In this episode of BeInCrypto’s Video News Show, host Jessica Walker will explain how you can avoid losses and take a look at two of the simplest strategies you can adopt during a bear market to protect your money.
Have you ever wondered what it means when your granny who can’t use a computer asks you if it’s a good time to buy Bitcoin? This is precisely the alert that it is time to take action because something big is coming to the markets.
Market cycle psychology
But first of all, we want to show you why markets have such dark periods to give you an advantage over other investors. Markets follow a cyclical behavior, and in the cryptocurrency market there was a peak of euphoria in May, which was when the crash occurred.
We can explain this cycle with market cycle psychology. Most trends only develop incrementally, which means they don’t cause enough of a stir for mass media coverage. However, once word gets out of quick money to be made, the media is all over it. Upon hearing about the hype, many who do not typically invest become overly enthusiastic and motivated to try their luck.
However, few of us realize that the cycle has already started to reverse. Once assets become so ubiquitous, many investors begin to feel that it has become overexposed and is not really as valuable as the market has made it out to be, so they begin to sell it off to realize the excess profits. Once this starts, a mass selloff usually ensues, taking those unsuspecting new investors with it.
Now that prices are falling again and the direction of Bitcoin is very uncertain, you will surely wonder: what to do when prices keep on falling?
It is essential to know how to manage risk if you trade and invest in cryptocurrencies. The first thing that you should take into account before investing and trading is to know how much percentage of your capital you can lose without harming your personal finances.
Managing risks is key to succeeding as an investor and as a trader. This amount of money that you are willing to lose is called risk capital. Think, how would you feel if you lost $10 today? How about $1,000 dollars? To define your risk capital, think of it as a small percentage of your investment portfolio. Some traders only use 15% of their wealth to trade. The rest is kept in long-term investments with lower risk and/or in more stable investment funds to preserve the assets.
To get the best out of this risk capital, you have to assign a loss tolerance to it as well to further manage your risk and survive in the long run. Because even if it is money that you are willing to lose, it does not mean that you are going to risk everything in a single trade just to deposit it again into your risk capital account the next day. This is not sustainable at all.
Based on the example where 15% of your equity is risk capital, and you use it to trade, if your investment portfolio is $100, your venture capital would be $15. You have to assign a tolerance of loss per trade to these $15. It is recommended that it be less than 3% of your risk capital per trade.
What would this look like?
From your total of $15, you can only afford to risk 3% per trade, which means that for each trade, you have to adjust your stop loss so that your loss is no more than $0.45 cents on the dollar. It sounds little, and you may want to risk more, but only do it if you know what you are doing.
The idea to survive in any market, bullish or bearish, is to safely manage your risk. This way you can protect yourself from excessive losses when there is a sudden drop or rise in the market, which are very common in cryptocurrencies. Remember that with good risk management practice, the moon is the limit.
Most common strategies
Speaking of survival, what many traders do in a bear market is to decrease the size of their positions, or simply not trade. Let’s look at two of the most popular strategies to minimize risk: The first is to switch to stablecoins. Stablecoins, or stable currencies, are assets that do not increase or decrease, that is, instead of losing their value in the market, they will maintain it.
Stablecoins, as their name suggests, are assets whose value is fixed to another asset and are commonly fixed to the value of the US dollar. The most popular would be Tether USDT, or DAI.
Switching your earnings to a stablecoin not only reduces the risk of long-term losses, it also maintains the value of your portfolio and this allows you to freeze your earnings until the market stabilizes, and you decide to operate again.
The trick here is to know when in the market you should switch to stablecoins so as not to risk the value of your portfolio. Remember market cycle psychology and listen to the opinions of other more experienced traders.
Another common strategy is to HODL. At some point you may have read this word on social networks and have wondered what it refers to, HOLDING consists of staying. That is, do not sell under any circumstances.
Have you heard the term paper hands or lettuce hands? Those are the people who sell out of panic and cannot bear to see losses in their portfolios no matter how minimal. While someone with diamond or steel hands, is that person who does not sell their cryptocurrencies, nor will they for a long period of time.
If your strategy is to make profits as quickly as possible, you may find it useful to sell and buy in short periods of time to take advantage of other opportunities regardless of the market trend. But if your strategy is long-term, price fluctuations shouldn’t worry you.
Today we talked about how to manage risk, how to protect yourself with stablecoins and the concept of Hodl. What are your recommendations for surviving a bear market? Leave us your comments!
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