A guide to making money in a bear market

IMPORTANT NOTICE: This blog does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.

  • In a bear market, a solid investment strategy is the key to continue making money 
  • There are several strategies available to investors during bear markets, including crypto trading, yield farming investment strategies, dollar cost averaging and passive income crypto strategies
  • Passive income strategies, such as those offered by Yield App, could be a suitable choice for crypto investors who don't have the time or expertise to trade but want to make money in a bear market
  • During bear markets, investors tend to exhibit emotional responses, often selling their holdings when the price is down, therefore crystallizing their losses
  • It is important to conduct thorough due diligence when choosing a crypto platform for passive income in order to avoid counterparty risks, especially when the market is volatile
  • An intelligently designed and effective passive income strategy can open the door to true financial freedom during market declines and beyond

Many crypto investors have made significant gains during the latest bull market in crypto, but this is only half the battle. Holding on to and continuing to grow this wealth during a bear market is one of the keys to achieving financial freedom.

It can be exhilarating to watch one's portfolio go up during bull markets. However, when prices fall, investors tend to react in an emotional manner, often selling at a lower price instead of riding out the bear market and holding on for the long term.

As such, during market downturns, it is extremely important to have a solid investment strategy to avoid losing a portion or all of your crypto assets and continue making money in a bear market

There are a number of investment strategies that can help investors hold on to the gains made during the bull market, while also continuing to grow their portfolios despite the market correction.

What are bear markets?

A bear market is a term used to describe price movements in the stock market, defined by a period in which stock prices fall 20% or more from their previous highs. Bear markets occur regularly and tend to last for a prolonged period of time (months or years).

In cryptocurrency markets, prices of single coins and tokens can fluctuate 20% up or down in a shorter period of time due to the increased volatility of cryptocurrencies. This shorter-term fluctuation is usually considered a market correction rather than a proper bear market. This volatility can offer opportunities, but it also creates additional risks.

In contrast to bear markets, bull markets mark an extended period of time when stock prices rise continuously following a bear-market trough. In the stock market, a rise in stock prices of 20% after two declines of 20% each is considered a bull market.

The cryptocurrency space has already experienced three bull markets since the birth of Bitcoin in 2009 and is currently in the midst of its third bear market, having seen the price of Bitcoin fall nearly 70% from its all-time-high.

Preserving and growing crypto millions in bear markets

It has been common for crypto bull markets to result in significant gains for early adopters of successful digital assets. For example, those who were early enough to invest in Bitcoin at $100 back in April 2013 would be sitting on gains of 21,077% at today's price (as of 22 August 2022), despite the price correction resulting from the latest market downturn.

Many investors who generated strong gains during a crypto bull market are now sitting on significant gains, and in many cases, millions, since profits in crypto markets have far exceeded those in the stock market historically. According to CNBC's Millionaire Survey, a staggering 83% of millennial millionaires own crypto.

At the same time, crypto adoption is growing. The Global Crypto Adoption Index compiled by Chainalysis jumped 880% in 2021 in one year and is up over 2,300% since Q3 2019.

The rate of adoption of digital assets within millennial millionaire demographics is, perhaps, unsurprising, considering 2021 saw a significant bull market in crypto. In the 2022 crypto bear market that followed, however, volatility and market sentiment may have made it more difficult to minimize risk and execute stable crypto investment strategies. 

Recent CNBC data indicates that many millennial millionaires plan to either hold on to their digital investments (39%) or allocate even more to their portfolios (48%). What's the best strategy for an investor with a large lump sum to continue making money in a bear market, though? Let's take a look at some of the most popular bear market investment strategies.

Strategies to make money in a bear market

Crypto trading

For many new crypto millionaires, the idea of trading on cryptocurrency exchanges can be an attractive option with the promise of potentially sky-high returns.

A relatively small allocation of $5,000, for example, could have resulted in a return of $937,500 if invested in the Sandbox project in November 2020, when $SAND was trading at around $0.04 — provided that investors disposed of holdings one year later at $7.50. 

It's important to remember, however, that the crypto market is highly volatile and is, to a large degree, highly speculative. An individual that purchased $SAND at $7.50, for example, would see their position value drop by 86% today, after the price of $SAND fell to $1.03 (22 August 2022) as a result of the latest bear market.

Clearly, market entry point timing is critical with regard to investing in crypto. Determining exactly when to enter digital asset markets or purchase specific assets, however, can be an extremely difficult if not impossible task. 

As such, it's important to conduct thorough research before creating a crypto trading strategy, and then ensure this strategy is followed closely at all times, especially during bear markets.

READ: How to make money with cryptocurrency

Yield farming investment strategies

Yield farming, also referred to as liquidity mining, is the process of contributing digital assets to collective “pools” of assets, referred to as liquidity pools, or similar practices.

In simple terms, yield farming refers to a process through which an investor will move assets throughout the decentralized finance (DeFi) ecosystem and put them to use in order to generate profit. 

The yield farming process usually begins with the digital asset holder, often referred to as a “liquidity provider” depositing tokens into a “liquidity pool” within a protocol. Liquidity pools are collectivized pools of assets that are used to facilitate the decentralized instant exchange of crypto assets or other specific functions within the DeFi ecosystem.

By providing liquidity to the pool, a liquidity provider receives liquidity provider tokens, or LP tokens, that represent their contribution. These tokens can then be deposited into other liquidity pools to earn additional rewards, ad infinitum.

READ: How to spot if a crypto opportunity is too good to be true?

Yield farming can be a lucrative strategy, but like cryptocurrency trading, can be extremely time-consuming and requires a high level of knowledge and understanding of the DeFi ecosystem. 

This strategy grew in popularity with the advent of DeFi during the 2020-21 bull market in crypto. It is possible to utilize a yield farming strategy during a bear market, but it's important to be aware that the yields available in DeFi during the recent market downturn have contracted significantly.

There are also a variety of additional risks involved in yield farming practices not prevalent in stock trading, including the risk of impermanent loss. As such, it may not be a suitable investment strategy for many crypto investors, especially those with little experience in the crypto space. Additionally, it may not be as attractive in a bear market scenario.

Putting idle crypto assets to work during bear markets

A far simpler way for many crypto investors to continue growing a crypto portfolio and make gains in a bear market or a bull market is through passive income strategies, such as the ones offered by digital wealth platforms like Yield App. 

The DeFi ecosystem presents investors with a broad spectrum of investment opportunities that can be used to generate potential income from idle digital assets in a bear market scenario.

Creating and executing an effective DeFi or yield farming investment strategy with a satisfactory level of risk tolerance, however, requires specialized knowledge and extensive due diligence.

For those new to the digital asset space or those who don't have the time to research new projects, the biggest and most established cryptocurrencies, such as BTC or ETH, represent a simple, streamlined investment opportunity.

While major mainstream cryptocurrencies offer potential long-term gains, these assets are idle in the sense that they do not provide investors with any additional value after purchase. Digital asset portfolios that consist of these assets typically appreciate in value over time as cumulative crypto market cap increases. However, by simply holding these assets in a wallet it's not possible to generate additional income from long-term holding.

READ: Is it really possible to retire on passive income from digital assets?

Staking these assets in a portfolio such as those offered by Yield App, however, can bring regular compounding interest, which can represent a means of generating significant ongoing profit for a large portfolio. 

A relatively large digital asset portfolio, for example, with an interest rate of just 5% and daily compounding on an initial allocation of 10 BTC could provide an investor with a monthly passive income of 0.04 BTC, which is currently worth $848 at a BTC price of $21,210, as of 22 August 2022. As the price of BTC appreciates, so too would the regular passive income generated by a portfolio deployed via Yield App.

Dollar cost averaging

Dollar cost averaging is the practice of systematically allocating the same amount of capital to one's investment portfolios spaced out over equal time periods. For example, one could regularly invest $100 worth of an asset every month or every week.

Dollar cost averaging is a useful strategy during both bear markets and bull markets, as it has been proven to yield better returns than trying to time the market. However, during bear markets, this investment strategy can be particularly useful as it takes the emotion out of investing.

Emotional responses can be detrimental to potential investment returns, especially during a bear market. When a stock market or cryptocurrency market is rising, it is natural to us as humans to want to buy more of the asset that is performing well.

Conversely, during a falling market, our emotions dictate that we sell our holding, even if it will lead us to lose money. This can lead to crystallized losses and means the investor cannot take advantage of rising prices when the market recovers.

A dollar cost averaging strategy can help an investor profit in a bear market by buying assets at a lower overall price. It is much easier to dollar cost average than trying to time market entry, while this strategy also spreads the risk by ensuring each allocation is a small proportion of the overall investment portfolio.

Stablecoin investment strategies

For investors with a lower risk tolerance who may be seeking a more reliable passive income during bear markets, a strategy that includes stablecoins pegged to fiat currencies, such as USDT or USDC, could prove to be the right choice.

Such a strategy would allow the investor to escape the market volatility of digital assets while benefiting from competitive interest rates. In an inflationary environment combined with a bear market, such as we find ourselves in today, a stablecoin strategy can help reduce volatility while also preserving the buying power of one's assets, which would otherwise have been eroded by high inflation.

Assuming an annual interest rate of 10% and daily compounding interest, an investment of $100,000 equivalent into a passive stablecoin strategy could generate a passive income of around $837 per month. An allocation of $500,000 could potentially generate a comfortable monthly income of $4,183, while $1,000,000 would generate an impressive $8,367 per month.

It's important to remember, however, that although stablecoins are the least volatile type of digital asset, they are not without risk, as shown by the collapse of the UST stablecoin earlier in 2022. It's still possible to lose money from an allocation to stablecoins and thorough due diligence is always advised.

Passive income from crypto

Combining a stablecoin passive income strategy with one involving other digital assets could help create diversification in the overall portfolio, spreading the risk while ensuring some reliable monthly income.

During a bear market, this can also help an investor gain exposure to the growth and return potential of the more volatile crypto assets. Combined with a dollar cost averaging strategy described above, a passive income approach could help an investor make the most of market downturns and continue earning money in a bear market, while also participating in the potential upside during a bull market.

READ: How to become a stablecoin millionaire

Choosing a crypto earn platform

There are many crypto earn platforms available that offer attractive yields on stablecoins and other crypto assets. Putting crypto assets to work in a passive income strategy via digital wealth platforms such as Yield App eliminates self-custody risks and provides an extra layer of security, providing investors with peace of mind and confidence in the safety of their crypto portfolio.

However, as with all other cryptocurrency investments, it is important to conduct thorough due diligence before selecting a crypto earn platform for your passive income strategy, particularly in light of recent liquidity issues in the space.

In a recent piece published on the Yield App blog, our CIO Lucas Kiely outlined several ways to spot if a crypto investment opportunity is too good to be true. This includes ensuring that the yield on offer is sustainable given the prevailing market conditions and that risk management and due diligence are at the top of the company's agenda.

For those who prefer video content, it's worth watching a recording of Lucas's presentation at a crypto event in Rome on our YouTube channel.

Risk assessment and avoiding losses during a bear market

Volatility within the cryptocurrency markets can, at a glance, appear to present highly lucrative investment opportunities — especially in hindsight. While some high-profile digital assets may demonstrate significant appreciation in value, just as many assets lose value rapidly.

In addition, the rapidly evolving crypto market is in a constant state of regulatory flux. New financial products and applications of blockchain technology within the digital asset market must be classified and regulated by regulatory bodies, resulting in a legislative gray zone in which potentially fraudulent crypto projects and platforms operate.

READ: What is crypto arbitrage trading?

When investing in digital assets, it's critical to perform extensive due diligence and risk assessment. Accurate due diligence and risk profiling, however, can be difficult. Platforms like Yield App conduct this due diligence on behalf of their customers, so they don't have to put in the hours themselves.

In bear market conditions, vulnerabilities can emerge that create additional risks for cryptocurrency investors. As such, it is particularly important to focus on enhanced due diligence areas such as counterparty and credit risk when investing in a bear market.

Key takeaways

There are several strategies available for preserving and growing digital wealth that can be leveraged by individuals with significant crypto portfolios to make money in a bear market. The choice of strategy depends on knowledge and experience, risk tolerance, and expectations. 

While the bear market strategies presented within this article provide insight into different methods of investing idle crypto assets, they share a common factor — all leverage the potential of idle assets in order to generate ongoing passive income or continuous additional profit. 

An intelligently designed and effective passive income strategy that leverages the value of idle crypto assets in order to generate additional gains during a bear market and beyond can open the door to true financial freedom.

Employing such a bear market investment strategy can help crypto investors to preserve portfolio value, increase holdings, and grow wealth regardless of market conditions. 

Do you want to earn a secure and sustainable yield on your crypto during the bear market? Sign up for a Yield App account today!

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