Why a crypto bear market is the best learning experience
Toppling from its meteoric 2017 highs, bitcoin has certainly been experiencing a bear market. The cryptocurrency market in general has been down, with popular currencies trading at multi-year lows and many of the weaker players being taken out of the market. But why is this a good thing? What can you learn from a bear market?
First of all, it’s important to remember why you invested in the first place. Really understanding your reasoning goes a long way to maximizing your potential gains. If you’re just looking for short-term gains, then a bear market might not help you out. But if you really believe in the future of cryptocurrency, a bear market won’t fase you much.
What constitutes a bear market?
In the institutional investing world, a bear market is any time that market value dips by 20% or more. According to the Stock Trader’s Almanac, the average bear market for the Dow Jones Industrial Average trims 31.1% over 402 trading days. The 2008 financial crisis trimmed a crippling 86% from the Dow.
These bear markets are an inevitable part of any capital market, and it’s up to individual investors to make the most of them. While bear markets are incredibly difficult to predict with absolute certainty, there is no doubt when you’re in one. The issue is the fear that the market — or any particular asset — won’t rise again. In history, it almost always does.
What does a favorable market look like over time?
Over any given period of time, there are three different scenarios that might play out for a given market:
- The first is a long, steady, consistent gain to a certain peak.
- Next is a roller-coaster of ups and downs, culminating in that same peak.
- Finally, imagine the same time period but a flat market until a strong late rally ending in the same peak high value.
Which one of these sounds preferable to you? Many people would choose the first one, a slow and predictable rise over time. In terms of long-term gains, however, this one is worst. Provided you’re earning a steady amount and can buy at certain intervals, each time you buy the value is higher and you end up with less coins.
The preferred situation is probably the least chosen of the three, the final example. If the market stays low and flat for a long time, you end up with the maximum amount of a given cryptocurrency with each purchase. Over time, this one will yield the most net gain.
Unfortunately, these kinds of markets are rare, while the middle example more closely resembles markets over time. Most investors make the mistake of buying at or near the peaks, when things are ‘looking strong,’ and selling near the bottom when panic sets in.
Lessons to learn
A bear market can teach you as an investor to flip your thinking and wait for troughs in the price before buying. Especially if you’ve done your research and are a believer in the product you’re investing in, you can weather the storm and use those dips in value to acquire a larger portfolio of a certain cryptocurrency.
The current crypto bear market actually represents a great opportunity to buy, and most savvy investors are doing just that. If you want to learn from this bear market, the thing to do would be to really do your due diligence and find the currencies or tokens you believe in most and pick up as many as you can.
By taking emotion out of it — and with emotion, the primary driver is fear — you will make an informed decision and, likely, a smart investment. If your goal is a long-term gain, buying during a bear market is the best way to maximize that.
Letting go of fear
At least with standard financial markets, stocks and commodities have always followed that middle model from above, with overall long-term growth that is punctuated by frequent fluctuations and repeated bear markets. If you buy consistently and concentrate on buying during bear markets, you can expect much higher returns over time.
They key to learning from a bear market is not succumbing to the fear of your investment never recovering. You want to get used to the fact that investment markets behave like this, and should be looked at as an opportunity. Many cryptocurrency investors do not have a background in institutional investing, so these are critical lessons to learn.
Many of the top investors have already learned these lessons in traditional financial markets, and many of the same strategies apply to the crypto markets. Learn as much as you can about not only the specific currency you’re investing in, but what institutional investors say about bear markets.
Ultimately, letting go of the fear that comes with the bear market will allow you to turn it into not only a great learning experience but a potentially lucrative one to boot.