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A Prolonged Crypto Bear Market - What, How, and Strategies

Illustration by Angela Zillich.

As the year comes to a close, the financial markets have been battered by tough economic conditions, and the crypto industry has been no exception. After a volatile month, prices have reached a relatively stable equilibrium, but market participants remain concerned about the future and a prolonged crypto bear market. Liquidity and volumes have dried up, and many crypto companies have either been forced to scale back operations or shut down completely. The outlook for the industry remains uncertain, but prices have held up relatively better than expected considering the challenges of the year. Throughout this article I've made references to my personal dealings throughout the year in relation to these collapses, and as context for bear market strategies and how you could act.

From All-Time High's in 2021 to a Crypto Bear Market in 2022

To understand where we are now, it's important to consider the events that have led us here. In 2021, crypto markets soared to new heights, but in 2022, they have dropped significantly and we're in a crypto bear market. The $LUNA collapse and FTX exchanges played a significant role in this process, sucking liquidity out of the lending markets and triggering a wave of liquidations. The aftermath of these liquidations has been devastating, with billions of dollars in losses and trillions of dollars in market capitalization evaporating. Meanwhile, the macro economics of the world have all been in downward trends putting more pressure on our space.

The question now is whether there will be more fire sales in the future. While some portfolios are under the control of bankruptcy administrators and will need to be unwound in the coming months and years, it seems that in many cases, the market is actually facing a shortage of Grade-A crypto rather than a surplus. Companies like FTX, Alameda Research, and insolvent lenders would not have sought Chapter 11 protection if they had any tradable coins left to sell. On the other hand, there are many depositors who thought they held crypto, but now hold only distressed claims on assets that are locked up for the foreseeable future, or perhaps lost forever. It's possible that some of these individuals and entities will decide to buy back in or replace their lost assets at some point. I consider that to be likely considering the fact that time heals, and people tend to forget. If the crypto world go full throttle in a future bull market, I'd bet that many of these scorned individuals will make their way bacak into crypto trading and investing. These individuals may even have an advantage over newer traders as they'll have first-hand experiences about risks, what not to do, and be all the better for it.

Personally I was incredibly lucky this year as I sold off all my $UST that was kept in Anchor Protocol, right about 2-3 weeks before the collapse as there was rumors around a bankrun. That and the fact that LTV was declining slowly. I figured it was not the time to be greedy to get those ~18% returns from Anchor Protocol. As such I withdrew and converted hodlings to fiat. For $LUNA I was late to the party and never bought any since the price had skyrocketed long before I'd even consider buying any.

What is Chapter 11 Protection?

I had to learn what Chapter 11 is all about so I thought I'd share it in a paragraph here. Chapter 11 is a type of bankruptcy protection available to businesses in the United States. It allows a company to restructure its debts and assets in an effort to become financially viable again.

Under Chapter 11 bankruptcy, the company's management remains in control of its operations, but must submit a plan to the bankruptcy court for how it will pay its creditors and reorganize its finances. The court will then oversee the implementation of the plan and make sure it is fair to all parties involved.

Chapter 11 bankruptcy is often used by businesses that are struggling but have a good chance of turnaround if they can reorganize their finances and restructure their debts. It is more common for businesses than for individuals, as it allows the company to continue operating while it works to pay off its debts and get back on track.

In the context of the crypto industry, insolvent companies may seek Chapter 11 protection if they are struggling financially and need to restructure their debts in order to stay afloat. This can be a complex process, and the outcome is not always certain, but it can provide a way for the company to survive and potentially recover in the long term.

FTX Served a Major Blow to The Crypto Industry

The sudden failure of FTX, a major player in the cryptocurrency industry, has sent shockwaves throughout the crypto world. The collapse of a company with such a significant reputation has had significant impacts on both users and investors, and exchanges are under pressure to provide greater accountability and transparency as they seek to maintain investor trust. With the recent arrest and charges of founder Sam Bankman-Fried, it's safe to say that FTX and Alameda Research are way beyond Chapter 11 protection. And rightfully so, criminals belong in jail. But unfortunately, several major players in the space are affected.

Before the FTX crash, there were speculations that the market was close to finding a bottom and that a trend reversal was imminent. However, the bankruptcy of FTX has halted this potential recovery, and the bear market is now expected to last longer than anticipated.

The bankruptcy has severely damaged investor confidence, with many large crypto companies holding funds on the now-defunct exchange and thus vulnerable to the collapse. Genesis Trading and BlockFi are among the institutions that have been heavily impacted. Large fund holders are now reportedly considering investments in more stable assets and industries, leading to reduced allocations to cryptocurrency companies in the short term.

In addition to the negative impact on investor confidence, the FTX bankruptcy has also contributed to a negative market sentiment among retail investors, with withdrawal requests in other crypto exchange increasing significantly after the announcement. There is a growing lack of trust in cryptocurrency exchanges, as the collapse of a company as significant as FTX has raised concerns about the stability of the industry as a whole.

A personal note on exchanges: except for my early days in 2020 and 2021, I never hold any crypto on exchanges longer than a couple of minutes/hours. "Not your wallet, not your keys" and all that. And when I did use exchanges it was always Binance, KuCoin, and Coinbase. All of which so far have held up well, except the Coinbase stock price. Time will tell as all crypto exchanges are currently under pressure from regulators. Not the least Binance, and as far as my "trust" goes, I'd rather keep my fiat in Binance than any other exchange, despite what mainstream media and the US government are saying. It's all politics, noise with few signals "bruh."

This negative market sentiment is evident in the continued decline in crypto prices and a prolonged bearmarket.

What is a Bear Market, and What Was a Recent Example?

As cryptocurrency prices continue to fluctuate, it's important to understand the different market conditions that can affect the value of crypto. One such condition is a bear market, which can be characterized by sustained periods of downward price movement and overall market pessimism.

So, what is a bear market and how does it differ from a bull market? A bear market is a period of declining asset prices, typically characterized by a negative outlook for the market and investor pessimism. It is often marked by a high level of selling pressure and a lack of buying interest. In contrast, a bull market is characterized by sustained upward price movement and optimism about the future.

The most recent example of a bear market in the cryptocurrency industry occurred in 2018, following the record highs of the previous year. After reaching an all-time high of almost $20,000 per bitcoin in December 2017, the price of the cryptocurrency began to decline in early 2018 and continued to fall throughout the year. By December 2018, the price of bitcoin had fallen to around $3,000, representing a decline of more than 85% from its peak.

This bear market was accompanied by a general decline in the value of other cryptocurrencies as well, with many altcoins experiencing similar drops in price. The overall market capitalization of the cryptocurrency industry also declined significantly, falling from a peak of almost $830 billion in December 2017 to around $130 billion in December 2018.

In accordance with regular financial cycles we later, in early 2022 started seeing signs of a bear market as events that was outlined earlier unfolded through the year. Question is how deep it will go, Bitcoin is now down to $16,911.46 on December 16 2022 from all-time high's of $68,789.63 (a -75.4% change).

It's important to remember that bear markets are a normal part of the market cycle and can provide opportunities for long-term investors to buy assets at a discount. However, it's also important to be mindful of the risks involved in investing in cryptocurrency, as the value of these assets can be highly volatile and may not always recover from a bear market.

As the cryptocurrency market continues to evolve, it will be important to stay informed about the different market conditions that can affect the value of these assets and to make investment decisions based on a thorough understanding of the risks and potential rewards.

How to Capitalize on The Bear Market in 2023

As the crypto bear market rages on, many investors are left wondering whether they should continue to invest in cryptocurrency. Some may opt to invest in other assets or engage in short-term trading, while others see the drop in prices as an opportunity to buy at a discounted rate. Day traders, in particular, may be able to use the volatility of the market to their advantage by taking positions on both the buying and selling sides.

Despite the uncertainty, it's important to remember that investing in cryptocurrency is still a matter of personal choice. For those willing to weather the storm and hold onto their investments for the long-term, there may be opportunities for growth down the line. In fact, El Salvador President Nayib Bukele has announced plans to continue buying Bitcoin on a daily basis, despite the current downturn in the market.

That said, it's crucial for investors to have a solid understanding of how to navigate a bear market and implement strategies that will help them weather the storm. Those who are able to do so may be well-positioned to take advantage of any future upturn in the market. Below are a couple of ways on how you can capitalize on the crypto bear market in 2023.

Dollar-Cost Averaging: A Smart Strategy for Bear Markets

Say the price of a crypto in your portfolio slumps 25%, from $100 to $75. If you have money to invest – and want to buy more of this crypto – it can be tempting to try to buy when you think the crypto's price has cratered. Problem is, you’ll likely be wrong. That crypto may not have bottomed at $75; rather, it could tumble another 50% or more. This is why trying to pick the bottom, or “time” the market, is a risky endeavor.

A more prudent approach is to regularly add money to the crypto market with a strategy known as dollar-cost averaging (DCA). Dollar-cost averaging is when you continually invest money over time and in roughly equal amounts. This helps smooth out your purchase price over time, ensuring you don’t pour all your money into crypto at its high (while still taking advantage of market dips - buying the dips).

At this point, it probably 'safer' to invest into well established crypto such as Ethereum, and of course, Bitcoin. Personally, I am vary of altcoin as further downtrends can send altcoins plunging. When looking at altcoins I would consider those that are established and has been through previous storms are better options compared to newer blockchains, this includes the likes of Cosmos Network ($ATOM), Cardano ($ADA), and Polygon ($MATIC).

How Staking Crypto Can Help You Earn Passive Income in a Bear Market

If you're looking to hold onto your crypto portfolio for the long-term, staking can be a way to earn passive income, even in a bear market. Staking involves locking your crypto into a given blockchain for a set amount of time, during which you can generate income regardless of the value of the asset. Many exchanges and DeFi protocols currently offer attractive annual percentage yields (APYs) for staking, including Cosmos Network ($ATOM) and underlying layers such as Stargaze ($STARS).

While there is always some level of risk involved in staking, you can minimize it by choosing a shorter-term staking period, selecting platforms that pay out rewards on a regular basis, and avoiding anything that seems too good to be true. Even if the underlying asset isn't growing in value, staking can still help you increase your overall assets.

Maximizing Your Losses: A Tax-Saving Strategy for Crypto Investors

For crypto investors around the world, it's not all bad news when it comes to losses. In fact, these losses can be used to reduce your tax bill. For example, in the United States, under current US tax law, there is no limit on the number of investment losses that can be offset against capital gains, and any unused losses can be carried forward indefinitely. Additionally, up to $3,000 of investment losses can be offset against income to further reduce your tax bill.

But that's not all. The wash sale rule, which prevents investors from selling securities at a loss and then immediately buying them back, does not currently apply to crypto. This is because crypto is classified as a property, and the wash sale rule only applies to securities. So, if you sell your crypto at a loss to harvest the capital loss and reduce your tax bill, you can then buy it back at a lower price point.

By harvesting your losses now, you can use them to offset any gains in the 2022 financial year when the market recovers, potentially saving you thousands of dollars in capital gains tax when the 2023 tax deadline rolls around.

Adoption to Drive Recovery of Crypto Bear Market in 2023

Looking ahead to 2023, the key to market recovery may be adoption. Against the backdrop of a volatile dollar, China and Russia are quietly easing restrictions on bitcoin and increasing its geopolitical significance. At the same time, major tech companies with billions of users are embracing blockchain technology. The volatility of crypto has caught the attention of investors across the spectrum, from retail to institutional.

Another aspect to consider is macro trends, I mentioned at the beginning that financial instability has been a huge factor in setting the pace of the crypto markets. This will be true in 2023 and beyond. As long as the Ukraine war rages on, uncertainties about Covid and China (supply chains/blockages), increased energy prices, rate hikes and inflation (or possible global recession), the crypto market will remain under pressure along with every other financial market.

As a reference to my personal strategy during this bear market. I am currently staking coins that I believe will recover and reclaim previous highs, such as $ATOM and $AKT. I did sell off crypto, sometimes at a loss. I am doing my best to write off losses to offset capital gains that was made on crypto. This is something everyone should do. In terms of DCA:ing, I have bought some $SOL at $12-$13 on Binance (then sent it to cold storage). Other than that, I am expecting that markets continue down. The macro economics and macro politics aren't looking great, I also want the dust to settle around FTX and I think that there's a high risk more big players (for example Silvergate) will fall in the wake of its collapse.

I don't expect the current paradigm of indifference and price stability to last forever. Instead, I expect to see more volatility as the market realigns and web3 business models adapt over the long term. Ultimately, I expect to see an uptrend emerge.

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