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Sooner or later, we will be heading into a crypto bear market. There is even some debate whether we are approaching one right now. In this article we will talk about a possible crypto bear market, the different market cycles and most importantly want people should do to prepare for it.
Every single asset has its own market cycle of booms and busts. While each market cycle tends to vary in length and volatility, all of them follow a similar pattern. The fundamental reason why the price of an asset goes up and down in the short term has to do with human psychology. More specifically, emotions like fear and greed. This makes some markets more volatile than others. The reason why crypto currencies are so volatile is because nobody knows for sure what they actually worth. These emotions are the basics of most of the technical analysis trading methods. This concludes the chapter of a short-term cycle.
Besides the human emotions, there are also some macro factors at play which influence the asset market long term with higher impact. One of the most important macro market factor is called the debt cycle. This cycle is broken down into two phases. Short debt cycle which lasts around 7 years and ends in a recession and a long term debt cycle which last between 75 and 100 years. The latter ends in a depression. What this basically mean is: Borrowing money creates economic growth in the short erm. Individuals typically use borrowed money to buy more stuff. This creates a bull market for most assets classes. Eventually, this debt piles up and all these individuals need to start paying off some of that. This requires a reduction in spending which means that the individuals buy less stuff. This creates a bear market for most asset classes and a sustained long term downtrend in price. These debt cycles could be seen very clearly in indexes like the S&P 500. From 1997 to 2002, from 2002 till 2009, from 2009 to 2016 and from 2016 until now. These cycles can be also transferred to the crypto market as its behavior is very similar to the global stock market. This is because we live in a globalized world and everything is somehow connected. Why does this matter? Because we will probably see a bear market in crypto around the same type when we will see a bear market in the stock market.
As everybody knows by know, the crypto market is following a four-year cycle that seems to be caused by the bitcoin halving which occurs about every four years. This halving reduces the BTC supply by 50% and this reduction coupled with a gradual increase in demand means BTC goes up in price. Because almost every other cryptocurrency is related to BTC, the whole crypto market responds in kind. After the top arrives it takes about one year to hit the bottom of the current cycle. A lot of people suggest that the start of the decline will start in early 2022 and the bottom will be reached in fall 2022.
There are two things that are worth pointing out. First, there is a chance that the current bull market will continue indefinitely into the future as all the cryptocurrency replace the current financial system. Very unlikely but worth mentioning. This event is called the crypto super cycle and like I said it is not very plausible because it is logistically not possible to achieve something like that in such a short period of time. The second point to mention is that crypto might continue its bull trend due to the endless money printing of the governments. Although it looks like this is coming to an end as inflation starts to rise, the bull market gets definitely extended because of that.
If the bull market can get extended this also means that the bear market can get extended as well. As mentioned earlier, the long-term debt cycle can last between 75 and 100 years. Assuming this model is correct a depression could be around the corner. This is because the last depression took place in the 1930s which was around 90 years ago. Some economists are suggesting that we are already in a depression due to the pandemic. Others suggest that the depression should have happened in 2008 but was just kicked down the road because the governments kept printing money. The problem is that if a depression is happening it could last as long as a decade. These are all hypothetical scenarios but should always be in accounted in planning in my opinion.
So how could we prepare for these scenarios? In the following we will discuss three different scenarios. Regular bear market, the hyperinflation scenario and the depression scenario. Regarding the regular bear market, it is probably for the best to just HODL what you have and adding to the existing position on a regular basis. This is called Dollar-Cost-Averaging and is statistically the most successful method if you are planning long-term. If you want to ride the waves it is much harder to hit the actual bottom. This is why many people suggest to really wait for an uptrend to happen. In my position I would just use DCA because it is the less stressful method and like I said before the most successful.
This is not always the case with the other two Scenarios. In a hyperinflation bear market the crypto prices will probably go through the roof but their purchasing power will decrease. This sounds surprising because it is often said that assets like BTC or Gold would thrive under these conditions. Unfortunately, this is not always true. This could be explained by the Gresham’s Law which basically says that people tend to use the least valuable form of money that they have. This means that assets like gold and BTC would be hoarded and not used which would result in the following. Whenever somebody sells gold this would mean that they would nothing left to sell. The person that is buying this asset would therefore offer a much lower price than what this asset is really worth because the seller is desperate. This would mean that the value of this asset would be crushed.
What this whole scenario means is, that if we enter this scenario the last thing you want to do is to buy or to sell your crypto currencies based on their fiat value. Instead you will have to do your best to estimate how much value your cryptocurrencies have relative to other assets that you actually need or want, like housing, tools or food. By this point I assume all of us will have bigger concerns than cryptocurrency. Which is probably also the case with the third scenario.
If the next bear market ends up being part of a global depression, it will make for an amazing DCA opportunity, assuming you have the funds to spare. The problem with spotting depression is that you don’t know you are in one until much later. Typically, they start off like a regular recession, which means a big crash and lots of lost jobs. Although the crypto market has not gone trough a depression before history suggests that it wont hold up too well and the price could continue to drop for years. This is because people tend to buy two types of things during depressions: Things that they need to survive and things that secure safety. Cryptocurrency does not fall into either of these categories. Things that do fall into these categories are shelter, energy, clothing, food or entertainment. The only crypto currencies that might survive this, might be cryptos that provide a virtual world or the metaverse.
Writing this article and just the thought of a depression makes me worry a lot. On the other side, bear markets are a normal and necessary part of every asset development. This is of course easy to forget if you just joined the crypto or investing space after the pandemic started. I think it is important not to gamble with your money and only invest the funds that you absolutely can afford to lose. With that being said, lets hope that the upcoming bear market will not hit to hard and that the crypto space will continue to thrive like it did in the past year. Stay save and healthy!