A Guide to Self-help in the Cryptocurrency Bear Market

Recently, my friends who invest in digital currencies have been tortured by the bear market and have lost interest in life. There are wails everywhere in various investment groups, and everyone is looking for secrets to survive the bear market.

From May to June, the global Bitcoin price fell all the way, from nearly $10,000 in early May to around $6,000 at the end of June, and the price was almost halved. After the Bitcoin price rebounded in April, many investors thought that the Bitcoin price would continue to rise, but they were trapped in this wave of plummeting prices.

Affected by the overall bear market in the digital currency market, the prices of many other digital currencies also fell. On June 27, the top 10 digital currencies ranked by total market value on CoinMarketCap all fell, including 8 digital currencies such as ETH and EOS, which fell by more than 5% in 24 hours. In June alone, some digital currencies even fell by 86% from their highs, a staggering plunge.

What caused the digital currency to plummet?

This round of Bitcoin price plunge has affected the entire digital currency market. Many researchers have tried to figure out the reasons for the Bitcoin price plunge, but there are many different opinions.

Some people believe that Bitcoin futures contracts are one of the reasons. Tom Lee, head of research at Wall Street securities research firm Fundstrat, suggested that Bitcoin prices will fall sharply before Bitcoin futures contracts expire. Justin Saslaw of Raptor Group Consulting also pointed this out. Cboe Bitcoin June futures contracts expired on June 13, and Bitcoin prices fell to their lowest point in four months.

But Chris Concannon, president of Cboe Global Markets, overturned this statement. He said: "Some people say that Bitcoin futures have a serious impact on the price of Bitcoin. This statement exaggerates the impact of Bitcoin futures and ignores other important influencing factors."

Some researchers and media have also tried to find reasons from other major events. The major events they listed include: hackers attacked the Korean digital currency exchange Bithumb, and about 31 million US dollars of digital currency was stolen; South Korea may impose a 10% tax on digital currency income; due to the administrative order issued by the Japanese Financial Services Agency, Japan's largest digital currency exchange BitFlyer announced that it would stop registering new accounts...

In fact, these negative events are all factors that affect the price of Bitcoin. But it is far-fetched to use any one event as an explanation for the sharp drop in the price of Bitcoin. A similar event also occurred when the price of Bitcoin was on the rise six months ago. Although the event will affect price fluctuations, it cannot reverse the general upward trend of Bitcoin prices.

There is only one core reason why digital currency is in a bear market: most people are selling, but few are willing to buy.

This is a conclusion that seems like nonsense. But please don't forget that supply and demand determine prices, which is a universal law in the free market. Behind it is a key factor that most people ignore - market sentiment.

“He who wins the market sentiment wins the world”

What is market sentiment? It's simple, just two words: fear and greed.

Fear causes people to sell, and greed causes people to buy. The dynamic game of selling and buying forms the price changes in the digital currency market.

"Be fearful when others are greedy, and be greedy when others are fearful." Buffett's investment motto also applies to the digital currency market. Digital currency is a market where emotion outweighs rationality. People often buy/sell digital currencies based on their emotions. Whoever can grasp and transcend emotions (including the market's and yours) is more likely to save themselves in a bear market.

Let’s take a look at an interesting comparison chart. This is the trend of Bitcoin search popularity on Google Trend. This curve forms an interesting corresponding relationship with the Bitcoin price.

Bitcoin price change chart from 2016 to 2018

Google Trend "Bitcoin" popularity change chart from 2016 to 2018

When people's enthusiasm for Bitcoin reaches its peak, the price of Bitcoin also reaches its peak. When the price of Bitcoin drops to a low point, people's enthusiasm for Bitcoin is no longer there. You can also try to reverse the cause and effect of this sentence, and you will find that the logic is actually true.

This picture and the above sentence, which can be both positive and negative, well explain how market sentiment and market prices influence each other.

I have two friends who both invested in a World Cup concept project. They bought it at around 2 yuan three months ago. By mid-May, the price of the digital currency rose to 13 yuan, an increase of more than 500%. One friend sold it, and the other complained: "It's still early, the World Cup hasn't arrived yet, and the fun hasn't started yet." As a result, when the World Cup opened, the project's online products did not perform as expected, and the price fell back to 2 yuan.

They both knew that they should be fearful when others were greedy, but the difference between them was whether they could accurately judge the market sentiment to be in a state of "greed".

Although market sentiment is elusive, there are ways to capture it quantitatively.

There are several data metrics that can be used to capture “market sentiment”: price volatility, volume, Bitcoin dominance, social media sentiment, search volume.

When market sentiment is greedy, Bitcoin prices rise, buying volume increases, Bitcoin dominance decreases, and positive information about Bitcoin on social media and the Internet increases. When market sentiment is fearful, Bitcoin prices fall, selling volume increases, Bitcoin dominance increases, and negative information about Bitcoin on social media and the Internet increases.

Alternative.me's Bitcoin market "Fear-Greed" index shows that the entire Bitcoin market was in a state of "extreme fear" on June 26 and 27. When the market sentiment index is in "extreme fear", it may be a sign that investors are too worried and it may be an opportunity to buy. When market sentiment becomes too greedy, it may mean that the market will adjust.

Bitcoin market "fear-greed" index (source: alternative.me)

What changes is emotion, what remains unchanged is the cycle

Market sentiment is unpredictable. Fortunately, there is a relatively more stable law: the market cycle.

Does the Bitcoin market have cycles? There is no definitive answer yet. However, I have discussed with many veterans in the cryptocurrency industry who experienced 2013 and 2014, and they generally believe that the Bitcoin market does have cycles.

Bitcoin mining output is halved every four years. Many people believe that the Bitcoin market is affected by this and forms a four-year cycle.

2012 and 2016 were both critical time points for Bitcoin mining halving, and the subsequent market changes were quite similar. The Bitcoin mining halving in 2012 kicked off the bull market, and the Bitcoin market was hot in 2013. In the second cycle, the Bitcoin halving in 2016 kicked off a new round of bull market, and 2017 became a major Bitcoin bull market.

Comparison of Bitcoin prices in 2013 and 2017

If the cycle is established, then we can infer the situation in 2018 and 2019 based on the market changes in 2014 and 2015. 2014 is considered the autumn of Bitcoin. 2015 became a cold winter, and those who experienced it saw with their own eyes that a large number of old cryptocurrency players "frozen to death" in the winter.

And so on:

In the next cycle, the bear market in 2018 is autumn, and 2019 may become "winter". With the halving of Bitcoin mining output in 2020, a new round of bull market is likely to start again - this is the inevitability, continuity and stage of the bear market.

When I talked to a world-renowned mining machine manufacturer, their funding strategy impressed me:

They make 900 million and spend 100 million. When the bull market comes, they will save at least 3 years of funds in advance. Obviously, they are people who clearly understand the market cycle and make adequate preparations.

This strategy is also suitable for us individual investors. To achieve this, we must not only have an accurate understanding of market cycles and market sentiment, but also transcend our own greed and fear.

Recognizing the inevitability, persistence and stages of the bear market is the decisive factor for survival in the digital currency market. Only those who survive can thrive in the next spring.