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What’s the Best Way to Deal with Extreme Fluctuations in Crypto?

By Evan Jones07/04/2023

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There’s one thing that is certain in digital asset markets: fluctuation. Crypto assets are frequently going through large up and down trends in price, making it difficult to decide what you want to do as an investor.

If you’re looking to avoid fluctuation as much as you can, then it’s a good idea to implement strategies for both bull and bear markets, such as using stablecoins as a hedge. But before we get into some strategies you can use to help mitigate crypto fluctuation in any market condition, let’s first define the two macroeconomic market conditions.

Bear and Bull Markets

Bull and bear markets are the two most common terms used when referring to market conditions.

Bull markets are ones that are on an uptrend and where the macroeconomic conditions of the economy are mostly favorable. Bear markets exist in economies that are receding and where most assets like stocks are dropping in value. Apart from being market indicators, being bullish or bearish denotes how an investor feels about the current market and overall economic trends. You can be a bull in a bear market and vice-versa.

Bull markets are generally signified by sustained increases in asset prices. Investor confidence is high during these times, leading to more investment as they expect the trend to continue. It’s likely that the country’s economy is strong with high employment in these scenarios as well. 

Bear markets, in contrast, are typically signified by a sustained decline in prices, such as in the second half of 2022. Assets in bear markets often drop at least 20% from recent highs, and investors often fear they will continue dropping. This fear can result in a downward trend that investors believe will continue (they’re bearish towards the market) and this can create a price spiral to the bottom. During bear markets, the economy slows down and unemployment rises as companies begin laying off workers to save costs.

Bull and Bear Market Investment Strategies

Below we’ve outlined four different investment strategies for dealing with bull and bear markets and asset value fluctuation. While these aren’t the only ways to help avoid 

Using Stablecoins as a Hedge (Bear)

One of the best ways to avoid fluctuation in digital asset markets is by using stablecoins as a hedge. Traders can use stablecoins as a hedge against a fluctuating market, while also using them to increase profit and/or holdings. This is essentially done by cashing out your non-stable asset at a predetermined point, turning it all into a stablecoin like USDT, and then waiting for the asset’s value to drop before buying back in. Because the value of the stablecoin didn’t fluctuate, but the value of the digital asset did, you can buy back more than you had to begin with. 

Similarly, if a trader feels that a bear market or price drop is coming, they can just turn all their assets into stablecoins to ensure their profit at least locks in at that point. They can buy in again at a lower price assuming the asset does indeed fall in value. This is more so a way to mitigate potential losses than a way to short digital assets, because the asset might go up in value rather than down.

Here’s a simple example. If Bitcoin is trading at $40k per coin, but you expect it to drop to $35k within X period of time. You can trade that Bitcoin for $40k worth of stablecoins, then when BTC does go down to $35k, you can buy it back for $35k and then you have 1 BTC but also have another $5k in stablecoins in profit. But, if the price went up to $45k instead, you’d have to spend another $5k to buy it back.

Stablecoins are also a good way to lock in your profits too. Rather than using profit to buy more digital assets, turning it into a stablecoin ensures that the profit remains $5k in the above example. If you chose to buy $5k more in BTC instead of turning the profit you earned into a stablecoin, then it’s possible that the value of the BTC drops below $5k. These are all things you have to assess as a trader.

Rebalancing into Bitcoin (Bear)

When the digital asset market is in a down trend, one of your best options, other than stablecoins, is to rebalance into Bitcoin. This means taking profits from other assets, and turning them into Bitcoin, as it’s generally the asset that experiences the smallest overall drop in value. Of course, this can also be done with stablecoins, but it’s really up to you and depends on your risk tolerance, as outlined in the example above about using profit to buy stablecoins versus buying an asset like Bitcoin that has a fluctuating value. 

When Bitcoin goes back up, altcoin values are lower compared to it, as they’re traded against Bitcoin on exchanges, meaning you can get more altcoins for your Bitcoin. This doesn’t work the same way as if you had bought stablecoins, because they lose purchasing power as Bitcoin and altcoins go up in value. This leads us to our next strategy.

Rebalancing into Altcoins (Bull)

In a crypto bull market, Bitcoins value tends to bring up all other assets with it because, as mentioned above, they all trade against Bitcoin on exchanges. This means that you can get more value by rebalancing your Bitcoin profits into altcoins which haven’t yet increased in value. Then, when they go up against Bitcoin, you rebalance the other way.

If you can successfully do this continuously through the ups and downs of the market, you’ll certainly both avoid fluctuations, but also see great profitability. It’s easier said than done however. Your best strategy to avoid fluctuation might actually be the next one.

Dollar Cost Averaging (Bear and Bull)

Dollar cost averaging, or DCA, is an investment strategy that involves buying a set amount of an asset over a period of time, rather than in one lump sum. This helps reduce the impact of market fluctuations on the asset you purchase. By buying at different prices, you’re less exposed to price fluctuations because your average price changes over time as the market goes up or down.

Let’s look at an example. If you want to buy $500 worth of Bitcoin you can split that amount and buy in 4 pieces. You could buy $125 when BTC is at $22,000, $125 at $18,000, $125 at $19,000 and $125 at $20,000. Overall, this creates an average cost of $19,750 for the BTC you’ve bought. If you invest all $500 in a lump sum when Bitcoin is at $22,000, you’d end up with a much higher buy-in price. You also get a lower profit if/when the price goes above your buy-in.

Dollar cost averaging is a good strategy for avoiding market fluctuations regardless of whether the market is currently bullish or bearish. If it is a bear market, you’ll keep buying at lower and lower prices, decreasing your average cost, increasing profit when the bull market comes back. In a bull market, your average cost will rise, but it also gives you an opportunity to sell and take some profits, alleviating any imbalances in purchasing price. You can then use the rebalancing or stablecoin strategies outlined above.

Article tags

cryptocurrency
guide
investing
trading
Evan Jones

Author

Evan entered the crypto scene in 2017, attracted to the many disruptive possibilities that blockchain could have on current world systems. He has a keen interest in decentralized services, payment processing, and viable NFT use cases such as event ticketing. He spends his days writing with his dog Kobe under his feet, if not on his lap.

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