Low liquidity in bear markets. Here’s what you need to know

The combined market capitalisation of digital currencies has dropped from a breathtaking $3 trillion in November 2021 to $1.2 trillion at the time of this writing. Bitcoin dropped to $28,000 from an all-time high of $69,000 on November 10. In fact, the OG cryptocurrency has been trading lower for eight weeks in a row, the longest continuous string of red weekly candles in history.

Ether, the altcoin market leader, has lost 65% of its value since its peak back in November 2021. Many other coins, such as Solana and Chainlink, are down roughly 80% from their peaks as well. This is what a bear market looks like in the wild world of cryptocurrency. Stock markets enter bear territory when they collapse by 20%, but a 20% drop for crypto is just another day.

In such a volatile market, many traders and investors are left wondering what steps to take to reduce downside risk and, hopefully, recoup losses. Also, there’s much you need to know when it comes to low liquidity rates in bear markets in the cryptocurrency world. Fortunately, you can find all the answers here.

How Liquidity Takes Place In The Bear Market

As trading volume declines, so does liquidity, causing prices to rise and become more volatile. Speculators claim that the narrative that Bitcoin is a store of value has never fully come to fruition and that this has never been fully represented in the price value because it is primarily purchased as a risk asset, particularly at the institutional level.

Furthermore, while there may be brief-time delays between the influence of liquidity on asset values, prices usually do not respond to the changes in liquidity for long. Regardless, digital currency assets are viewed speculatively, and purchasing crypto is a speculative investment.

Surviving The Crypto Bear Market

Many professionals and industry insiders believe that HODL-ing and patiently waiting out a crypto bear market is the best way to survive it. Having a long-term perspective is more important than succumbing to the urge to sell in a panic.

Furthermore, avoid trading during bearish market conditions, especially if you have little to no prior trading experience. Aside from that, most of the points we’ll cover in the following section also apply to a crypto bear market.

1. Refining Your Trading Strategies

Because bear markets offer several entry points to begin your journey, it pays to use this time to fine-tune your favoured trading strategy, whether you’re a highly-focused intraday trader or simply someone who positions investment opportunities on occasion. When the bull market arrives, you will be better prepared to make more confident moves. And to help you with it, there are platforms like Bitcoin UP that are very popular among investors, particularly beginners, who want to ensure a secure and profitable trading experience.

1. Prevent Shorting In A Bear Market

Shorting is a trading strategy that allows traders to actually make money from falling cryptocurrency prices. That should make it a great fit in a bear market, where price drops are common. Most experts, however, advise against shorting crypto since it could result in unlimited losses or the liquidation of your market position. This is a fundamental issue with shorting, and no amount of experience can prepare you for the unpleasant surprises that await you when things go wrong.

1. Prevent Yourself From Catching A “Falling Knife”

There is a fine line between recognising a true bottom in prices and attempting to “catch a falling knife” and buying a steadily decreasing asset near its recent bottom in anticipation and optimism of a quick recovery. Be aware that, in most cases, these falling knife moves do more harm than good to your investment portfolio. With that in mind, you should always proceed with caution, as with any trade.

1. Thoroughly Assess Your Current Situation

Bitcoin appears to have found significant support near $30,000 as of mid-2022, in the midst of the present bearish trend. Given that few large institutional investors purchased within this price range, this support is expected to maintain its position for a while. Meanwhile, other indicators revealed that a significant portion of new investors who likely purchased near the top have already sold almost all of their crypto assets due to fear, lack of certainty, and doubt.

Their exit from the market at this point could help to stabilise crypto prices even further. The point here is that it is critical to stay informed and aware of the current state of the market. This gives you the best chance of positioning yourself appropriately, acting quickly, and minimising losses.

1. Consider Buying Reliable Coins

We can all agree that most crypto traders still measure their profits and losses in fiat currency, whether the dollar or their local currency. As a result, in a bear market, it may be reasonable to strengthen some of your crypto portfolios into fiat-backed, audited stablecoins to protect yourself from potential massive losses. Then, as the market begins to recover, you can convert more of your fiat holdings into stablecoins.

Don’t Be Freaked Out By The Outcome.

This may seem obvious, but trying to manage your emotions during bear markets is more difficult than it appears. Indeed, it is frequently described as the most difficult aspect of learning how to trade professionally. An important step is understanding that fear and greed are great sources of motivation and can often lead to making bad judgments that end in losing trades. Having a clear plan in mind before entering a trade can mean the difference between profiting and losing money.

Making a profit is another seemingly simple but extremely difficult skill to master. Greed can often hold you in a trade past your take profit level, expecting the asset’s price to rise even higher. This increases the likelihood of the trade going against you, especially if stop losses are not set. Regardless, the cryptocurrency market is extremely volatile, and while you may be disappointed if you missed out on the chance to buy the dip this time, another crypto crash is almost certainly on the horizon. Take profits, keep some capital in reserve for crashes, and remember to keep your cool when the bears arrive.

Final Thoughts

We do not know when the bearish market will end, but we understand that bearish viewpoints tend to worsen before positivity and optimism return. The most useful tools available to crypto investors are passive income strategies and, more importantly, derivatives. Crypto derivatives trading is an excellent alternative for both experienced and novice investors. You can use various derivatives to safeguard your portfolio and set it up for significant gains, depending on how much risk you’re prepared to take.

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