>> 6 Strategies Crypto Investors Should Consider in Market Downturns
Over the past few months, we have witnessed cryptocurrency prices rocket to the moon and plummet back to earth. Since the beginning of 2018, the market has lost over 60% of its value, catalyzed by uncertainty and previous periods of hyper growth.This downward trend for an extended time is what is known in common terminology as a bear market. A bear market is typically a time in which investment prices fall by 20% or more. Cryptocurrency is currently still in a bear-ish market, though in the past few weeks we have seen some signs of recovery. Nevertheless, this is not the first nor the last bear market to hit this new asset class, and it behooves all investors to be duly prepared.
Millennials Bear Greatest Burden in Crypto Bear Market
This bear market has been found to affect millennials in particular as estimates show that by the end of this year, one in three millennials will own some form of cryptocurrency. For many millennials this is the first down market they have faced. The volatility will cause many to panic sell and leave the market altogether. But a bear market is in no way a death knell. Despite the recent drastic decreases in price, selling based on emotion alone is the last thing you want to do. With the right strategy millennials could face the bear market head-on and still come out on top. We’ll cover some strategies for approaching bear markets with confidence in this article — but there are many different approaches to take, so it’s up to you to find the one that best suits your investment goals and needs.
1. Keep calm and do your homework
As part of financial challenges occurring over the last decade, millennials face hurdles in a new investment market as they approach their mid-career years. Despite outnumbering previous generations in quantity, millennials have lower salaries and levels of employment. Is it any wonder that millennials are more likely to put their money into cryptocurrencies rather than “slow and steady” pension funds? When we combine the recent decrease in cryptocurrency values with young and less experienced investors, there is a decent likelihood of a bear market having negative effects.
When the market is going through a downtrend keeping your emotions at bay could work to your advantage. In stocks, the average bear market lasts for about 15 months. Within those 15 months investors who remain calm and have plans in place survive, while those without a plan either suffer significant losses or leave the market altogether. Try to stay calm and objective, and make sure to do your homework. Think long term — do you believe this asset will appreciate in the next 5 years? Don’t underestimate the power of technical analysis — if you are interested in strategies like margin trading make sure to do your research to gain a deeper understanding of the how and why.
>> Remember: educating yourself will help you refrain from panic selling. Do some research on the assets you are interested in and set up an investment plan.
In support of Tip 1 — here are a few important terms and indicators:
- Beta is a measure of risk, or volatility, in your portfolio compared to the rest of the market. You can calculate beta by using a method called regression analysis. This is useful for evaluating the trading tendencies of an asset.
- Another useful indicator is the Sharpe Ratio, which refers to the average return earned beyond the risk-free rate per total risk. The Sharpe Ratio assists investors with defining the relationship between risk and return and is widely used today. The standard Sharpe Ratio equation is as follows:
Sharpe ratio = (Mean portfolio return − Risk-free rate)/Standard deviation of portfolio return
- Then there are the moving averages. Moving averages refer to the tracking and identifying of trends by following price fluctuations. This indicator is widely used in technical analysis and helps to remove unnecessary information or distractions from random price fluctuations. There are two types of moving averages which are used: the simple moving average (SMA) and the exponential moving average (EMA). The simple moving average is the average of a security over a set number of time periods while the exponential moving average gives more importance to recent prices.
>> Remember: indicators and technical analysis will help you establish facts about your investments. Make use of them when setting up your investment plan.
2. Strength in diversity
An essential strategy for any market, especially in a downturn, is to diversify. In Harry Markowitz’s paper Portfolio Selection he describes his “Modern Portfolio Theory” which states that risk-averse investors can set up their portfolios in a way that will maximize the expected return, based on an accepted amount of risk. The paper notes that higher rewards are naturally accompanied by some degree of risk. By accepting this risk you can set up a portfolio which is diversified by combining more traditional investments such as stocks and bonds with crypto and lower your beta and increase returns. In Crypto Assets: The Innovative Investor’s Guide to Bitcoin and Beyond authors Chris Burniske and Jack Tatar describe three kinds of investors that existed in the 2008 bear market:
- Aggressive investors typically have portfolios which are divided into 90% diversified stock and 10% fixed income
- Moderate investors divide their portfolios into 70% diversified stock and 30% fixed income
- Conservative investors divide into 50% diversified stock and 50% fixed income
Diversifying your portfolio with a conservative investment outlook helps to provide stability during the overall downtrend and sets you up to play the ‘long game’. Diversification doesn’t just include the type of assets in your portfolio but also refers to how long you keep them: spread your investments over both short and long term outputs. Another strategy is called ‘scalping’, which refers to making profit off of small price movements. If you have the time to trade regularly and want a more aggressive approach this could be a good approach to try during a bear market.
>> Remember: diversify your portfolio to maximize your expected return by combining more traditional investments like stocks with crypto to lower your beta.
3. Minimize your debt
The next step in your bear-market ‘survive to thrive’ plan relates to leverage and debt. The problem is that debt can be a crushing burden during a challenging economic period. This is particularly true of millennials as research shows that two-thirds have at least one source of long-term debt, typically divided between student loans, car loans or home mortgages. 30% of this group has debt with more than one source. It’s critical for millennials trying to make it through the bear market to remove and avoid adding any new debt.
>> Remember: Avoiding debt helps you stick to your investment plan in turbulent times.
4. Rebalance your portfolio
Rebalancing your portfolio might be a more suitable way to help minimize losses. Rebalancing your portfolio refers to selling some of what has done well and buying some of what has recently depreciated with the intent of having it grow slowly (coming back around to short and long-term diversification). This typically consists of turning to safer havens such as adjusting the percentage of bonds you hold upwards or by shorting stocks through a type of exchange traded fund which will profit from a fall in value. Crypto shorting strategies are also possible, however, this approach should be left to experienced traders as significant losses could occur.
>> Remember: an important part of rebalancing your portfolio is building up your cash reserves and ranking your non-investment capital needs in terms of importance.
5. Buy, but buy smart
In a bear market, one person’s trash can be another’s treasure. In a time when many token holders are beginning to sell impulsively, an investor with a keen eye for opportunity could benefit greatly. The panic selling of tokens, stocks and bonds offer investors the unique chance to purchase assets at lower costs, with the idea of appreciation in value in the future. The importance here is to be able to differentiate between tokens or assets which are being sold and will continue to depreciate after the bear market has come to an end, and those that are at a sold at a discount but have a good chance of appreciating. Cheap does not always equal valuable. Acquaint yourself with the market and look for value — find companies you really believe in, long-term, with strong teams and great product ideas. They may likely come back around. Finding the balance here could be the key to prospering when the market rebounds.
>> Remember: look out for opportunities to buy. Try to find assets which are at a lower cost due to the bear market, but which will appreciate in the medium to long term.
6. If all else fails, play dead
Some of these more actively involved strategies can be intimidating to less experienced investors. “Playing dead” is method which holds all assets without trading. Another alternative method is to find a job with a crypto company, many of which pay in cryptocurrencies that could play heavily in your favor when the market turns.
Volatility is a natural part of investment and it is imperative to remember that bear markets, while intimidating, are also temporary. In the 1973’s bear market the Dow Jones dropped by 48%. The dotcom bubble of the nineties burst in the early 2000s and the NASDAQ index dropped 78% taking several years to come back up. Millennials dealing with the crypto bear market need not fear losses as measured in prior bear markets, so long as they have prepared appropriately and approach investing with calm and patience. By choosing one (or a combination of) the strategies discussed here it can be possible to profit during a time when others fail. By diversifying effectively, minimizing debt and rebalancing your portfolio during a bearish period it can be an opportunity to return stronger during the next bull run.
Whichever strategy you choose, welcome the volatility of the bear market as an opportunity. After all, as super investor and business magnate Warren Buffett once said:
“If you expect to continue to purchase stocks throughout your life, you should welcome price declines as a way to add stocks more cheaply to your portfolio.”
Disclaimer: Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. This press release is for informational purposes only, and is not financial advice. Future profits are not implied nor guaranteed, past performance does not guarantee future outcome. The information does not constitute investment advice or an offer to invest. Caviar tokens are not, and will not, be registered with the SEC, and are not offered or sold to persons and entities from the USA and the Cayman Islands.
Millennials Take Note: Bear Markets Have Their Benefits was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.