A bear market is a long period of falling prices. In stock markets, the usual definition is a decline of 20 percent or more over at least two months, as the SEC's investor site notes in its bear market entry. Crypto bear markets have been far deeper than that. This guide covers what has happened in past downturns and the habits that limit damage.
What Past Bear Markets Looked Like
Bitcoin peaked near 20,000 dollars in December 2017 and fell to roughly 3,200 dollars a year later, a drop of about 84 percent. It peaked again near 69,000 dollars in November 2021 and fell to around 15,500 dollars in November 2022, a drop of about 77 percent.
Smaller coins usually fall further. In both cycles, many altcoins lost more than 90 percent and never returned to their highs. Some stopped trading altogether.
The 2022 downturn also showed that falling prices are not the only danger. The Terra stablecoin and its sister token LUNA collapsed in May 2022. The lender Celsius froze customer withdrawals in June 2022. The exchange FTX filed for bankruptcy in November 2022. People who had the right coins on the wrong platform still lost access to their money.
Past recoveries do not guarantee future ones. Each cycle has had different causes, and nobody can reliably call the bottom.
Accept That Prices Can Fall Further
A coin that is down 50 percent can fall another 50 percent. To get from an 80 percent loss to a 90 percent loss, the price has to halve again.
The math of recovery is uneven too. A 50 percent loss needs a 100 percent gain to break even. An 80 percent loss needs a 400 percent gain. Plan for prices to stay low for many months, because in past cycles they have.
Protect Your Capital
- Only invest money you will not need for several years. Being forced to sell for living expenses locks in losses.
- Keep an emergency fund outside crypto.
- Avoid margin and borrowed money. A borrowed position can be liquidated during a sharp drop, and that makes a temporary loss permanent.
- Keep position sizes small enough that a further 50 percent fall would not change your life.
- Decide in advance what would make you sell, and write it down.
Moving part of a portfolio into stablecoins reduces exposure to price swings, but it is not free of risk. Stablecoins depend on their issuer and reserves, and Terra's UST showed that a poorly designed one can fail completely.
Reduce Platform Risk
The failures of 2022 were mostly lending platforms and exchanges, not blockchains.
- Be skeptical of high yields on deposits. The yield is paid for by risk that someone is taking with your funds.
- Do not leave more on an exchange than you need for trading.
- If you hold your own keys, back up the seed phrase offline and never share it.
The SEC's investor education site has a section on crypto assets that covers these risks and common scams.
Dollar-Cost Averaging
Dollar-cost averaging means investing a fixed amount at regular intervals, whatever the price. You buy more units when prices are low and fewer when they are high, and you avoid having to guess the bottom.
It has limits. It does not protect against loss if the asset keeps falling or never recovers. Averaging into a failing token only increases the loss. If you use it, apply it to assets you have researched and expect to exist in several years, set a schedule, and keep the amounts affordable.
Manage the Emotional Side
- Check prices on a schedule, not all day.
- Write down why you bought each asset. Review it when you feel pressure to act.
- Stay away from sources that deal in panic or confident predictions.
- Accept that some losses are permanent. Holding a dead project in the hope of breaking even is a common trap.
Be Selective
Bear markets expose projects that depended on rising prices. When judging what to keep, look at whether people actually use the product, whether the team is still building, whether the project has funds to operate, and how much of the supply is still due to be released to insiders.
Low prices alone are not a reason to buy. A token that is down 95 percent is not cheap if the project has no future.
Watch for Scams
Scams increase in downturns because people want to recover losses. Common ones include fake recovery services that charge upfront fees, impersonators of exchange support staff, and offers of guaranteed returns. No legitimate service needs your seed phrase.
Know the Tax Rules
In the United States, the IRS treats digital assets as property, so selling at a loss can produce a capital loss that offsets gains. Rules differ by country and change over time. Keep records of every trade, and consult a qualified tax professional before acting.
Common Mistakes
- Selling everything in a panic after a large drop, then buying back higher.
- Adding borrowed money to win back losses.
- Averaging down on a token whose project has failed.
- Ignoring platform risk because the coin itself is sound.
Nothing in this article is financial advice.
Key Points
- Bitcoin fell about 84 percent in 2018 and about 77 percent in 2022.
- Many altcoins never recover.
- Platform failures caused some of the largest losses in 2022.
- Position size, no borrowed money and patience do most of the work.
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