The global crypto market posted losses of €328.000 billion during the bearish leg that started on Friday. That's more than the market capitalization of pharmaceutical giant Pfizer. Many investors, both newbies and veterans, will be caught up in the market downturn and unable to cash out without incurring huge losses.
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According to data from Intotheblock, 28% of bitcoin investors and more than 31% of ether investors are "out of the money" right now, which means that the prices of both cryptocurrencies are currently lower than the who paid for them. In this case of other activities such as Cardano, more than 87% of investors are in the red.
So what happens now?
1. Buy crypto dip using DCA
It's all too easy to get caught up in a crypto trade when the markets seem to be very volatile, but that doesn't mean you have to sit back and watch your portfolio crash every hour.
Investors who have held a stash of fiduciary or stablecoins, or who have expendable capital in their bank accounts, will have the ability to "buy the dip." This phrase commonly used throughout the cryptocurrency industry refers to the practice of acquiring crypto whenever there is a significant bearish correction in the market.
For buyers, the object of buying the dip is to make a nice profit when prices return to their previous highs. This strategy is in line with the teachings of stock trading legend Warren Buffett, who once said, "When there's blood on the streets, buy."
Although acquiring the dip can be done in a single trade, the most recommended strategy is to implement something called "Dollar Cost Averaging (DCA)." This involves dividing your reserve funds into smaller tranches and performing multiple trades over time.
Let's say you have €1,000 in reserve funds, for example. A good DCA strategy would be to split the amount into five €200 tranches or even 10 €100 tranches, and then trade those smaller amounts.
The idea behind this is that it's incredibly difficult to know exactly when an asset has bottomed out—that is, reached the lowest price before reversing—so instead of spending all your money at once for It usually works best to buy a small amount and wait to see if the price of the asset falls further. If that does happen, you buy some more, and so on.
Buy the dip, they said. pic.twitter.com/EHxMn4WPWP
— Alpaca bow | Chad Biglaw Lawyer (@bowtiedalpaca) January 21, 2022In this way, you will get better results than if you invite all the capital to a single operation, unless you try to save yourself at the perfect time.
2. Use indicators to find the best entry point
For investors who have a basic or superior understanding of technical analysis—the Practice of Predicting Strong Asset Price Movements in Trends, Indicators, and Chart Patterns—It is possible to use certain indicators to gauge when an asset has bottomed out.
Of course, no indicator is completely foolproof, but they can often give a strong signal of when to buy a dip.
One popular method is to use the Relative Energy Indicator (RSI), a momentum oscillator characterized by a channel with a line oscillating between the tines and the el. There are two key elements to this tool:
- Overbought: When the indicator line is above the channel, the asset in question is considered "overbought" - that is, overvalued - and usually indicates that prices will fall again soon.
- Oversold: When the indicator line appears below the channel, the asset in question is considered "oversold"—ie undervalued—and only indicates that prices will soon subside.
Although these two signals can be used on their own with good results, they do not always accurately predict the lows or highs, especially in the shorter time windows such as the four hour, one hour or 30 minute options. A better method is to employ the RSI divergence strategy.
Something to note about the RSI: it normally follows a pattern similar to the price of an asset, which means that when the price falls the line of the RSI indicator also falls. However, sometimes the two move in opposite directions. This is known as RSI divergence and usually indicates the beginning of a trend reversal.
To spot a bottom, you will need to see if the RSI line makes a higher high while the corresponding price makes a lower low. Ideally, the RSI line will be around the corner of the surviving region on a larger time frame such as the daily to signal a strong reversal opportunity.
Next, there is an RSI divergence on the bitcoin daily chart (A) signaling a trend reversal followed by a price rally. Very late, this RSI (B) divergence came into the overbought zone, where it indicated a bearish trend change that happened quickly.
3. Diversify your investments in different assets
Just as it is impossible to accurately predict the basis of a bear market, it is also impossible to know exactly as more than 17.000 crypto assets will recover faster or trend higher.
One way to hedge your bets is to use DCA for a range of different assets. This may involve reducing the size of your trades, but by doing so you will also reduce your overall risk. Therefore, it is not enough to randomly select assets and invest in them. You will first need to conduct a thorough investigation of each one you intend to purchase and look for the following:
- Previous All-Time High – It is not guaranteed that any crypto will go back to its all-time high, but it can give you an idea of what kind of potential the asset has.
- Past Performance – Look at the price history of the asset using tools like TradingView and see how well it has bounced back during previous declines. Is it correlated with the market restaurant, or does it periodically outperform other major assets? Past performance is not a guarantee of future price action, but again, it does provide a rough idea of what might happen.
- Upcoming Roadmap Announcements – One thing that can help an asset recovery is the arrival of a major roadmap or the development of a roadmap. This can include things like a rebrand, the launch of a major network, or a new partnership.
4. Notes
This may seem like a no-brainer, but managing your emotions during bear markets is not as easy as it seems. In fact, one is often described as the most difficult to master when learning to trade professionally.
The famous American economist Benjamin Graham said: "People who cannot control their emotions are ill-equipped to profit from the investment process."
An important step is to recognize that the environment and the greed of your motivators may have a menu that can be taken fast enough to end in losing trades. Sticking to a concrete plan before placing a trade can make the difference between making a profit or missing out on dinner. It can be simply saying, "When I see a bullish RSI divergence on the daily chart, I will allocate X amount to the trade and take profit on Y."
Taking profit is another seemingly easy but incredibly difficult thing to master. Greed can cause you to stay on a trade beyond its take profit level in the hope that the asset will go even higher in price. This increases the risk of the trade moving against you, especially if you do not set a stop loss.