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Dear Bankless Nation,
If this is your first bear market, you’re probably fighting the urge to bury your head in the sand and wish that it all just goes away.
Don’t do that!
There’s a lot to be gained from engaging with Web3 in times like these — you just have to adjust your perspective.
Today, Frogmonkee offers up strategies for beginner, intermediate, and advanced crypto traders that will have you best positioned for the next bull market.
We’ve also got some words of wisdom on how to keep your mind focused.
Remember: To beat the bear, you have to think like the bear.
Let’s do it together.
– Bankless
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📺 STATE OF THE NATION
WRITER WEDNESDAY
Bankless Writer: frogmonkee, Governance Research at Orca Protocol
First things first: are we in a bear market?
Let’s get our basic definitions aligned. Let’s consider the definition offered by our old friend Investopedia:
“A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.” – Investopedia
Okay, we have questions: What are “prolonged price declines?” How is “pessimism and negative inventor sentiment” defined? “20%” drops? That’s a bad Tuesday in crypto. In 2018, the market experienced drawbacks of 80% or more. Okay, so let’s try another way…
David put it well when he wrote:
“Instead of trying to categorize recent price action as a bear market or not, ask yourself, does this feel like a bear market? If yes, then act accordingly. If not, then act accordingly.” – 5 reasons to be excited for the bear market
In my degen niche of crypto, I’ve noticed a tangible retraction in enthusiasm. Fewer people are apeing into new NFT projects or taking risks with small-cap tokens, while more are converting their tokens into ETH/BTC or stables.
A quick look at the market shows we’re far, far down from ATHs. According to CMC, crypto’s market cap peaked back in early November at just under $3T. As of writing, crypto sits at roughly $1.25T. That’s a 58% fall over the span of 7 months. Even after accounting for crypto’s volatility, we’re still looking at three times the drawdown from the 20% heuristic.
So are we in a bear market? I’d say yes. But it’s not up to me to decide. It’s up to you and how you choose to interpret market sentiment.
Framing your Intentions
For the sake of this article, let’s assume you’re feeling the hallmark conservative sentiment that is a bear market. What should you do?
In a bear, market conditions remain depressed as investors, institutions, and people are all less likely to take risks. Bear markets are also dangerous in a different way: they play on your emotions. It’s easy to lose faith, develop short-term tunnel vision, be anchored to previous buying points, and be driven by fear. All of these can result in impulsive decisions that can cost you.
That’s why we must first frame our intention. What is our goal? What tenets will we fall back on? What is our portfolio management strategy in the bear market?
Here are a few guiding principles:
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Bear markets are opportunities. No one wants a bear market, but if you play your cards right, you’ll benefit. I don’t want to rehash all of David’s 5 reasons to be excited for the bear market, but an important takeaway is that smart investors can steadily accumulate assets in bear markets that will net them outsized returns during the next bull run.
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Survive. This is your goal. In a bull market, your goal is to build wealth and take profits. In a bear market, your goal is to survive for the next bull market while losing as little of your portfolio as possible. If you focus on trying to grow your bag during a bear market, you’re in for an uphill battle. It’s not easy, but not impossible either. Otherwise, I suggest focusing on retaining your net worth and making it out the other end with the next bull cycle. It’s not sexy, but neither is billionaire Warren Buffet’s investment strategy.
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KISS. Keep it simple, stupid. Amidst the euphoria of a bull market, it’s easy to look like a finance genius. In a bear market, your strategies will get stress tested. So keep it simple and trust in your strategy’s long term time horizon.
Evaluating your risk profile
Before we dive into any strategies, I want to first talk about risk profiles. A risk profile is a tool that investors use to identify if a particular investment falls within their appetite for risk. Here are some high-level examples:
Aggressive Risk Profile
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Mostly small cap tokens, some BTC and ETH, no stables.
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Willing to use protocols that have not been audited
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Invests across dozens of different projects
Moderate Risk Profile
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Majority BTC and ETH, some stablecoins, and some small cap tokens
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Stakes in higher yield pools, but is determined to understand the protocol first
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Uses a small percentage of portfolio to ape into projects
Conservative Risk Profile
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Entirely BTC, ETH, and stables
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Stables are parked in a Compound market earning low single digit yields
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Does not keep more than 5-10% net worth in crypto
Having a risk profile in mind will frame what types of investments you pursue in general. For a bear market, I’d recommend between a conservative to moderate risk profile as more aggressive risk profiles benefit from market manias indicative of bull markets.
Remember: In a bear market, our goal is to make it to the next bull with our portfolio intact.
All right, now on to the strategies!
Beginner – DCA & Hold
The premise of the beginner strategy is simple: Choose a portfolio allocation of low-risk assets, regularly invest a budgeted amount, and forget about everything else until the market heats up.
This strategy has two steps:
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Identify which assets you want to own
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Dollar cost average into those assets and hold
Asset Allocation
The first step in this strategy is to identify which assets you want to own. These assets will be the bread and butter of your portfolio until the markets begin to heat up.
It helps to have a risk profile in mind when you make this selection. Ideally, you’ll allocate a large portion of your portfolio into blue-chip assets that you know for a fact will be up during the next bull run — like Ether and Bitcoin!
The DeFi Edge has some examples of asset allocations for different risk profiles
🚨 DISCLAIMER: This thread is NOT an endorsement by Bankless. It is included for educational purposes only—content is out of date regarding the UST Meltdown.
Dollar Cost Average
Once you’ve decided on your portfolio allocation, the next step is to budget an amount you want to periodically invest into those assets. This strategy is one of the most basic investment strategies called Dollar Cost Averaging (DCA), which we’ve written about before.
The beauty of DCA is that it removes the cognitive burden of timing the market. The premise is simple: Buy at the same time every period (like once a month). Ignore the price, just buy.
That’s it! Just set and forget, check back in during the next bull run, and reap the rewards of steadily accumulating blue-chip capital assets.
Intermediate – Indices & Sector Rotation
The intent behind this strategy is to diversify your holdings as a hedge against market volatility and take advantage of little bubbles of bullishness throughout the bear.
Diversification
Any reasonable investment advice always starts with diversification as a means of spreading risk throughout your portfolio and limiting exposure to any one type of asset. The DeFi Edge tweet above is an example of diversification — but can we go one step further?
It’s one thing to diversify into a specific token. But what about an index? Indices are a basket of tokens, meaning they represent a microcosm of diversification itself. For example, Index Coop’s DPI token captures blue-chip DeFi tokens into a single basket token, spreading the risk and return of battle tested DeFi protocols across a multitude of tokens.
If you’re considering diversifying your portfolio, look at indices instead of individual tokens. Index Coop has a slew of different products, but you can find many other indices on TokenSets, or even create your own.
Once you’ve selected your preferred indices, you can DCA into them.
Sectors
You’ll notice that many indices are broken down into sectors, representing a basket of tokens for a particular market niche:
In all types of markets, some sectors will outperform others. For example, when comparing MVI, DPI, and ETH, we can see that ETH performed better in the long term. In other periods like September to December, MVI came out ahead of ETH and DPI:
This is the first bear market with such a breadth of crypto sectors. Back in 2018-2020, there was no DeFi or Metaverse to segment the market. Because of that, there’s also no data on which sectors will perform well against the average performance of the entire market.
A detailed intermediate tactic will accommodate how to invest with sector rotation, including which tokens to consider within a sector, what metrics to follow, how to set stop losses & alerts, and when to rotate are out of scope for this article. But if you have time to watch the markets, rotating in and out of stable sectors throughout the bear market is a good way to stay afloat, if not even earn a small profit.
PS. If you’re interested in a tactic on sector rotation, leave a comment below!
Advanced – Defensive Options Trading
I generally do not recommend actively trading during bear markets. Trying to profit in a bear market is much riskier than profiting in a bull market. However, since our goal is to make it to the next bull, I will focus on defensive trading strategies. Defensive trading is a set of principles for trading in the market centered around limiting losses and volatility. Common tactics include diversification, sector rotation, DCA and hodling.
To use any of these strategies, you’ll need to find an options exchange that supports the assets you want to create a position against. Some popular DeFi-native options exchanges are:
As always, DYOR!
Protective Puts
Buying protective puts is a hedging strategy using options to limit downside risk while going long on assets.
By purchasing a put option on the underlying asset that you own, you are effectively buying an insurance policy that sets a price floor beyond which you will not lose more money, even if the underlying asset continues to fall in price.
Covered Calls
Covered calls are another options trading strategy that sacrifices potential upside to earn a current income stream.
Covered calls require you to own the underlying asset and sell a call option to purchase that asset at a set price. In a bear market, this works in your favor as asset prices may stay steady for the life of the option, allowing you to earn income through premiums earned by selling the call option.
However, the tradeoff is that your earning potential is capped if the underlying asset appreciates above the strike price.
Bear Spreads
Spread trading is a common options strategy that limits your profits and losses within a bounded range. They work by purchasing one security at one strike price and selling a related security at another.
There are two types of bear spreads: Bear Put Spread and Bear Call Spread. Both strategies work the same way: by buying options at a strike price and selling an equivalent number of options at a lower strike price. By doing so, these spreads create limited profit and limited loss trading strategies for investors that are moderately bearish.
If this is your first bear market, here are some of the lessons learned between 2018 and 2020 from the Bankless Team:
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Build for the long run. Stop watching the markets everyday. For the sake of your mental health, pick a strategy, follow it, and forget the numbers. It’ll pay off in the long run.
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Remember your goal. Speaking of bulls, remember the mantra: survive. If you’re experiencing FUD, remember that everyone feels FUD during a bear. Put it aside, stay conservative, and wait for the bull. It’ll come, as it does in all markets eventually.
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Invest your time. Speculators and tourists leave during bear markets, but builders stay. If you have the time to contribute to projects, you’re bound to make meaningful connections and maybe even get an edge before the next bull cycle. This is the time to educate yourself, level-up, and…
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Become a crypto user. Becoming a genuine crypto user is one of the best things you can do. Lend, borrow, stake, earn, swap–just start using crypto products. People that traded on Uniswap, registered ENS names, donated to Gitcoin, all earned sizable rewards from airdrops. You can earn some of the best yields in the world and earn ownership in key protocols while doing it. By becoming a crypto user, you’re positioning yourself for the future bull market.
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Make friends. Bear markets are the time when the crypto community huddles up to stay warm during crypto winters. This is the time to find your tribe and vibe out. These relationships will pay off in every way possible in the future–you may travel across the world with them, attend their weddings, work together. The real value of the crypto journey are the friends you make along the way 🙂
See you in the bull!
Action steps
Author Bio
Frogmonkee writes about governance for Orca Protocol. He was previously a core contributor at BanklessDAO and an editor at BanklessHQ.
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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
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