Factors that can constitute strong strategy during crypto winter:
1. Risk Management: It is the first and most important strategy. While this is true for any market, it is vital to survive in these market conditions. An effective risk management strategy should focus on managing both systematic as well as unsystematic risks. Those who survive will get rewarded by the market, and the only way to stay is through a thorough risk-management approach.
2. Robust trading strategy: It is believed that the bear market is not dreaded as it presents an opportunity to take long-term positions in good projects at attractive prices. Even though bear markets are not easy for every market participant, the opportunity they offer is immense, and as such, these short-term pains eventually pave the way for long-term gains.
3. Diversification: Diversification has been another critical factor which impeccably helps during crypto winter. During the bear market phase, a diversified portfolio limits the drawdown and makes it relatively easier to survive this painful period, which holds true for any asset class. It is imperative to build a diversified portfolio after thorough research during the bullish phase, the lack of which may come to haunt during a bearish market.
4. Managing Leverage: One thing prevailing in the crypto market is people losing their money owing to leverage. It should be used only by experienced players with proper risk management. Otherwise, it’s a sure-shot way to bankruptcy. Crypto is a highly volatile asset where assets can lose 50-60% of their values in a matter of days, and thus people should deal with leverage with extreme caution.
What to do in a bear market, i.e., a prolonged dip in asset prices?
First and foremost, it is a myth that one can make a profit only in a bull market. Plenty of strategies can be profitable even in a bear market. A bear market, too, presents decent rallies, which can be extremely rewarding. Scalp trading is one strategy which can help generate returns during crypto winter. Another strategy which works exceedingly well for long-term investors is dollar cost averaging if it’s backed by proper research and thorough analysis.
The bear markets are also a good time to invest in strong projects with good fundamentals due to lower prices. It is when investors have low confidence due to prolonged price dip, and as a result, the valuations are attractive.
One common mistake that novice investors or traders make is trying to recover their losses by overtrading. It should be avoided at all costs, as such emotional decisions in trading do not generally end well. Also, Revenge trading can be highly detrimental to a portfolio. People should invest in quality projects, hedge their risks and always have the dry powder to deploy in case of a price drop. People should never go all in or fully invest.
Another factor which helps, especially in the bear market, is observing macroeconomic factors. Crypto markets are not insular to macroeconomic risks (like inflation and interest rates). So, it helps a lot when people assign some weightage to these factors in their overall investment strategy.
One should always look at the risk-return spectrum when it comes to portfolio allocations and an efficient frontier can be a good way to create an optimal portfolio. Ultimately, risk management should be at the core of our investment philosophy because it is risk management, which is often the most overlooked aspect of one’s trading strategy, that decides our longevity in the market.
(The author is Vivekanand Pandey, Co-Founder – Kunji, a crypto asset management platform)