What Should You Know Before Trading in a Cryptocurrency Bear Market?

Cryptocurrency market has its share of highs and lows, much like any other market. Those familiar with investment terms will be aware that these peaks and troughs are referred to as the bull market and the bear market, respectively. While the market can be volatile at any time of the year, it can be exceptionally difficult to make fool-proof decisions during these specific phases. While both these phases are not uncommon, a bear market is the shorter end of the financial stick. The difficulty in making the right choices only increases further if you are a cryptocurrency investor.

Given how volatile the cryptocurrency market is, it is too soon to say if we are in a bear market or getting out of one. Traditionally, a bear market is defined as a period of negative returns, where stock/ commodity prices record a dip of 20 percent or more from recent highs.

It is not unusual for the fall in prices to be followed by a sense of pessimism among investors.

With regard to cryptocurrency, it would be an understatement to say that 2021 has been an unpredictable year.

Take for instance  Bitcoin and Ethereum, the prices of which have fallen almost 30 percent since May, despite showing some semblance of an upward trajectory in the last few weeks and seeing record-high value a few months ago. Bitcoin price in India stood at Rs. 34.4 lakhs and Ethereum price in India stood at Rs. 2.3 lakhs as of 6pm IST on August 10.

However, if you play your cards right, even a bear market in the future can help improve your cryptocurrency portfolio. Here are a few things that you can do as a cryptocurrency investor when faced with a bear market.

Make the right buys

The bear market can just be the right time for you to make some good cryptocurrency purchases that will prove beneficial in the long run. The issue with the bear market, however, is you don't know how long the dip will last or how far the prices will drop. Due to this, you are often at the risk of making a premature buy or miss the chance of making a good investment altogether.

Since it is going to be a speculative investment, you will need to remain patient. However, one way to circumvent this issue is by following a plan wherein you invest a fixed amount at regular intervals during this phase, irrespective of which way the cryptocurrency market is going. This strategy is referred to as Dollar-Cost Averaging.

Diversify your cryptocurrency portfolio

If you have been sticking to only one kind of cryptocurrency, this could be a good time to experiment. Not all cryptocurrencies go through dips at the same time. Remember when Dogecoin value shot up after Tesla founder Elon Musk ditched Bitcoin due to its carbon footprint? So, controlled and well-researched investments during a dip can help you build a versatile portfolio during this period. Dogecoin price in India stood at Rs. 19 as of 6pm IST on August 10.

Think long-term

A bear market could serve as the perfect catalyst for some long-term cryptocurrency investments to be added to your portfolio. With prices at a low, focus on investments that will prove to be fruitful in the long run as a short-term investment is less likely to do you good in such a phase.

Given how volatile cryptocurrency markets are, thinking long-term can seem intimidating. Making wise investments can prove to be beneficial in the long run. Consider, for instance, Bitcoin's value of around $4,000 (roughly Rs. 2.97 lakhs) in March 2020. By January, this year, it reached over $33,000 (roughly Rs. 24.55 lakhs), giving a return of over 800 percent in just eight months.

Similarly, a Forbes report stated that despite the fall in value, a group of experts have predicted that Bitcoin will “overtake the US dollar as the dominant form of global finance by the year 2050”.

Another report said that Ethereum could soon overtake Bitcoin as the "world's most valuable cryptocurrency”.

So, making controlled investments with an eye on long-term crypto wealth management could prove to be fruitful.