First, let’s look at why market crashes happen. This will give you an edge over other investors. Markets move cyclically. Cryptocurrencies reached the peak of euphoria in May, then there was a collapse.
This phenomenon obeys the laws of psychology. Most of the trends develop gradually, without a rush, worthy of media coverage. But as soon as the rumor spreads that somewhere you can get rich quickly, the media immediately spread this topic. Upon learning about the hype, people who usually do not invest anywhere begin to be interested in the asset, they want to try their luck.
But few people know that at this very moment the trend is already unfolding. Once assets become popular, many investors begin to feel that they are overvalued and not worth their money. They start selling to take profits. Selling snowballs, crushing unsuspecting new investors.
Now that prices are falling again, and the fate of bitcoin in some countries is very ambiguous, people are wondering: what to do and how to get through this period?
- We will tell you how to avoid losses in the bear market.
- Markets move cyclically. Cryptocurrencies reached the peak of euphoria in May, then there was a collapse.
- Some traders do not trade in a bear market. They take assets or just bide their time.
In this article, we’ll show you how to adapt to a bear market and protect your money.
Management of risks
It is important to know how to manage risk if you trade and invest in cryptocurrencies. First of all, you need to understand what percentage of the invested capital you can afford to lose without significant harm to personal finances.
Risk management is the key to success as an investor and trader. This amount that you are willing to lose is called venture capital. How will you feel if you lose $ 10 today? What about $ 1000? To define your venture capital, think of it as a small percentage of your investment portfolio. Some traders use only 15% of their fortune to trade. The rest is held in long-term investments with less risk or in more stable investment funds.
To get the most out of risk capital, you need to set a threshold for sensitivity to losses, it will help you further manage your risk and survive in the long term. Because even if it is money that you are ready to lose, it does not mean that you need to merge everything in one trade and re-deposit the amount of risk capital the next day. It doesn’t work that way.
For example, your share of risk capital is 15%. You use it for trading. With an investment portfolio of $ 100, the risk capital is $ 15. Now we need to determine the risk sensitivity of the trade for this $ 15. Experts advise making sure that this threshold does not exceed 3% of your risk capital in one trade.
How does it look in practice?
You can only risk 3% of $ 15 at a time. That is, you need to adjust the stop loss so that it does not exceed $ 0.45 per dollar. It seems that this is very small, and you want to risk more, but do not fall for this bait.
Your task is to survive in any market, regardless of the trend, so risk management needs to be taken seriously. Thus, you will protect against large losses in case of a sharp fall or rise in the market, which is very common in cryptocurrencies. Remember, with good risk management practice, anything is possible.
Most common strategies
Many bear market traders reduce their position sizes or simply do not trade. Let’s take a look at two of the most popular risk minimization strategies.
Fixing in stablecoins
The first is the transition to stablecoins. Stablecoins or stable currencies are assets that do not rise in price or decline in price, their value is always stable.
Stablecoins, as their name suggests, are assets whose value is pegged to another asset, usually the US dollar. The most popular are Tether (USDT) and TrueUSD (USDC).
By moving earnings to stablecoins, you will not only reduce the risk of long-term losses, but also maintain the value of your portfolio, take a break until the market stabilizes.
The trick here is knowing when to get out on time. Remember the psychology of the market cycle and listen to other more experienced traders.
Holding Cryptocurrency (HODL)
Another common strategy is HODL. You may have already come across this word on social media and wondered what it refers to. HOLDING is accumulation. This means that you are not selling under any circumstances.
Have you heard the term «paper hands» or «salad hands»? These are people who sell in a panic and cannot suffer losses in their portfolios, however minimal they may be. During this time, someone with diamond or steel hands is not selling their cryptocurrencies and will not be selling them for a long period of time.
