Bear Market: How to Survive a Declining Market?

Introduction

The financial market is constantly changing. Prices move up and down – this is normal. However, when prices start to consistently decline and this lasts for months or even years, it is called a bear market. Many traders, especially beginners, fear acting during a bear market. But it's really not as scary as it seems – especially if you know what to do.

An interesting fact about cryptocurrencies is: although Bitcoin has predominantly been in a growth trend throughout its history, it has also experienced several terrible bear markets. In some of these, the BTC price dropped by more than 80%, while many alternatives lost even over 90%. Nevertheless, they all recovered.

What happens in the futures market?

A bear market is a prolonged period of declining prices, where investors lose confidence and widespread pessimism prevails in the marketplace. This differs from a short-term decline – a bear market is typically a symptom of a deeper economic downturn.

When prices start to fall, a humane fear arises. Many want to exit the market to minimize losses. Others want to secure their profits. This creates a domino effect: one seller's exit encourages the next seller to leave as well. The process accelerates, especially when traders use leverage. A massive loss creates a cascading effect, resulting in even stronger declines.

A common saying among traders is: “Up the stairs, down the elevator.” This means that price increases can be slow and gradual, but declines are sharp and quick.

Why do market crashes occur?

The reasons for the bear market are varied:

Economic recession and GDP growth slowdown – as the economy weakens, corporate profits decline and investors begin to sell stocks and cryptocurrencies.

Geopolitical uncertainty – wars, trade disputes, and other crises create fear. Investors seek safer assets, such as cash or bonds.

Market bubbles and their burst – when assets become overly expensive (like the Dot-Com bubble in 2000 ), a sudden drop can occur very quickly.

Interest rate increase – higher interest rates make borrowing more expensive and negatively impact the market.

Unexpected shocks – for example, the COVID-19 pandemic in 2020 caused a rapid market decline due to fear and uncertainty.

These factors often go hand in hand. For example, the financial crisis of 2008 was caused by a combination of real estate bubbles, reckless lending practices, and a global economic panic.

Bear Market versus Bull Market

The difference is simple: in a bull market, prices rise, while in a bear market, they fall. However, one important difference is that bear markets can experience long consolidation periods, where prices move sideways within a certain range. During such times, volatility is low and trading occurs infrequently.

The long-term downward trend is no longer attractive to most investors, so such behavior is common in bear markets.

Historical examples with Bitcoin

Bitcoin has been in a growing trend on a macro scale since the beginning of trading – one of the best assets in the financial market. However, BTC has experienced several tough bear markets:

2017-2019: Bitcoin afterwards, when it rose to about $20,000 at the end of 2017, fell more than 84% in early 2018-2019.

2020: Bitcoin fell more than 70%, particularly sharply in the first quarter of 2020 due to the coronavirus pandemic. It was the last time BTC traded below 5000 dollars.

2022: After Bitcoin reached nearly $69,000 in 2021, a 1670% increase, it fell by more than 77% to below $15,600 in November 2022.

Bitcoin has recovered from all of these bear markets.

How to behave in a bear market?

Your method depends on your investment profile and risk tolerance. Here are the most common strategies:

( Risk minimization

The easiest way: sell part of your assets for stablecoins. If the downturns cause you discomfort, your position was actually larger than it should be. Correctly calculating the size is critical.

) Wait and hold ###HODLing###

Sometimes the best strategy is simply to wait. Historically, the S&P 500 and Bitcoin have always recovered from the cryptocurrency markets. If you have a time horizon of years or decades, a bear market is not necessarily a sell signal.

( Dollar Cost Averaging )DCA###

Many respond to bear markets by buying regularly, regardless of the price. This allows for purchasing more when prices are low, thus reducing the average cost per unit. For example: you buy 1 BTC at a price of 100,000 dollars, it drops to 80,000, then you buy another one – the average becomes 90,000.

( Short selling and risk hedging

Experienced traders often profit from falling prices by short selling. It can also be used for hedging – for example, holding 2 BTC in the spot market while simultaneously opening a short position of 2 BTC to offset losses.

) Trading against the trend

Risk is high, but some traders are looking for “bear market rallies” – short-term bounces that go against the main trend. These are notoriously volatile as traders attempt to extend the bounce. However, more often than not, the downtrend resumes shortly after. This is actually a very risky strategy.

Why is it called a bear market?

The term originates from the image of a bear pushing down with its front paw – this symbolizes a decline. A bull market, on the other hand, is a bull whose horns move upwards. These terms have been in use since at least the 19th century. According to one theory, “bear” comes from the old practice where traders sold furs before they actually owned them – similar to modern short selling.

Summary

Market corrections arise from economic, geopolitical, or speculative factors that undermine investor confidence. Although they come with their own set of challenges, they are a natural part of market cycles. With discipline and planning, traders can protect themselves and even profit from downturns.

Many investors simply choose to hold ###HODLing### during a bear market or move to lower-risk assets. Dollar-cost averaging is a popular long-term strategy. Short selling and trading against the trend are riskier, but they suit experienced traders well.