This complete 101 guide will help you prepare for a bear market
Bear Market of Crypto – Does the market look bearish or not? Is it going to start soon? Against the bear market, what should we do?
According to clickbait headlines, the crypto bear market has arrived. It is no secret that the crypto market has been moving sideways since mid-May, and at times it feels like there is a possibility that we will have another big crash that will start the bear market.
At other times, the bull market appears to be on the verge of a resurgent rally that will set new all-time highs. Bull markets are wise to have, but the truth is the bear market is just around the corner.
Though the bear market has not yet arrived, it will at some point. When will that be? In the event of a bear market, how will you recognize it? Are there any preparations you can make? An explanation of what a bear market is?
This article is for you if you have these kinds of questions on your mind.
Short Term Market Cycles
The market cycle of every asset has booms and busts. Despite the differences in the length, volatility, and character of each asset’s market cycle, they all follow the same pattern as this photo, the so-called Wall Street Cheat Sheet.
According to this photo, the fundamental reason why the price of an asset rises and falls in the short term is the psychology of human emotions, specifically fear and greed.
The value of even fiat currencies fluctuates every day because of this. Their stability isn’t great. Just that fiat currencies are usually stable enough that their fluctuation is often insignificant.
Then there is the entire global foreign exchange market where traders earn millions of dollars, often in pips, or percentage changes. The percentage is 101%.
The value of cryptocurrencies, in comparison, can fluctuate rapidly by hundreds to thousands of percentage points each day. They are therefore at the opposite end of the spectrum when it comes to asset volatility.
Because no one knows exactly what cryptocurrencies are worth, they have such a volatile value. Let’s take Ethereum as an example. Through Ethereum, lending, borrowing, and saving money are possible without a middleman such as a bank. Accessing these services is as simple as having a broadband connection.
You can even take out a flash loan using cryptocurrency to borrow over 20 billion dollars without any collateral. It only costs a few dollars to use this service.
Is that kind of technology going to cost a lot? Since cryptocurrencies are meant to replace the financial system, they are regarded as more valuable than all the money in the world.
As cryptocurrencies take on similar roles in certain parts of the world, they are expected to be worth as much as their real-world equivalents. Several people still think cryptocurrencies are merely Ponzi schemes. In fairness, some cryptocurrencies are not much different.
Traders who buy and sell cryptocurrencies based on their emotions experience these mixed messages, resulting in mixed emotions. Trading with technical analysis is based on this concept.
Long Term Market Cycles
The ebb and flow of any specific asset market are affected by more than just human emotions. There are also macro factors at play. The long-term effects of these are much greater.
A debt cycle is considered to be the single most important macro market factor by famous hedge fund manager Ray Dalio. Short-term debt cycles last 5 to 8 years and end in recessions. Long-term debt cycles last 75 to 100 years and end in depressions.
Short-term economic growth is generated by borrowing money. People borrow money in order to purchase more things, companies borrow money in order to produce more stuff, and governments borrow money in order to fund programs.
As a result, most asset classes are experiencing a bull market. Price trend that is sustained over a long period of time. All that fun stuff, higher highs, and lower lows. Individuals, corporations, and governments will eventually need to start paying off some of that debt. Individuals must reduce spending in order to achieve this goal. Governments cut back on programs while companies make less stuff.
Almost all asset classes are adversely affected. Price declines for a sustained period of time. It wasn’t the most fun stuff, lower lows, and lower highs.
You can clearly see this debt cycle in action if you examine the price history of a big market index.
In descending order from 1997 to 2002, 2002 to 2009, 2009 to 2016, and then 2016 to the end of this cycle. My calculation is based on the end of each cycle starting with the start of each bear market, not with the peak of each bull market.
You can see a surprising correlation between cryptocurrencies’ past market cycles and the stock market when you compare the two.
It is likely that the stock market did something similar to the crypto market whenever it reached its highs.
As a globalized world, all assets are linked in some way, which has become even more obvious when it comes to cryptocurrency since Bitcoin’s CME futures provided exposure to institutions in 2017.
The correlation between Bitcoin and the stock market reached its highest point last year.
What is the significance of this? Basically, it means that the cryptocurrency market will likely go through its bear market at the time the stock market does. Prices suggest this will happen sometime in mid-2022, which coincides with what cryptocurrencies’ market cycles imply.
In order to explain the four-year cycle, consider that the cryptocurrency market is influenced by the Bitcoin halving every four years.
Due to the reduction in supply and eventual increase in demand, BTC prices rise when the amount of newly mined Bitcoin is reduced by 50%.
In proportion to bitcoin, almost every cryptocurrency reacts in the same way.
In the event that history repeats itself, we should see a top to the bull market this summer or very early next year.
In any case, it is likely that we will see a big crash after the crypto market top and then a decline in price over the next year until this current cycle reaches its end. It should bottom sometime in the summer or fall of 2022. A bear market is beginning with this decline.
The only caveats here are two. This bull market for cryptocurrency is possible to continue indefinitely as all the cryptocurrency coins, tokens, and technologies make their way into the market to replace the current financial system.
Supercyclical price hikes are possible, but the likelihood is low. This is known as the cryptocurrency market supercycle. In such a short amount of time, something of this nature is simply logistically impossible.
Cryptocurrency adoption has been a gradual process with many obstacles and bureaucratic requirements. As a consequence of hyperinflation, cryptocurrency prices are likely to take a super cycle. Adoption-driven supercycles are arguably less likely.
Inflationary effects are only just beginning to surface as a result of governments printing currency like crazy around the world.
In paper terms, just because Bitcoin and Ethereum are worth hundreds of millions of dollars, does not always translate into stronger purchasing power.
The value of Bitcoin and Ethereum may be going down despite technical bear markets, despite their nominal price increases due to the devaluation of money.
Housing, stocks, and cryptocurrency bubbles appeared probably as the result of this inflationary effect.
There is a second caveat in that the next crypto bear market may last much longer than a few years. A long-term debt cycle lasts 75 to 100 years, as I mentioned previously.
The model is assumed to be correct. There is a possibility of depression. Approximately 90 years ago, there was a depression in the 1930s.
There are some economists who think this pandemic has already led us into a depression.
According to others, there should have been a recession in 2008. While governments continue to print money like mad, they keep kicking the can down the road.
There is even some belief that monetary policy will prevent the next recession.
Depression will eventually occur, and history suggests it will last a decade or longer. There’s no guarantee the next depression will come anytime soon, so it’s impossible to predict when it will arrive. When you plan for the next crypto bear market, you must keep this in mind.
Now that we’ve discussed some potential bear market scenarios, let’s look at what you can do to prepare. As a quick reminder, crypto bear markets can take three possible forms.
I suggest holding what you have and adding to it regularly in the case of a regular bear market.
Dollar-Cost Averaging is a long-term investment strategy that, regardless of the asset, is statistically the most successful.
Purchasing the bottom of the next bear market is extremely unlikely if you’re hoping to ride the wave.
The bear market bottom is anywhere between 20K and 30K and, if we experience a regular bear market, I would guess it will fall within that range.
As we near the bottom of the bear market, there will be bull traps that we need to watch for. Short-term spikes occur in this case before the price continues to fall.
By setting your price chart to monthly, you can easily filter out these bull traps. By doing this, you will be able to see the long-term price trend more clearly.
A clear reversal of the trend is what you are looking for entering the market. Here is an example of a previous bear market for Bitcoin. May 2019 saw the $6000 mark. Please note that I have moved up to the weekly chart.
If you could get in for $3,000, that would have been ideal. It’s impossible to tell if that price was the bottom and you’ll end up kicking yourself if you commit to that price only to watch it fall in the future. You’re better off waiting until that reversal happens. We should especially pay attention to the two other bear market scenarios.
Hyperinflation Bear Market Scenario
The price of cryptocurrencies will likely increase in a bear market with hyperinflation, but their purchasing power will definitely decrease.
While Bitcoin and gold often flourish under inflationary conditions, this might seem surprising. An online financial channel called Star Path Academy recently published a series of videos discussing precious metal prices in Romania during the 1990s hyperinflationary period.
A two-year stretch of over 200% inflation was experienced by the Romanian Lei at the time.
It was mainly because most people didn’t have gold or silver that they weren’t used as exchange currencies. Gold and silver are among the best long-term investments when it comes to wealth storage. This was often their last item to sell.
People tend to buy things with the least valuable type of money they have, according to Gresham’s Law.
In any case, hoarding precious metals resulted in the effect that whenever someone sold gold or silver, this left them with nothing to sell. The person buying could offer a lower price because the seller was desperate, which lowered the value of gold or silver.
The subsequent fall in gold and silver value consequently caused a crash in the value of other assets utilized as currency in the country at the time, such as food, livestock, and building materials.
Thus, if we enter a bear market hyperinflationary period, buying or selling cryptocurrencies based on their fiat value will be the worst decision to make.
To purchase and sell your crypto-assets, you will need to estimate how much value your cryptocurrencies have in relation to the assets that you actually need or want.
I believe that by then you’ll have bigger concerns than buying the bottom of the bear market, and you’ll have similar concerns if we see a third bear market.
It will be an amazing time to dollar-cost average in the next cryptocurrency bear market if the next bear market is part of a global depression. Obviously, if you have the resources.
Oftentimes, you don’t realize that you’re depressed until you’ve been there for a long time. There are usually big crashes and a lot of lost jobs when a recession/bear market kicks in.
It is likely that the crypto market won’t hold up very well, and the price could continue to depreciate for a long time to come. Depressions cause people to purchase two types of products. Things that are essential to their survival and things that relieve stress. These categories don’t apply to cryptocurrencies.
These categories include shelter, energy, clothing, food, water, as well as interestingly alcohol, cigarettes made of different kinds of plants, and even entertainment such as movies and TV shows.
In this stressful time, the companies that offered these outlets fared pretty well; some even grew during the great depression.
Only virtual worlds like Decentraland (MANA) and e-sport sites like Enjin (ENJ) could potentially provide the same outlet for digital currencies. In the future, I can totally see people gambling their crypto in Decentraland during the next depression, but I don’t think people will be too eager to spend their limited funds on in-game NFTs.
I‘m not a financial advisor and this article is simply for educational purposes. It should not be used to make any decisions regarding your finances. If you need investment advice, please contact a qualified financial advisor.
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