How to Make Money in a Bear Market

MORITZ PUTZHAMMER

21 September 20227 min read

Table of contents

With geopolitical turmoil in Europe and elsewhere, a strong dollar, the US Fed raising interest rates, inflation, a schizophrenic S&P 500, high energy prices, and supply-chain bottlenecks and shortages, investing in crypto isn’t as easy as it used to be. Even Ethereum can’t seem to catch a break, despite news of their recent Merge, which sent the price of ETH down almost 19%.  To add insult to injury, we’re deep into a crypto winter.

What’s the crypto investor to do? Can you make money during a bear market, or even take profit? Are you better off HODLing? Or DCAing to build your stacks over time? Believe it or not, there are ways to beat the bear market, but it’s going to take a fair bit of creativity and, frankly, a smidgeon of luck. But it’s possible.

In this article, we’ll take a look at crypto bear market basics and see how they compare with a bull market before exploring some of the possible strategies for making money in a crypto bear market, ranging from earning passive income to short selling or margin trading.

What is a Crypto Bear Market?

In very basic terms, a crypto bear market is a period of low prices or sustained falling prices. Typically, supply is greater than demand and investor confidence is low, resulting in “bears” who are reluctant to trade. The end of a bear market can be difficult to predict since it’s often based on a number of factors, some of which work in conjunction with each other.

It’s important to note, though, that bear markets are not the same thing as corrections. The latter are short-term trends that usually last no longer than two months. When the crypto market is in a correction, value investors often have the chance to find a good entry point, unlike in a crypto bear market in which such opportunities are infrequently available. Falling markets can make it challenging for investors to recoup losses, unless they use certain strategies such as margin trading to amply their positions and take profits.

What Causes a Crypto Bear Market?

What exactly causes a bear market? It’s a good question, one that has a number of answers. Let’s take a look at a few of the most common ones below.

Crypto bear market and regulatory changes

Regulations that hinder cryptocurrency transactions will significantly affect the crypto sector and cause a drop in market prices.

Crypto bear market and negative news

A drop in crypto asset prices often comes after negative publicity, comments, and sentiment from traditional financial and media sources.

Crypto bear market and reduced trading volume

As a result of market uncertainty, cryptocurrency traders usually close off trading and hold onto their assets, resulting in a marked reduction in trading volume.

The Differences Between a Crypto Bear Market and a Bull Market

With a sound understanding of how a bear market is defined as well as some of the causes that lead to it, let’s briefly consider the other, more positive side of the coin—a crypto bull market.

A bull market is one in which asset prices are rising or are expected to rise in the near future. Traditionally, some analysts have defined a bull market as a period in which prices increase by more than 20% after two 20% losses. If you can remember the halcyon days of October and November 2021, then you know exactly what a crypto bull market looks and feels like. Bull markets are marked by investor confidence and economic growth.

What Causes a Crypto Bull Market?

Crypto ads featuring Matt Damon? In all seriousness, economic growth, falling unemployment, and low-interest rates are all part of the puzzle when it comes to the various causes that can lead to a crypto bull market (and a spot by Matt Damon doesn’t hurt).

Some of the major differences between a bull and bear market include:

Crypto bull market and supply and demand

In a bull market, demand is considerably strong, and supply is weak or limited. While a bear market is marked by more sellers than buyers, a bull market is marked by fewer sellers. Although it can be somewhat intangible, there’s a general positive or optimistic feeling in the market.

Crypto bull market and consumer confidence

Increased gross domestic product (GDP) and consumer spending usually signal a growing economy and, with it, bull market conditions (imminent or otherwise). When times are tough, consumers tighten their belts; when there’s extra cash available, consumers usually buy more stuff or invest their disposable income.

Crypto bull market and economic strength

Energy is cheap. The fundamentals are sound. The economy is growing. People are working. Businesses are recording profits. While a weak economy is associated with a bear market, overall economic strength and vitality are generally suggestive of bullish market conditions.

Can You Make Money in a Crypto Bear Market?

TLDR: Yes!

Now that I have your attention, there are certainly ways to make money and even profit during a crypto bear market. While the majority of traders are only active during the crypto market’s bull phase, opportunity does indeed knock during a crypto bear market. The key is to pair the right trading tool(s) with the right market conditions and overall investment goals.

One reason investors realize negative returns is that strategies that work during a bull market don't work (or work well) during a bear market. And the crypto market’s notorious volatility only complicates matters, but there are ways to identify undervalued coins as well as even glimpse the light at the of the tunnel and spot the next crypto bull run.

Strategies for Profiting in a Crypto Bear Market

In case you hadn’t noticed, the cryptocurrency market has been in a bit of a tailspin lately. Prices either continue to stagnate or, worse, fall, and volatility remains uncomfortably high, making it tough to beat the market. But it’s not an impossible task.

Crypto margin trading

Margin trading (short selling or shorting) is among the most popular strategies for making money during a bear market. Buying on margin basically involves amplifying your position by borrowing from an exchange. The point is to leverage the borrowed among to increase your gains exponentially. The benefit is that you don’t need to make a substantial investment up front, but one of the drawbacks is that margin trading can be risky (everything carries some degree of risk).

With margin trading, investors can (and do) take out long positions, but the inherent risk level means that most investors will opt instead for short positions. And since margin trading involves borrowing, there are additional fees that need to be factored into each position.

Nevertheless, margin trading can be a great way to boost returns during a crypto bear market. If you do your research, take a conservative approach, margin trade in moderation for short positions, and factor in interest costs and fees, you can definitely come out ahead during a stagnant market.

Dollar-cost averaging (DCA) or “buying the dip”

A bear market can be an ideal time to invest in different crypto tokens, particularly since prices are low. This practice is known as “buying the dip” and Bitcoin maximalists are renowned for pushing this approach each time BTC “dips” in price.

Dollar-cost averaging or DCA might sound complicated, but it simply entails investing at regular intervals rather than all at once with a lump-sum investment. By investing small sums incrementally over time, irrespective of price, you are both building a stronger position as well as averaging out the negative effects of short-term volatility.  

Let’s take a practical example. Say that you want to invest $20,000. You could commit the entire amount to BTC (or a combination of cryptocurrencies). Or, you could split this amount over several investments progressively over time. For example, if you buy $500 worth of coins every two weeks over the course of months, you will have eventually invested $20,000, but with reductions in risk and exposure as well as the elimination of emotion-based investment decisions and bad timing.

Investing at regular intervals also instills discipline. The easiest way to go about dollar-cost averaging is with the help of crypto trading bots, which automate the process based on the initial parameters that you define.

Crypto and earning passive income

During a bear market, lending or saving your cryptocurrency is a wise way to make passive income. Think of it. When you deposit your assets on a platform or protocol, you automatically receive a free cryptocurrency token. As these tokens accumulate, you can gradually start to make up for bear market losses. And, with the help of crypto savings accounts, you may store your funds while earning interest on several of the best crypto exchanges.

Additionally, you can earn interest on your crypto assets by lending them, a process in which investors lend their cryptocurrencies to various borrowers (simple enough, right?). In exchange, they’ll receive interest payments, known as "crypto dividends." Many platforms that specialize in crypto lending accept stablecoins in addition to cryptos. Binance, the world’s most popular crypto exchange, has an excellent guide to crypto lending and borrowing.

Crypto yield farming and liquidity mining

Yet another way to beat the bear-market blues is through yield farming and liquidity mining. As a “thank you” for your efforts, you will receive free crypto tokens since you’re adding liquidity, particularly if you’re doing it on DeFi (Decentralized Finance) platforms.

Here’s how it works. Yield farming means that you are lending your crypto to exchange for rewards and/or interest. Unlike staking, which we’ll cover in the next section, yield farmers can move their crypto from one pool to another, making it a more flexible option for earning passive income during a crypto bear market. Crypto investors who lend their crypto to decentralized exchanges, on the other hand, are engaging in liquidity mining. Not only do you put your crypto to work for you, rather than simply HODLing them, you earn rewards and contribute to the growth and long-term viability of decentralized finance.

Crypto staking

Another profitable way to generate income in crypto during a bear market is to stake some of your crypto tokens, and there are platforms that will reward you with extra crypto tokens if you lock in your tokens. In addition to receiving free tokens, you won’t have to bother with panic selling since your tokens are locked into the platform.

Staking is similar to receiving dividends from equities. Generally, proof-of-stake blockchain networks such as Cardano (ADA), Secret (SCRT), Solana (SOL), and Fantom (FTM),  among others, offer staking. For example, you can stake SOL tokens on the Solana network, contributing to the network’s overall security. As a reward, the network will give you additional SOL tokens.

Final Thoughts

So there you have it. Even in the deepest, darkest depths of crypto winter, there are legitimate ways to beat the market, make money, and return a profit. And since markets move in cycles, there’s no need to sell your stack. What goes down will definitely go up once again.

For all of your diehard HODLers, keep on HODLing. For everyone else, consider some of the ways to earn passive income during a crypto bear market, which we’ve already outlined. For those looking for more robust returns, then margin trading should definitely be on your radar.

And take comfort in the fact that experience in trading counts. The next time the market starts to move south, you’ll be able to quickly spot the next crypto crash. More importantly, while everyone else around you is losing their heads, you’ll already know how to survive and indeed prosper!!