Photo courtesy Art Rachen on Unsplash.
In the year 2021, there was euphoria in the Crypto markets. The price of Bitcoin has touched $69,000 in the month of November 2021. There was fear of missing out (FOMO) and all the investment talks’ veered around cryptocurrency. There were advertisements all around and people were investing in cryptocurrencies in droves.
Come to the year 2022 and the mood has turned somber. The price of Bitcoin has dropped and is hovering around $30,000. The bears have taken complete control of the market. Most of the altcoins have lost value falling from their all-time high, thereby dampening the investor confidence in cryptocurrencies. The arrival of the crypto bear market has taken the newbie investors by surprise and all their investment calculations and projections have gone haywire.
The market cap of cryptocurrencies is around $1.7 trillion; there are around 18,140 cryptocurrencies and 460 crypto exchanges. There has been a clamor for regulating cryptocurrencies. The traditional financial system is about to connect with cryptocurrencies and people fear there could be a spillover effect from the crypto ecosystem that may cause some instability.
The companies connected with cryptocurrencies have been aggressively marketing for the past 2 years often utilizing the fame of the movie stars to draw attention. Advertisements often claimed and portrayed investing in cryptos to be simple where money could be made easily. The crypto winter has demonstrated that this is not the case. As has happened recently the stable coin Terra Luna is no longer valuable thereby adding to the panic of the investors.
The Indian government in its budget for 2022 imposed a 30% income tax on all virtual digital assets and a TDS of 1% on each transaction. The losses too can’t be carried forward or set off. The increased cost of trading has also led to some cooling-off effects in cryptocurrencies.
Investors should be disciplined and invest for the long term. They should not worry about timing the markets. They should invest according to their life goals and have not more than 3-4% of their portfolio in cryptocurrencies as these are very volatile.
There are certain things that the investors can do during the crypto bear market and make most of the opportunity that arises.
1) Use Rupee or Dollar-cost averaging and buy the dip-
The investor may have bought cryptocurrency at a higher price. Now that the price has come down in the bear market; what the investor can do is add more to their portfolio average out the price and utilize the principle of rupee cost averaging or dollar-cost averaging. Suppose you wish to purchase crypto for $4000 and are not aware of where the bottom or the minimum price would be. It is best to purchase in tranches; like in five tranches of $800 or ten tranches of $400. The crypto can be bought on dips and when the market turns and prices start rising again you will certainly make a healthy profit.
2) Do thorough research-
During the bull market, everyone invested just on the basis of rumors, and the prices of all cryptocurrencies were heading north. People invested based on tips from WhatsApp groups or recommendations from friends and relatives without even trying to find out if they were competent enough to give recommendations.
In the bear market, it is better to sit down and do a thorough study of cryptocurrencies and what their future uses are likely to be. If the cryptocurrencies are around for a sufficient period of time see their charts and the price movements. Try to learn technical analysis and you will know when to enter crypto. The overbought and oversold situations will be amply clear.
3) Always maintain your asset allocation-
Keep the portfolio diversified across cryptocurrencies and above all maintain a proper asset allocation. Asset allocation is the strategy where an investor tries to balance the risk/ reward in their portfolio by adjusting the percentage of each asset according to their risk tolerance. This is according to the investors’ goals, risk profile, and investment time horizon. The investor can be invested across market segments like stocks, bonds, fixed deposits, and cryptocurrencies according to their risk profile so that the fall in crypto prices would not affect them much.
4) Don’t be anxious to sell-
It is natural to be overcome by emotions and let fear overtake you. This way you can sell all the cryptocurrencies that you have. But try to recollect why you invested in the first place. It was to improve your financial well-being. Remember that after every bear market there is a bull market and the prices do recover. If the crypto that you have purchased is proving to be useful and solving real-world use cases then it would definitely recover in price.
There are many companies that are embracing crypto payments like Starbucks, Gucci, Dell, and Newegg, and in the future, more companies will join the list. Crypto would definitely be useful in the Global remittance system where people would easily be able to send remittances at a faster pace, lower price, and at low processing times. Then there are the gaming and decentralized finance (Defi) spaces that appear to be attractive.
Nathan Rothschild had stated, “The time to buy is when there’s blood in the streets.” Individuals can consider making staggered investments. Blockchain is definitely the technology of the future. It makes sense to invest in a disciplined manner in the crypto bear market and reap the rewards later when the markets turn around.