As an investor, it is imperative to understand that a bear market is part of the economic cycle as just much as a bull market. Therefore, the best way to weather a bear market is to be prepared for one.
What if I said that one of the best times to make money in any market is during a bear market? Successfully navigating a bear market is dependent on the mindset of the investor. So in this guide, we’ll discuss three things people tend to get wrong about bear markets.
Mistake #1: Selling Most/All Your Assets
When crypto is hitting all-time highs in a bull market, everyone is experiencing positive emotions. Everyone is profiting. As much as it may feel otherwise, bear markets provide one of the biggest opportunities for wealth transfers. When prices are plummeting and we enter a recession, negative emotions become a prominent driver of investment decisions. One of the most powerful emotions that leads to the worst investment decisions is fear. Fear of missing out, fear of being wrong, and fear of losing money. Primarily, in a bear market, people start to sell their assets in a bid to minimize their losses. For a sale to occur, there must be a willing buyer. This triggers a transfer of wealth from the fear-stricken sellers to the pragmatic buyers.
A tip to help you shift from being a seller to a buyer in a bear market is that, in a bear market, you accumulate more for less. This is contrary to a bull market where we accumulate less for more. This concept presents a great opportunity for wealth generation over time. You just need to have liquidity available to take advantage.
Mistake #2: Timing The Market Bottom
Markets are influenced by market participants. Participants consist of individual retail investors like you and me, and large-scale institutional investors. We can assume that every investor participating in a market does so to reap a profit. They do so by acting on how they believe the price will reflect the value of an underlying asset at some point in the future. Every action by participants in the market, in the form of a buy or sell order, exerts a force on the equilibrium of current prices. Therefore, we can assume that every market participant acting on their own beliefs acts as a force on market prices.
Understanding this concept has profound implications for trying to time the market, whether in an uptrend or downtrend. One should remain aware of what the thoughts of the participants are. What is their level of optimism? Of course, it is impossible to consider the thoughts of each investor, therefore making it impossible to time the market bottom. What we can do, however, is take a broad look at the market sentiment and place our bids (and asks) accordingly.
Rather than trying to time the bottom, it may be best to adopt a strategy such as a dollar-cost average buying strategy or set a recurring buy for a dollar amount per period.
Mistake #3: Letting Emotions Get the Best of You
Logic and facts are an integral part of maintaining the mindset required to generate wealth. Unfortunately, during a bear market, the crowd tends to be driven by fear. Fear is to be expected, but fear-based selling comes as a result of beliefs that overpower logic and facts. Beliefs form and propel our mindsets. Therefore, to adopt an appropriate mindset to navigate a bear market, we need to develop appropriate beliefs. Here are some suggested ideas to help form beliefs to get you through a bear market:
1) Anything can happen. Your crypto can plummet 100% overnight. Therefore, only invest what you can afford to lose, and understand the inherent risks of investing. The inherent risk is loss of capital.
2) We are still early. Many feel the fear of missing out on the major Bitcoin bull run. Therefore, they try to catch the “next bitcoin” and go all-in on cryptos they think will “moon”. This is highly risky and typically ends up as lost capital in the subsequent bear market. However, if one is against a strategy to efficiently deploy capital into crypto with proven utility and security, then wealth can be created.
3) Consistent investing practices are key to success. If you are going to make money in crypto, you need to adopt and follow a consistent investment strategy.
Bear markets can be challenging to experience for even the most seasoned investment veterans. Nobody likes to lose money.
At the base of any investment decision needs to be a foundation built on a solid belief system and thought processes based on accurate information. These principles should guide you to not fall for the top three things people get wrong about the bear market and welcome it as an opportunity instead.