Title: 《How to Survive a Crypto Bear Market》

Author: frogmonkee, Bankless

Compiled by: Katie Gu, Odaily Planet Daily

In a bear market, market conditions are bleak. It's easy for people to lose confidence, driven by fear, and only make short-term investments. These impulsive decisions can come at a cost. Therefore, we must first determine what our goals are, what investment principles to follow, and what our portfolio management strategies will be.

This article will provide strategic advice for beginner, intermediate, and advanced crypto traders to help you position yourself best for the next bull market.

First, are we in a bear market?

Let’s first align on the basic definitions. According to Investopedia:

"A bear market is a period in which securities prices fall 20% or more from recent highs, typically characterized by widespread pessimism and negative investor sentiment."

According to CMC data, the market cap of cryptocurrencies peaked at just under $3 trillion in early November last year. As of the time of writing, the value of cryptocurrencies is approximately $1.25 trillion.

In my view, we are certainly in a bear market. This is not something you or I can decide. At this time, don’t rush to label recent price movements as a bear market; ask yourself, does this feel like a bear market? It depends on how you choose to interpret market sentiment.

When I was making crazy bets on cryptocurrencies, I noticed a significant decline in enthusiasm among people. Fewer people were following new NFT projects or daring to use small-cap tokens, while more were converting their assets into ETH, BTC, or stablecoins.

Three Guiding Principles for a Bear Market

1. A bear market is an opportunity. No one wants a bear market, but if handled properly, you can benefit. Smart investors can steadily accumulate assets during a bear market and reap huge returns in the next bull market.
2. Survive. That is your goal. In a bull market, your goal is to accumulate wealth and profit. In a bear market, your goal is to survive until the next bull market while losing as little of your assets as possible. If you focus on increasing income during a bear market, you will face a tough battle. I recommend focusing on preserving your net worth and weathering the storm until the next bull market cycle begins. Buffett's investment strategy doesn't work in a bear market either.
3. Keep it simple, keep learning. In the euphoria of a bull market, it’s easy for everyone to look like a financial genius. In a bear market, your strategy will be stress-tested. So, keep it simple and trust that your strategy is long-term.

Assessing Your Risk Profile

Before we discuss any strategies, I want to talk about portfolio. A risk portfolio is a tool that investors use to determine whether an investment aligns with their risk preferences. Here are some representative examples:

Under an aggressive risk preference:

• Primarily small-cap tokens, with some BTC and ETH, excluding stablecoins;
• Willing to use unaudited protocols;
• Investing in dozens of different projects;

Under a moderate risk preference:

• Primarily BTC and ETH, with some stablecoins and small-cap tokens;
• Staking in higher-yield pools, first understanding the protocols;
• Using a small portion of the portfolio to follow projects closely;

Under a conservative risk preference:

• All in BTC, ETH, and stablecoins;
• Staking stablecoins in compound markets for low single-digit yields;
• Holding crypto net worth not exceeding 5-10%.

For the bear market, I recommend choosing between conservative and moderate risk portfolios, as more aggressive risk portfolios are an excessive pursuit of an unknown bull market.

Remember, in a bear market, our goal is to keep our portfolio intact into the next bull market.

Bear Market Survival Strategies

Beginner Crypto Players ------ DCA (Dollar-Cost Averaging) and Hold.

Target Audience:

• Experiencing a bear market for the first time;
• New to investing and financial markets;
• Have a full-time job unrelated to crypto.

The premise of the beginner strategy is simple: choose a low-risk asset portfolio, invest a budgeted amount regularly, and forget about other unrealistic ideas until the market heats up.

This strategy has two steps:

• Determine which assets you want to hold;
• Dollar-cost average into these assets and hold.

Asset Allocation

The first step of this strategy is to determine which assets you want to hold. These assets will be the main components of your portfolio before the market starts to heat up.

Having a risk profile is helpful when making choices. Ideally, you will allocate a significant portion of your portfolio to blue-chip assets that you know will rise in the next bull market—such as Ethereum and Bitcoin.

The following chart provides some examples of asset allocation for different risk profiles (not representative of Bankless endorsement).

(This table is merely an example of allocation methods under different risk preferences, created before the Terra collapse, and does not represent specific asset choices.)

Dollar-Cost Averaging

Once you’ve decided on your portfolio allocation, the next step is to budget the amount you want to invest regularly in these assets. This strategy is one of the most basic investment strategies, known as Dollar-Cost Averaging (DCA).

The beauty of DCA is that it eliminates the cognitive burden of timing the market. The premise is simple: buy at the same time each period (e.g., once a month). Ignore the price, just buy.

Just be prepared, then forget about them, and come back to check your portfolio during the next bull market to reap the rewards of steadily accumulated blue-chip capital assets.

Intermediate Crypto Players ------ Index and Sector Rotation Investing

Target Audience:

• Have tried various DeFi protocols;
• Willing to take some risks;
• Have time to pay attention to the market.

The intent behind this strategy is to diversify your holdings to hedge against market volatility and take advantage of small bull market bubbles within a bear market.

Diversification

Any reasonable investment advice starts with diversifying portfolio risk and limiting the risk of any single asset. The above asset allocation chart is an example of investment diversification, but we need to further enhance investment diversification.

Diversifying specific tokens is one thing. What about indices? An index is a basket of tokens, meaning it represents a snapshot of diversification itself. For example, the DPI token from the decentralized and autonomous asset management company Index Coop captures blue-chip DeFi tokens into a single basket token, spreading the risk and return of tested DeFi protocols across multiple tokens.

If you are considering diversifying your portfolio, look at indices rather than individual tokens. Index Coop has many different products, but you can find many other categories on tokenset, or even create your own category.

Once you choose a category you like, you can apply DCA (Dollar-Cost Averaging) to it.

Investing in Sectors

Many indices are broken down into sectors, representing a basket of tokens from specific markets:

• DPI = Blue-chip DeFi tokens;
• MVI = Metaverse projects;
• DATA = Data economy.

In all types of markets, some sectors will outperform others. For example, when comparing MVI, DPI, and ETH, we can see that ETH performs better in the long run. In other periods, such as from September to December, MVI outperformed ETH and DPI:

This is the first time the crypto industry has experienced such a large-scale bear market. From 2018 to 2020, there was no DeFi or Metaverse to segment the market. Because of this, there was also no data showing which sectors would outperform the overall market average.

A detailed intermediate strategy will adapt to how to conduct sector rotation investing, including which tokens to consider within a sector, what indicators to follow, and how to set stop-losses and alerts. If you have time to observe the market, rotating in and out of stable sectors throughout the bear market, even if you can't make a small profit, is a good way to maintain survival.

Advanced Crypto Players ------ Defensive Options Trading

Target Audience:

• Have a financial or self-taught background;
• Familiar with options;
• Seasoned players in a bear market.

I generally do not recommend actively trading in a bear market. Trying to profit in a bear market is riskier than in a bull market. Defensive trading is a set of market trading principles focused on limiting losses and volatility. Common strategies include diversification, sector rotation investing, DCA, and holding.

To use these strategies, you need to find an options exchange that supports the assets you want to short.

Some popular native DeFi options exchanges:

• Opyn;
• Dopex;
• Ribbon Finance;
• Hegic……

Protective Put

Buying protective puts is a hedging strategy that uses options to limit downside risk while being long on the asset.

By purchasing put options on the underlying asset you hold, you are essentially buying an insurance policy that sets a price floor, ensuring that even if the price of the underlying asset continues to fall, you won't lose more money.

Covered Call

A covered call is another options trading strategy that sacrifices potential upside to earn current income streams.

A covered call requires you to hold the underlying asset and sell call options to buy that asset at a fixed price. In a bear market, this works to your advantage because the asset price may remain stable throughout the life of the option, allowing you to earn premium income by selling call options.

However, if the underlying asset appreciates beyond the strike price, your profit potential will be limited.

Bear Spread

A spread trade is a common options strategy that limits your profits and losses to a finite range. They buy one collateral at one strike price and sell the related collateral at another strike price.

There are two types of bear spreads: put spreads and call spreads. Both strategies operate the same way: buying options at the strike price and selling an equal amount of options at a lower strike price. By doing this, these spreads create a trading strategy for moderately bearish investors with limited profit and limited loss.

Lessons from the Bankless Team

If this is your first bear market, here are some lessons learned by the Bankless team during the 2018-2020 period:

1. Think long-term. Don’t stare at the market every day. Maintain mental health, choose a strategy, follow it, and forget about the numbers. There will be returns in the long run.
2. Remember your goal. Survive. If you are experiencing FUD, remember that everyone feels FUD during a bear market. Set it aside, stay conservative, and wait for the bull market.
3. Invest your time. Speculators and retail investors leave during a bear market, but builders stay. If you have time to contribute to projects, you will definitely build meaningful connections and may even gain an advantage before the next bull market. Focus on learning and improving yourself.
4. Become a crypto user. Be a true crypto user. Those who trade on Uniswap, register ENS names, and donate to Gitcoin have received substantial rewards from airdrops. You can earn the best returns in the world and gain ownership of key protocols. By becoming a cryptocurrency user, you are preparing for the next bull market.
5. Make friends. The bear market is when the crypto community huddles together for warmth during the winter of the crypto industry. It’s time to find your community and investment rhythm, which will pay off in various ways in the future; the true value of the crypto journey lies in the friends you make along the way.