Life in the bear market can be very scary. With crypto it can be even more scary.
Cryptos are a scam!
“I invested when my friend told me about this new cryptocurrency… I thought it was a sure thing. I mean, why wouldn’t it be? He’s been investing for years and everyone’s making money off of cryptocurrencies these days!
But it wasn’t even 5 minutes and everything was dropping. I lost all my savings, and now I’m broke. It’s all a scam and I’m never doing it again!”
I hear this a lot these days. Which is no surprise. Uneducated, inexperienced investors jump into an investment because someone told them it was a sure thing with fast returns. They see the price rise and they feel the need to move fast. Greed and fear of missing out get the better of us all, but add that to ignorance and inexperience and it can be a fatal cocktail.
Here’s the thing about bear markets
There are lots of cryptocurrency scams and even some large frauds like FTX. But that doesn’t make all cryptocurrencies a scam. The trick is to know which ones are scams and which ones are not.
“Buyer beware” is the best advice I can give to most people who are participating in the cryptocurrency markets today – even those with knowledge but no experience with the bear.
When we are in a bull market, it’s easy to invest for gains by buying at one price and waiting for the investment to go up – what we call the long-play to achieve a capital gain. But that’s not the environment we have today.
We’re operating in a bear market. It requires a different way to think and earn investment gains. No matter what investment vehicle you are using, whether stocks, bonds, cryptos, even real estate, you need to invest with the trend. And today, the trend is down.
What does investing with the trend look like in a bear market?
In a bear market, investing with the trend means “shorting” the asset – betting on it going down.
The process involves borrowing the asset from someone who has it and selling it to someone else for cash.
If your bet is right and the price goes down, the asset can be repurchased at the lower price and returned to the original owner. Allowing you to keep the difference in cash.
Since most assets fluctuate in price over time (volatility), the bet can go against you, sometimes immediately before going back to the trend direction. But this isn’t the risk. After all, a long position can drop in price before going up and giving you gains.
No, The risk in a short trade is that the original owner can demand the asset back at any time. So, if the price goes up, you may either need to pay the diff erence in value to extend the loan – called “buying to cover”, or you must purchase the asset at the higher price and return it to the original owner to exit the trade, realizing a loss.
Each time you are called to “cover”, you are again assessing whether the down trend is intact or whether it has turned. You choose again whether to stay in the trade or exit and realize losses.
If intact, then how far will it rise against your bet before it returns to the down trend? This determines the amount you’ll need to pay into the “cover” if you stay in the trade.
Long Hold vs Short Trade
The difference between playing long or playing short, is who has the control.
In the long-position you maintain control of the decision of when to buy and sell – you can choose to hold through the volatility or take losses and move on.
In a short-position, the original owner of the shares controls the decision of when to buy and sell, and you are forced to make a transaction, usually when the position goes against you.
This is the inherent risk of trading in the bear market and why your brokerage house will require you to provide extra authorization and receive training before allowing you a margin account in your stock portfolio.
No such controls exist in the DeFi crypto space. You are fully responsible for recognizing and mitigating the risk of operating in a bear market short.
If you’ve figured it out, put mitigations in place and are playing the bear market like a champ – Excellent!
However, if you’re not doing so well, human traits may be part of the problem. Whether your loss in the bear market is from continuing to invest like you did in the bull market, or you’re struggling to implement a bear market strategy, there is a human propensity to want to recover losses as quickly as possible.
Fear, frustration, impatience take control.
We hate to look at our portfolio and see it bleeding red, so we start looking for those quick gains that are going to recover our losses – anything for a reprieve. Casinos bank on this trait, and there is nothing more alluring than asymmetric returns promised by cryptocurrencies to make that feel possible.
So, what do we have?
We’re investing in an environment that holds inherent risk because of the method needed to invest in a bear market trend.
Add the inherent risk of a new asset class that has no regulation.
And the “human need” to recover losses as quickly as possible to alleviate our sense of fear, frustration and impatience.
What could possibly go wrong?!
This is the world of speculation
Some people who think they are speculating are actually gambling and other people who are speculating think they are investing. Both leads to loss, usually fast.
The first step to successful speculating is knowing what it is and how it is different from investing.
A speculation is high risk for the very reason that we’re investing in something new, untested and unproven. It rarely has a customer base, often doesn’t even have a viable product, and
definitely doesn’t have a revenue stream – at least not one to exceed the cost of development and operation.
It is a bet on the future – on the growth and adoption of an idea or a product, and often not expected to have returns for years into the future.
The earlier into the speculation investment, the higher the risk. It is the risk that pays the high returns, and that demands a strategy…also, research and due diligence – with a method for doing research that covers all aspects of the people, product, and business. Finally, it requires a strong intuition that is strengthened with experience and the discipline to follow it.
Bear Market Best Practices
There are some best practices for speculating that have been demonstrated by venture capitalists and other successful investors, specifically:
- Investment size is proportional to the level of research and due diligence performed.
- Investment size is proportional to the level of personal access and control of operational decision-making over the asset or underlying company.
- Speculations are by their nature long-term but by no means guaranteed. Therefore, it is useful to enter all speculations with the expectation that most, if not all of the investments will fail. That means, being willing to lose it all. Not just all of the investment in one of the assets, but all of the investment in all of the assets within the speculative portfolio.
That means keeping the speculation portfolio at a fraction of overall personal net worth.
- Due diligence is performed with a mindset of removing the opportunity from the list rather than adding it. Each asset must earn its place in the portfolio. This is true for all assets, but critical for speculative assets. Even if it means not making an investment for a long time.
- Position size is key to staying in the game. With an assumption that we’ve done proper due diligence and still expect them all to fail, the position size is the same for every asset and small enough to participate in enough assets to have a chance of one being a winner.
The winner is the one that has 1000’s of times the gains and although these are extremely rare, they do happen – especially in a new asset class. Bitcoin and Ethereum both offered up these returns, multiple times. But as the floor value increases and volatility is removed, these gains disappear.
With a broad collection of speculative assets, well vetted and given time, possibly many cycles like Bitcoin, one or more of the assets can return life-changing gains.
Finally, speculating is not trading. It requires attention but not much action.
One strategy that works well is to invest and then wait. When the pop comes, withdraw the investment (maybe some profit) and allow the rest to ride. The best one will make up for all the others that went nowhere or more likely to zero.
As the cryptocurrency asset class matures the volatility will decrease and the explosive gains will disappear, that’s why this is the right time to be speculating in this asset class.
Speculating is not hard, but it does require eff ort, patience and attention. Things can be promising for a long time and then all of a sudden, go bad. Without a detailed plan on how to manage every asset in the portfolio, opportunities to take profits are lost, confusion about what action to take can set in.
Investing of all types requires intention and a plan, speculating is no different and should be only a small part of a larger, more robust investment portfolio.
If you’d like to learn more about building a portfolio that fi ts your own interests, values and goals, visit Wealthy Wise Woman and book a call with Susan.