Why You Shouldn’t Fear Bear Markets

Bear markets are an inevitable part of any economic cycle, every period of successive highs will always be followed by a period of decline — however short or long that may be.

Odds are that right now, we are in the midst of a weak cryptocurrency bear market without a prevailing long-term bull market. Trading volumes are down, major cryptocurrencies have dropped by more than 20% from their recent peaks, and shares in the largest Bitcoin fund (Grayscale Bitcoin Trust) have been trading at a discount for most of the year — indicating a skew towards oversupply.

Likewise, the average Bitcoin hash rate has almost halved in the last two months, while supply for ASIC mining hardware skyrocketed amidst waning demand — indicating miner capitulation.

But while many inexperienced investors dread the thought of a potential bear market, those that have witnessed several market cycles and have some experience under their belts are readying their wallets for a buying frenzy. And contrary to what you might expect, bear markets generally present some of the best buying opportunities.

Ebbs and Flow

Cryptocurrency markets are notoriously volatile — both to their benefit and detriment. They are also strongly driven by waves of FUD and FOMO, which can trigger erratic price movements and periods of cascading decline, as well as periods of meteoric growth respectively.

This makes both bull and bear markets a land of opportunities for savvy traders, who are able to spot and exploit patterns in market structure, as well as capitalize on the sometimes predictable market movements that arise from changes in supply and demand.

But for inexperienced traders, bear markets can be a worrisome period. After all, nobody likes experiencing potentially considerable losses on investments — despite the fact that these losses would often be transient, had they managed to hold through the bearish period (at least as far as Bitcoin investments are concerned).

In general, bear markets tend to be shorter than bull ones. According to Forbes, the average bear market lasts just under 10 months, whereas the average bull market lasts considerably longer, at around 2.7 years. As a result, odds are that any period of decline is likely just a temporary period of reprieve within a bull market, rather than a full-blown bear market.

Given that a large proportion of cryptocurrency traders have limited investment experience, many are spooked into exiting their positions at the first sign of turbulence — some of which do so with the intention to buy back later at a lower price (i.e. they attempt to time the market). However, few traders manage to successfully execute this strategy, as the market either recovers (forcing them to re-enter at a higher price) or they get cold feet if the market falls further as predicted.

Meanwhile, experienced traders that have built up their risk tolerance and have a proven track record of following through on strategies without succumbing to emotional bias, instead use bear markets and periods of decline to scoop up undervalued tokens at a discount. Think buying Bitcoin for $3,250 in October 2018, just months after it reached $20,000+.

Indeed, according to LookIntoBitcoin’s ‘Bitcoin Profitable Days’ chart, Bitcoin has had 3901 profitable days out of 4002 days total. This means had you purchased Bitcoin on any random day throughout its history and held until today, there is a 97.5% chance that you would be in profit. These numbers flip when you consider those that sold, since Bitcoin has only been higher than its current price for 2.5% of its lifetime — meaning most sellers made the wrong decision.

Cryptocurrency markets generally transfer money from the impatient to the patient. Those that exit their positions early or on a whim will, on average, lose to those that employ a carefully considered and long-term focused trading strategy. Bear markets amplify this discrepancy, strongly favoring those with a plan while punishing those that act without one.

Overall, drops of ~20%+ are fairly common for volatile assets like Bitcoin and are part and parcel of standard market cycles. But given that Bitcoin has never lost over any 3-year period, it is clear that fortune favors the patient in this case.

Side Note: Fundamentals Always Prevail

Within any market, there is always a wide spectrum of performance among similar assets. Some will perform extraordinarily well, while others will collapse in value — even during a bull market.

The place where an asset falls on the performance spectrum isn’t random but is instead largely determined by its fundamentals — doubly so for potentially disruptive assets like cryptocurrencies.

If an asset addresses a strong unmet need in the market, has significant room for further adoption and has genuinely transformative potential, then it’s almost certainly a far better bet than an asset with no substance or demand. Unfortunately, spotting the difference between these isn’t always straightforward, given that almost every cryptocurrency will be spun as the next big thing and may have a strong marketing strategy behind it.

But it’s important to bear in mind that not everything will recover or appreciate — even in a strong market. It’s a sad fact that a large proportion of cryptocurrencies do not have strong prospects, and shouldn’t necessarily be held long-term. In these cases, it doesn’t pay to have strong hands — but that’s not to say they can’t be profitable in the right scenarios.

If in doubt, check its historical performance. Multiple waves of successive highs over several years will more clearly demonstrate a long-term bullish trend than a single boom and bust cycle commonplace with many overhyped cryptocurrencies. In this case, cutting your losses early or taking profits when opportune can free up capital to invest in real prospects in advance of their next rally.

About Master Ventures

Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.

Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.

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