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The economy is facing an outlook bleaker than a Welsh weather forecast, and few are rushing to buy risk assets. Here are a few tips for weathering unfavorable market conditions.
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Option #1: Save cash
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There’s no shame in sitting on the sidelines and saving cash or stablecoins.
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When bullish momentum returns, you will have plenty of dry powder to make big allocations. In the meantime, there are still lots of opportunities to earn yield across crypto markets as long as you trust the protocol you’re using.
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But isn’t this timing the market, which is impossible? Possibly. But this is more about spotting momentum and general market trends as opposed to more focused price targeting or calling reversals. Larger trends are easier to spot. However, if that’s a bit risky, there’s another option.
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Option #2: Dollar-cost average (DCA)
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Have you ever been to a physiotherapist with a wrist or back complaint? You’re hoping for a quick and easy cure, but instead, you’re given a sequence of trifling, tedious exercises to do daily for three months.
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Well, dollar-cost averaging is the investing equivalent of that. It’s not sexy or even very interesting but it has a very high chance of working out in your favor given a long enough time horizon. And these days, there are automated bots that do it for you, so that helps.
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These first two options could be combined to create a strategy. For example, putting 50% aside in stablecoins waiting for bullish momentum to return, and putting 50% into the market in a price-agnostic manner. This tactic allows for some exposure to the market, which can help in resisting FOMO when the market rallies, even though your overall thesis remains bearish.
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Option #3: Find assets that outperform
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Decentralized perpetual exchanges have been the darlings of the bear market. Following the FTX scandal, traders flocked to decentralized options, crying, “where can I short?” Many went to protocols such as GMX and ApeX, which are up about 70 and 50% this year, respectively.
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There will always be assets that outperform during bear markets but finding them is labor-intensive and going long during a downtrend is risky. So this strategy should be approached with caution and is best used by investors with the nous and experience to spot a good project and apply solid risk management.
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Option #4: Use derivatives
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There are many strategies using derivatives and combinations of contracts to ensure profit in down-trending and sideways markets. For example, using options to create a “bear put spread” that allows you to make money when an asset falls by locking in a good selling price at a reduced rate.
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There are also pseudo-delta-neutral strategies that advanced yield farmers use to long and short both sides of a liquidity pool. This reduces their exposure to the volatility of the assets they are holding so they can collect the pool fees while reducing their downside exposure.
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The hard part is not so much actioning these strategies — there are instructions easily available online — but managing them and sizing your position. The management and position sizes can make or break these kinds of trades. They can be profitable in a bear market but should be used with caution.
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Option #5: Keep your head on while others are losing theirs
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Unless you’re a free climber like Alex Honnald, you wouldn’t attempt to scale any kind of cliff without good safety equipment. The same goes for crypto investing.
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What safety equipment? Well, an emergency fund that is kept in cash is a good starting point. It should cover about six months of basic living expenses and shouldn’t be used for yield, borrowed against or staked.
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You should also have a sinking fund, kept in similar circumstances (read: highly liquid) to pay for large expenses that crop up such as car repairs or, say, getting stuck in expensive Singapore for a week while your outgoing visa is delayed. The sinking fund will give you that extra buffer of support so you can keep your emergency fund pristine and use it for genuine emergencies only.
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Finally, recessions are hard, so remember to go look after your mental health. If you are worried about your portfolio or constantly checking the price, then you are making yourself less healthy and reducing the chance you will make good decisions when the time comes. Therefore, go outside, turn off the computer and play around.
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Develop your life outside your investing and trading activities. If you don’t do that, where will you go when you finally make it?
