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Knowing which way the market is trending is an essential part of any entry or exit strategy in the world of investing

August 19, 2021

Bull markets are times when the market is exploding upwards. You generally hear everyone talking about the asset classes that are involved. Bull markets can last for several weeks to several months. The key factor to distinguish a bull market is for investors to believe that a sustained uptrend of a market will take effect. The opposite is true for bear markets where investors believe a sustained downtrend will occur[1].

 In crypto, these market trends are highly exaggerated because the market caps are much smaller than traditional markets, such as stocks. Since crypto currently allows immense over-leveraging bets on whether the market will rise or fall, this can cause mass liquidations of assets. When assets are liquidated quickly investors who participated in leverage lose their entire trade and sometimes owe more to cover the costs. Exchanges that offer this service also sometimes scramble to sell to cover a loss which can further increase volatility.

In the latter half of 2020 we saw first hand the impacts of a true bull market – Bitcoin exploded from around 6500$ after the corona fears to nearly 40,000$ by the first week of January 2021. The market had just suffered from a tremendous down-turn and bear market during this time, and the rebound was substantial. 

One of the most difficult aspects of investing is buying during a bear market. However, this is the single best way to create real wealth and generate profits. During the economic downturn the majority or crypto assets were mere fractions of their previous highs. This allowed investors to get into projects at low prices. Investors who believed in the market and bought those dips grew their wealth substantially.

As an example, ADA was around two cents, which has resulted in over a 100x gain for current holders. If an investor had bought BTC in March and never looked until the following March they would be in for a big surprise. They would not have seen the volatility, and the Elon musk inspired crash we are still recovering from. They would only see a 6500$ purchase price and nearly 40,000$ bitcoin today on 7/29/21. 

With this said we will cover how to approach each type of market for the long-term investor. During bear (downtrend) markets it pays to dollar-cost average into the assets you favor the most. The fundamentally strong larger cap crypto projects have a great upside with the least risk. Generally, the top 10-25 crypto assets (in terms of market cap) are the safest bets. Buying such substantial dips can do wonders for lowering an average entry price of an asset, which directly correlates to how much profit you make when you sell an asset. The smart money is here buying the dips with conviction, knowing that when the market sentiment shifts, the reversal will be explosive.

Image courtesy of Coinmarketcap

During Bull markets it is rather easy to get used to chasing soaring prices. This is commonly referred to as FOMO, or Fear Of Missing Out. Bull markets are the time to start looking at the more speculative new small market cap alt coins. These coins take the biggest hit to price during bear markets, but can grow substantially when the market shifts (far more than larger, more stable assets). The big risk of buying small cap coins during bear markets is that some of them never recover. Only the fundamentally strong projects survive, the projects with creative marketing teams, that have built partnerships during bear markets. It pays to research your plays strongly, and avoid those without good long term direction.

Image courtesy of https://medium.com/coinmonks/dollar-cost-averaging-dca-how-profitable-is-this-strategy-really-b4beed886f75

The key takeaway is that it is exceptionally risky to invest large percentages of a portfolio into highly speculative projects that are not already proving themselves. During bear markets one might allocate a small (1-2%) portion of a portfolio to these projects but the more exposure, the more tremendous risk an investor gets exposed to. This is why it is beneficial to focus the brunt of a portfolio on the proven market movers that lead the space, the top 10-25 cryptos. While none of the above is financial advice, this is what has worked for us over time. We have learned that patience is key.

Knowing whether you are in a bull or bear market is a fundamental aspect of investing. Regardless of the market, dollar cost averaging is far and away our most used strategy. Here at CoinBusters we are also gauging the market temperature and making sure we are buying or selling at the most opportune times.

[1] https://www.investopedia.com/insights/digging-deeper-bull-and-bear-markets/#:~:text=Bear%20Market-,A%20bull%20market%20is%20a%20market%20that%20is%20on%20the,stocks%20are%20declining%20in%20value.