- Bear markets are prolonged periods of price drops. While they can be stressful, they are also part of investment cycles.
- It's important not to panic and to focus on your long-term investment goals.
Here's how to keep your head when prices are dropping.
In the stock market, a drop of more than 20% is often judged as the mark of a bear run. But that definition doesn't really apply to cryptocurrency as it's so volatile, prices can rise or fall by 20% in a matter of days. It's most accurate to see a crypto bear market as a long period of consistent price declines. The opposite of a bear market is a bull market -- a time when prices are increasing and confidence is high.
Prolonged and extreme price drops are some of the most testing times any investor can face. Especially when cryptocurrency prices lose as much as 50% in a matter of months -- as they have at several points in the past decade. But sadly, investments do sometimes decrease in value and bear markets are something we all have to deal with.
Here are four moves every investor should make when everything seems like it's in the red.
1. Don't panic sell
It's extremely tempting to try to cut your losses when faced with huge price drops. But if you do, you won't benefit when prices start to increase again. Moreover, selling after a huge drop flies in the face of the oldest rules of investment: buy low and sell high. Granted, this is easier said than done as it can be hard to time the market. But selling at a loss will lock in your losses.
Take a deep breath and remind yourself of why you invested in cryptocurrencies in the first place. Perhaps you believe blockchain technology can transform the way we manage money -- or that Web 3 will be the next generation of the internet. Look at why prices have fallen, and ask yourself whether your original investment thesis still holds true. If so, now is not the time to sell.
2. Keep your eyes on the long term
Another way to keep this latest drop in perspective is to focus on your long-term objectives. Cryptocurrency is volatile and we've seen drops like this before -- and we'll likely see them again. But if you invest with a five- to 10-year horizon, it's much easier to hold when times are turbulent.
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It also helps to look at Bitcoin's (BTC) price history. Bitcoin is the oldest cryptocurrency and a look at its chart shows several significant price drops. What's reassuring is that so far it always recovers and goes on to hit new highs.
3. Use this time to research
Rather than focusing on how much the market has dropped, try to use this time to research. Time spent learning -- either about cryptocurrency in general, or individual cryptos in particular -- is never wasted. If there's a sector of crypto you want to understand better, that's a good place to start. Or perhaps you want to develop your investing skills so you can manage risk differently in future.
Personally, I've spent this bear market learning more about various passive income opportunities. In the face of falling prices, I find it reassuring to know my crypto assets are earning annual returns of 5% or more. I have some coins staked, which means they contribute to the overall network security and pay steady returns. I've also put a small amount of my portfolio into higher risk options like yield farming and liquidity pools.
4. Consider buying the dip
"Buy the dip," is a rallying cry on social media every time prices drop. And, going back to the logic of buying low and selling high we mentioned earlier, it can be a good move. As Warren Buffett famously said, "Buy when there's blood in the streets, even if the blood is your own."
But it isn't the right option for everybody. For starters, prices may fall even further. This is why some investors buy dips in smaller stages -- they might spend $100 today, and then spend another $100 next week if prices drop more. It's a form of dollar cost averaging that can smooth out the impact of prolonged price drops.
The biggest danger is that people get excited about the idea that crypto is "on sale." As a result, they may spend money they weren't planning to invest in crypto -- or money they need for other financial goals. They may also buy cryptocurrencies without doing their normal due diligence, which can hurt in the long run.
If you don't have cash to spare, already have a high exposure to crypto in your portfolio, or don't have time to research which cryptos to buy, don't try and buy just because prices are low. There will be other lows -- and maybe next time you'll be in a better position to take advantage of them.
Managing risk is crucial
The moves above will help you to wait out and potentially even benefit from a bear market. But bear markets are also a good reminder to manage the amount of risk we take. That means only investing money you can afford to lose, so you're never forced to sell at a low. It also helps to ensure crypto only makes up a small percentage of your investments. Having a diversified portfolio means if one type of asset performs badly, it won't spell financial disaster.
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Emma Newbery owns Bitcoin. The Motley Fool owns shares of and recommends Bitcoin.
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