Trading101

3 ways to trade Bitcoin and altcoins during a bear market

Everyone’s a genius during a bull market, but how should one trade in a bear market?

Markets are scary right now, and while the situation is likely to worsen, it doesn’t mean investors need to sit out and watch from the sidelines. In fact, history has proven that one of the best times to buy Bitcoin (BTC) is when no one is talking about Bitcoin.

Remember the 2018–2020 crypto winter? I do. Hardly anyone, including mainstream media, was talking about crypto in a positive or negative way. It was during this time of prolonged downtrend and lengthy sideways chop that smart investors were accumulating in preparation for the next bull trend.

Of course, nobody knew “when” this parabolic advance would take place, but the example is purely meant to illustrate that crypto might be in a crab market, but there are still great strategies for investing in Bitcoin.

Let’s take a look at three.

Accumulation via dollar-cost averaging

It’s helpful to be price agnostic when it comes to investing in assets over the long term. A price agnostic investor is immune to fluctuations in value and will identify a few assets that they believe in and continue to add to the positions. If the project has good fundamentals, a strong, active use case and a healthy network, it makes more sense to just dollar-cost average (DCA) into a position.

Take, for example, this chart from DCA.BTC.

*Results of weekly dollar cost averaging into Bitcoin. Source: DCA.BTC*

Investors who auto-purchased $50 in BTC weekly over a two-year span are still in profit today, and by DCA, there is no need to make trades, watch charts or subject oneself to the emotional stress that is associated with trading.

Trade the trend and go long off extreme lows

Aside from steady, reasonably sized dollar-cost averaging, investors should be building a war chest of dry powder and just sitting on their hands waiting for generational buying opportunities. Entering the market when it’s deeply oversold and all metrics are in extreme is typically a good place to open spot longs but with less than 20% of one’s dry powder.

When assets and price indicators are two or more standard deviations away from the norm, it’s time to start looking around. Some traders zoom out to a three-day or weekly time frame to see when assets correct to higher time frame support levels or previous all-time highs as a sign to invest.

*200-week moving average heatmap for Bitcoin. Source: LookIntoBitcoin*

Others look for price to flip key moving averages like the 118 DMA, 200 WMA and 200 DMA back to support. On-chain fanatics typically follow the Puell Multiple, MVRV Score, Bitcoin Pi indicator or Realized Price indicator to see when extreme multi-year lows are hit as a sign of when to buy.

Either way, opening spot longs during extreme sell-offs usually turns out to be a good swing trade or even entry point for a multi-year-long position.

Do nothing, until the trend changes

Trading during a bear market is hard, and capital and portfolio preservation are the top priorities. For this reason, it’s best for some investors to just wait for confirmation of a trend change. As the saying goes, “the trend is your friend.” Everyone is a genius and a superb trader during a bull market, so if that was you, then wait for the next bull trend to roll around and go be a happy-go-lucky genius then.

Downtrends, consolidation and bear markets are notorious for chopping up traders and reducing one’s portfolio size, so it’s unwise to trade against the trend unless one has a PNL positive method for trading during bear trends and some skill at shorting.

For crypto investors, it’s important not to live in a vacuum and keep an eye on the equities markets. Crypto traders have a tendency to only focus on crypto markets, and this is a mistake because equities markets and BTC and Ether (ETH) prices have shown a strong correlation in the past two years. In one’s charting suite of choice, it would be wise to keep the S&P 500, Dow Jones or Nasdaq charts up alongside BTC’s or ETH’s daily chart.

*Bitcoin correlation to equities markets. Source: TheBlock*

In the most recent trend reversal, BTC’s price action was the canary in the coal mine that began to chirp louder and louder as the United States Federal Reserve amplified its intent to raise interest rates. It is easy to be misled by the minuscule moves that occur in Bitcoin’s four-hour and daily price charts, and one could easily be lured into some hefty positions based on the belief that BTC is on the verge of a reversal.

Keeping an eye on the market structure and price action of the largest equities indexes will provide crucial insight into the strength and duration of any bullish or bearish trend that Bitcoin might exhibit.

This newsletter was written by Big Smokey, the author of The Humble Pontificator Substack and resident newsletter author at Cointelegraph. Each Friday, Big Smokey will write market insights, trending how-tos, analyses and early-bird research on potential emerging trends within the crypto market.

Disclaimer. Cointelegraph does not endorse any content of product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.

Pro traders may use this ‘risk averse’ Ethereum options strategy to play the Merge

Ethereum’s Merge upgrade is expected to induce volatility in ETH price, but options traders can safely remain long by using this strategy.

Ether (ETH) is reaching a make-it or break-it point as the network moves away from proof-of-work (PoW) mining. Unfortunately, many novice traders tend to miss the mark when creating strategies to maximize gains on potential positive developments.

For example, buying ETH derivatives contracts is a cheap and easy mechanism to maximize gains. The perpetual futures are often used to leverage positions, and one can easily increase profits five-fold.

So, why not use inverse swaps? The main reason is the threat of forced liquidation. If the price of ETH drops 19% from the entry point, the leveraged buyer loses the entire investment.

The main problem is Ether’s volatility and its strong price fluctuations. For example, since July 2021, the ETH price crashed 19% from its starting point within 20 days in 118 out of 365 days. This means that any 5x leverage long position will have been forcefully terminated.

How pro traders play the “risk reversal” options strategy

Despite the consensus that crypto derivatives are mainly used for gambling and excessive leverage, these instruments were initially designed for hedging.

Options trading presents opportunities for investors to protect their positions from steep price drops and even profit from increased volatility. These more advanced investment strategies usually involve more than one instrument and are commonly known as “structures.”

Investors rely on the “risk reversal” options strategy to hedge losses from unexpected price swings. The holder benefits from being long on the call (buy) options, but the cost for those is covered by selling a put (sell) option. In short, this setup eliminates the risk of ETH trading sideways, but it does carry a moderate loss if the asset trades down.

*Profit and loss estimate. Source: Deribit Position Builder*

The above trade focuses exclusively on the Aug. 26 options, but investors will find similar patterns using different maturities. Ether was trading at $1,729 when the pricing took place.

First, the trader needs to buy protection from a downside move by buying 10.2 ETH put $1,500 options contracts. Then, the trader will sell 9 ETH put $1,700 options contracts to net the returns above this level. Finally, the trader should buy 10 call $2,200 options contracts for positive price exposure.

It is important to remember that all options have a set expiry date, so the asset’s price appreciation must happen during the defined period.

Investors are protected from a price drop below $1,500

That options structure results in neither a gain nor a loss between $1,700 and $2,200, up 27%. Thus, the investor is betting that Ether’s price on Aug. 26 at 8:00 am UTC will be above that range, gaining exposure to unlimited profits and a maximum 1.185 ETH loss.

If Ether’s price rallies toward $2,490, up 44%, this investment would result in a 1.185 ETH net gain—covering the maximum loss. Moreover, a 56% pump to $2,700 would bring an ETH 1.87 net profit. The main benefit for the holder is the limited downside.

Even though there is no cost associated with this options structure, the exchange will require a margin deposit of up to 1.185 ETH to cover potential losses.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.