The saying goes: Bull markets make you money, bear markets make you rich.
To capitalize on this premise, one should be able to determine which market trend they are operating and what is the best strategy for them to execute regarding the market trend.
The traditional definition of a bear market is when prices are down 20% or more within widespread pessimism and negative investor sentiment. Respectfully, we lost over $2.250 trillion during seven months from an almost all-time high of $3 trillion in 2021. Here’s the current chart displays the total market capitalization of all crypto assets (Sum of Bitcoin + Ethereum + all other tokens combined):
Although charts can give us an idea about what’s going on, the most prominent indicator is investor sentiment formed by economic factors rather than inert charts.
The macroeconomic environment highly influences investor sentiment, including their approach to crypto.
Causes Outside of Crypto: Inflation in the US, Low Supply & Rising Demand, FED Raises Interest Rates
Data about inflation is pretty straightforward. According to NASDAQ:
- As of March 2021, COVID costs totaled $5.2 trillion. For reference, one of the most impactful periods, World War II, cost $4.7 trillion to the United States(in today’s dollars).
- All-in money printing totaled $13 trillion: $5.2 for COVID + $4.5 for quantitative easing + $3 for infrastructure.
Here’s an alternative expression of what has happened:
According to another source, which has relatively more recent data:
- 80% of ALL US dollars were printed in the last 22 months (from $4 trillion in January 2020 to $20 trillion in October 2021).
Can you imagine? 4 trillion dollars have been printed since 1862; in 158 years. 4 times that amount has been printed in the last two years, and no, this is not a joke.
Funny enough, money printing was beneficial(?) to the crypto and other financial markets alike because the surplus of ridiculous amounts of printed dollars went into assets. This could have caused hyperinflation if the FED had not intervened with interest rate hikes.
At the start of the inflation, people had surplus cash to invest apart from buying the basket of goods and services for their basic needs. However, prices started to go up, making it harder to afford a living. Consequently, there was no surplus cash to invest in the households anymore. In the meantime, FED was affirming the inflation would be transitory, meaning it would not last, but it turns out it wasn’t transitory. Then panic started to set in. And people began withdrawing money from the financial markets to afford a living due to increased prices of goods and services. And asset prices began to decline. The more prices fell, the more people started to panic, cashing out the assets they held into a scenery like this:
The last nail in the coffin that was relatively detrimental to crypto markets was FED raising the interest rates as it was a confirmation from the FED that inflation isn’t transitionary. After the rate increase, money has gotten more expensive, and the available supply started to decrease(aka quantitative tightening). As a result, the less money there is, the less money to spend and less money to invest in assets, including crypto. Especially crypto because it is generally considered the riskiest investment there is. And it is not very smart to make risky investments when you barely have enough money to pay your rent.
Yes, crypto was and is in a bubble in the short term. And this happened on more than one occasion. Every market has its cycles, and markets started to give out blatant signals when dog tokens have billions of dollars of valuation for no reason other than average Joe deciding to invest in it because his neighbor or favorite influencer said so.
As the crypto industry develops protocols and applications with real use cases, its prices become legitimized. Still, it takes time for each cycle to go around, waiting for new developments to emerge.
Fun fact: Did you know that Amazon had an extreme bubble period, and as a result of the bear market, it lost 95% of its value after the dot-com crash in the span of two years?
This chart shows that assets can be bubbles for some periods, long periods perhaps. And they can even pop at some point. However, if the fundamentals are strong, they will come back with even more impetus that could set them to the moon, as this was observed in crypto many times.
Pick your strategy according to your risk appetite: Low risk, Moderate risk, High risk
Aggressive Risk Profile
- High-risk tolerance throws money when they feel they see an opportunity. The possibility of losing everything is considerably high.
- Only holding some BTC out of respect to Satoshi, doesn’t like the profit margin he may have from it.
- Holds some Ethereum to throw it after unknown altcoins that are only listed on DeFi protocols, zero stable coins, and tone of small-cap altcoins
- Sometimes loses control to intensified FOMO and makes 10x leverage plays on a currency that appreciated 50% in a day.
- Buys highly illiquid assets such as NFTs as a retirement plan to capture outsized returns, constantly chasing the “next BAYC.”
- 10x returns are not enough, literally wants to own an island
Moderate Risk Profile
- Moderate risk tolerance, trying to find a balance between risk and reward. The possibility of losing a considerable amount of money is moderately high.
- Around 50% of the portfolio is in BTC and ETH; the rest is in mid and low-market cap tokens.
- Hunts for high DeFi yields while paying attention to the details, actively researching and vetoing bad projects, and relocating funds constantly.
- A small portion of the portfolio is for moonshot projects, 5% – 10%, where they make plays for either 10x or -%100 returns.
- Buys very well-established NFT projects with decent public exposure and track record to hold long term
- Wants to double the money each year
Conservative Risk Profile
- Low-risk tolerance. Doesn’t remotely like losing money. The possibility of losing some money is in the ballpark but substantially limited compared to other risk profiles
- Bitcoin and Ethereum are held as main tokens with some stablecoins
- Stable coins are staked in robust, low APY generating very well-known protocols (returns still beat the offers traditional banks are bidding)
- The relatively low proportion of net worth is held in crypto assets: 5% – 10%
- Doesn’t touch NFTs with a ten-foot pole
- Making 30% yearly returns is considered an absolute killing
The question is, which one are you? More precisely, which one do you choose to be?
