Low Liquidity in Bear Markets: Here's What You Need to Know
Low liquidity in bear markets. Here's what you
need to know
The combined market capitalisation of digital currencies has dropped from a breathtaking $3
trillion in November 2021 to $1.2 trillion at the time of this writing. Bitcoin dropped to $28,000
from an all-time high of $69,000 on November 10. In fact, the OG cryptocurrency has been
trading lower for eight weeks in a row, the longest continuous string of red weekly candles in
history.
Ether, the altcoin market leader, has lost 65% of its value since its peak back in November 2021.
Many other coins, such as Solana and Chainlink, are down roughly 80% from their peaks as well.
This is what a bear market looks like in the wild world of cryptocurrency. Stock markets enter
bear territory when they collapse by 20%, but a 20% drop for crypto is just another day.
In such a volatile market, many traders and investors are left wondering what steps to take to
reduce downside risk and, hopefully, recoup losses. Also, there's much you need to know when
it comes to low liquidity rates in bear markets in the cryptocurrency world. Fortunately, you can
find all the answers here.
How Liquidity Takes Place In The Bear Market
As trading volume declines, so does liquidity, causing prices to rise and become more volatile.
Speculators claim that the narrative that Bitcoin is a store of value has never fully come to
fruition and that this has never been fully represented in the price value because it is primarily
purchased as a risk asset, particularly at the institutional level.
Furthermore, while there may be brief-time delays between the influence of liquidity on asset
values, prices usually do not respond to the changes in liquidity for long. Regardless, digital
currency assets are viewed speculatively, and purchasing crypto is a speculative investment.
Surviving The Crypto Bear Market
Many professionals and industry insiders believe that HODL-ing and patiently waiting out a
crypto bear market is the best way to survive it. Having a long-term perspective is more
important than succumbing to the urge to sell in a panic.
Furthermore, avoid trading during bearish market conditions, especially if you have little to no
prior trading experience. Aside from that, most of the points we'll cover in the following section
also apply to a crypto bear market.
1. Refining Your Trading Strategies
Because bear markets offer several entry points to begin your journey, it pays to use this time to
fine-tune your favoured trading strategy, whether you're a highly-focused intraday trader or
simply someone who positions investment opportunities on occasion. When the bull market
arrives, you will be better prepared to make more confident moves. And to help you with it,
there are platforms like Bitcoin UP that are very popular among investors, particularly
beginners, who want to ensure a secure and profitable trading experience.
2. Prevent Shorting In A Bear Market
Shorting is a trading strategy that allows traders to actually make money from falling
cryptocurrency prices. That should make it a great fit in a bear market, where price drops are
common. Most experts, however, advise against shorting crypto since it could result in
unlimited losses or the liquidation of your market position. This is a fundamental issue with
shorting, and no amount of experience can prepare you for the unpleasant surprises that await
you when things go wrong.
3. Prevent Yourself From Catching A "Falling Knife"
There is a fine line between recognising a true bottom in prices and attempting to "catch a
falling knife" and buying a steadily decreasing asset near its recent bottom in anticipation and
optimism of a quick recovery. Be aware that, in most cases, these falling knife moves do more
harm than good to your investment portfolio. With that in mind, you should always proceed
with caution, as with any trade.
4. Thoroughly Assess Your Current Situation
Bitcoin appears to have found significant support near $30,000 as of mid-2022, in the midst of
the present bearish trend. Given that few large institutional investors purchased within this
price range, this support is expected to maintain its position for a while. Meanwhile, other
indicators revealed that a significant portion of new investors who likely purchased near the top
have already sold almost all of their crypto assets due to fear, lack of certainty, and doubt.
Their exit from the market at this point could help to stabilise crypto prices even further. The
point here is that it is critical to stay informed and aware of the current state of the market. This
gives you the best chance of positioning yourself appropriately, acting quickly, and minimising
losses.
5. Consider Buying Reliable Coins
We can all agree that most crypto traders still measure their profits and losses in fiat currency,
whether the dollar or their local currency. As a result, in a bear market, it may be reasonable to
strengthen some of your crypto portfolios into fiat-backed, audited stablecoins to protect
yourself from potential massive losses. Then, as the market begins to recover, you can convert
more of your fiat holdings into stablecoins.
Don't Be Freaked Out By The Outcome.
This may seem obvious, but trying to manage your emotions during bear markets is more
difficult than it appears. Indeed, it is frequently described as the most difficult aspect of
learning how to trade professionally. An important step is understanding that fear and greed
are great sources of motivation and can often lead to making bad judgments that end in losing
trades. Having a clear plan in mind before entering a trade can mean the difference between
profiting and losing money.
Making a profit is another seemingly simple but extremely difficult skill to master. Greed can
often hold you in a trade past your take profit level, expecting the asset's price to rise even
higher. This increases the likelihood of the trade going against you, especially if stop losses are
not set. Regardless, the cryptocurrency market is extremely volatile, and while you may be
disappointed if you missed out on the chance to buy the dip this time, another crypto crash is
almost certainly on the horizon. Take profits, keep some capital in reserve for crashes, and
remember to keep your cool when the bears arrive.
Final Thoughts
We do not know when the bearish market will end, but we understand that bearish viewpoints
tend to worsen before positivity and optimism return. The most useful tools available to crypto
investors are passive income strategies and, more importantly, derivatives. Crypto derivatives
trading is an excellent alternative for both experienced and novice investors. You can use
various derivatives to safeguard your portfolio and set it up for significant gains, depending on
how much risk you're prepared to take.