Bitcoin is down as much as 40% from recent highs, so it’s understandable that many fear the onset of a prolonged bear market. It’s not yet clear whether bitcoin will recover soon or if the current situation will turn into a long-term decline. In any case, it’s better to be prepared for a bear market than to try to predict one.
There are two clear facts we have learned from the past bear markets. First, bitcoin always recovers and emerges stronger than ever before. Second, patience and having a long-term outlook pay off.
What’s the best strategy for a bitcoin bear market?
In 2017, many people thought bitcoin was going to drop back to sub-$1,000 levels, but it never happened. Investors learned they shouldn’t try to time the market and predict bitcoin’s price moves because they would only end up with less bitcoin and more regrets.
The best strategy to build up a solid bitcoin position over recent years has been to dollar cost average (DCA) – to buy bitcoin regularly, no matter where the price stands at the time. Below is an illustration of the same investment of $2,100 deployed either in a lump sum or a DCA of $10 purchases every week, starting from 2017’s all-time high of $19,500. The DCA strategy would have generated more than twice the gains of the lump sum investment.
Adopting this DCA approach essentially means saving in bitcoin. The main benefit of this strategy is the shift in mindset: Investors no longer stress about the volatility and the fluctuating value of their stack in fiat terms. Instead, they focus on the ever-increasing amount of bitcoin in their wallet.
As DCA requires a long-term outlook, it stops investors from panicking during dramatic price drops and, to a certain extent, they start to welcome opportunities to stack cheaply. The popularity of the DCA approach can be seen by the many bitcoin-centric products that offer it. (Indeed, Trezor users will be able to DCA with Invity, the Trezor Suite-native exchange aggregator, as it opens up DCA to all its users.)
Besides DCA, there are other important rules to navigate safely through the next bear market:
- Take a satoshi mindset. People are used to accounting in full bitcoins, but there are 100 million satoshis in one full bitcoin. Switching to a satoshi mindset helps investors to appreciate how much bitcoin they really have. Every satoshi in a wallet matters.
- Do not trade. First-time traders usually aim to buy low and sell high. But somehow they end up doing the opposite because their emotions get in the way. Trading is a very stressful zero-sum game, where most people lose money. A recent Business Insider article noted that between 70% and 97% of day traders end up losing their money. Only experienced traders and exchanges end up in profit.
- Do not leave coins on exchanges. During a tumultuous time, such as a raging bear market, exchanges can end up insolvent. This has happened many times in the past, with Mt. Gox, QuadrigaCX and Cryptopia being only the largest examples. “Not your keys, not your coins” always – always – applies. Use a battle-tested, open-source hardware wallet such as Trezor to stay safe.
- Do not rely on bitcoin pumping in the short term. Investors, whose personal or business plans are conditional on bitcoin pumping, may be setting themselves up for a huge disappointment. Remember that prices can fall at any time. Investors should not keep all their money in bitcoin if they need it for paying for near-term personal or business expenses.
- Don’t obsess over all-time highs but do look at the yearly lows. This change of perspective should make it clear that bitcoin makes tremendous progress over the course of time, even if it’s a bumpy ride sometimes.
Bitcoin will make it
There is one further thing that is quite certain: Whether a bear market is upon us or not, bitcoin will survive. Investors should not worry about bitcoin as such, but should worry about how they’ll leverage the opportunities their bitcoin brings in a bear market. Following the few simple rules outlined above should help investors emerge with a better bitcoin position.
Whether they choose to DCA their way to a bitcoin fortune or try to buy all the dips, investors should not forget the ultimate rule: Safeguard coins with an open-source hardware wallet. An investment into best-in-class security pays for itself many times over.