about dollar-cost-averaging is that it is also a great tool for value investors during bear markets.

Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals.

For example, if I gave you $100,000 and told you that crypto is currently in a recession but the next all-time high will be in 10 months, what would you do?

Your reply would probably be: “I will wait to buy the biggest dip during this recession, or just straight invest everything right now.” A brilliant strategy indeed, but only if you could time the perfect moment, and from experience, you and I know that it rarely happens.

A DCA investor, on the other hand, would tackle the challenge in the following manner:

Instead of investing $100,000 all at once or waiting for the big dip to happen, he would spread out his investments over a long period of time. He could buy Bitcoin every day for up to $10,000 monthly for the next 10 months, regardless of price. Below is a scenario if the example happened at the beginning of the year.

An investor that bought BTC for $100,000 on Jan 1, 2022, would be down by -58.88% of his portfolio by June 20 2022, while the DCA investor would have lost -27.03% and have $44,080 in cash to invest further. Source: DCACryptoCalculator

Of course, it is impossible to know when the next ATH will be, but DCA ensures you smoothen up your entry price — taking advantage of the market swings, and ultimately buying more of a given asset with the same capital.

Stop-loss

Stop-loss is such a powerful tool in markets like these that it is a shame it is not talked enough about. It may be a basic instrument, that even the biggest rookie has heard of, but using it properly can save you from tons of losses.

Stop-loss or take-profit is a programmed command to sell your cryptocurrency once the asset hits a certain price level. You can say, “If Bitcoin goes below $50,000, I will sell.” Or, “If my position goes lower than -10%, sell everything.”

An example of using a stop-loss strategy. Chart via TradingView.

Not only can investors protect their portfolios from devastating losses of over -50%, but they can also do something that many people neglect — lock in some of their gains.

Of course, if you believe that an asset will be worth over 20x in ten years from the current ATH, it makes sense to hold it, even during a bear market. But if you’ve locked in some of your profits from the last bull run, you will have more to invest in the following swing.

Trading Automation

Trading automation, or trading bots, or Robo-advisors, is software that is pre-programmed to take specific action on autopilot when certain market conditions are met. Imagine having a professional trader in your pocket that can manage your portfolio 24/7 with the best strategies available — that is the concept of trading automation.

An example of how a trading bot may operate is by having the algorithm buy into an asset when the 50-day moving average is above the 200-day moving average of the same crypto and sell it when it moves below it.

Chart with MA-50 and MA-200 on BTC: USDT via TradingView.

Using such a basic strategy for trading BTC in 2022 would save you from substantial losses incurred by holding the asset. The average MA 50–200 Crossover return for 2022 is -11.28% while Bitcoin is down by more than -58.88% for the same time period.

Of course, your Robo-advisor can be set up to do a lot more sophisticated analysis and trade in various conditions. It all depends on the software, and how well it is able to tackle the volatility in crypto.

DCA, stop-loss, and trading automation are just a few of the strategies that profitable investors use to keep their portfolios more robust during bear markets. The list of successful tactics goes on and includes things like diversification, shorting (which requires high precision), arbitrage, and portfolio rebalancing. But what if we could put everything together?

All-In-One Solution

Imagine a tool that combines trading automation, DCA, shorting and all the other strategies that we mentioned all in one place? Imagine, if you could just click One Button, and activate all the effective tactics to manage your portfolio? That is what One Button Capital does.

One Button combines effective strategies for portfolio optimization and a simple user experience so that investors can get the best out of their capital with just a few clicks.

In May 2022 One Button Capital’s ROI was -0.4% when BTC and ETH were down by -15.31% and -27.76% respectively.

Source: OB Capital May Report

Learn more about the AI portfolio management technology behind One Button and our philosophy and reasoning behind AI-driven investments from the One Button Capital Medium.

Summary

For many crypto investors, this is their first big bear market. A big percentage of them do not have a strategic plan on how to handle the situation. While many of the common investing methods work when the markets are trending up, the quote “Everyone is a genius during bull markets” holds ground when things are not so green.

No investment strategy is 100% bullet-proof, during crypto recessions. Our list compared several methods that stood the test of time in other markets before crypto. The examples we gave used the most recent data, but still, there is no telling how long the bear market will last, and what the true impact will be.

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