We are in a bear market. Not just in crypto, but in stocks and other investment products too. Sure, there might have been some relief for crypto holders over the summer of 2022 (July was a particularly good month for crypto), but many believe that more pain is around the corner. Indeed, some believe that we are only at the beginning of a recession and that the rallies we have seen over the summer are part of a huge bear trap. For example, investor Michael Burry – the man made famous by the movie The Big Short and one of the first to sound the alarm over the 2008 Financial Crisis – has recently sold nearly every stock he owns. There is rampant speculation that Burry – and many others – believe we are going to see a huge crash.
So, what does this mean for crypto? Well, while we might assume that BTC and ETH do their own thing, their fate is often intertwined with that of the wider financial markets. In short, if stocks crash, so too will the value of your Bitcoin. There are, of course, different ways to trade a bear market. For instance, you might want to short Bitcoin. But many investors will see the same advice over and over again – dollar cost averaging (DCA).
Stick to your investment plan
DCA is a simple tactic. The idea is that you select a couple of investments – we are talking crypto here, so let’s say BTC, ETH, and MATIC – and you blindly invest in them regardless of what the market says. So, for example, if your investment budget was $100 per week, you might buy $40 worth of Bitcoin, $40 in Ethereum, and the last $20 into Polygon Matic. When you DCA, you stick to that plan – not paying any attention to whether one or more of the tokens has gone up or down in price. Think of it a bit like using the Martingale Strategy when you play roulette at a casino, although without the need to double your bet. Just choose your budget, then blindly stick to your plan – simple.
The question, of course, is why use DCA as a strategy at all? Why not, say, wait for the fabled “bottom”, i.e., when your chosen asset has hit its lowest point? The problem is that nobody knows for sure when the bottom is in. Indeed, the likes of Michael Burry could be wrong. Bitcoin dipped under $18K in June 2022 (today, it’s hovering around $24K), so perhaps that June low was the bottom. The whole point of DCA investing is that you stop trying to guess.
An assumption that trends will point upwards in the long term
Of course, there are drawbacks to DCAing. For a start, it is based on the assumption that the asset will recover. Even with our example of using Martingale for roulette, we know the wheel will land on Red or Black eventually. This is not the same with crypto. Yes, you might think that BTC and ETH have shown resilience over the years, but who knows what is around the corner? If you want proof, just ask those who invested in LUNA. The Terra LUNA crash in May 2022 wiped billions from crypto, and it led to many holders of LUNA seeing their investments go to zero effectively.
In the end, a DCA strategy is a method for those who ‘believe’ in crypto but understand that a bear market can wreak havoc on the markets. As with all crypto investments, you should only put in what you can afford to lose. But if BTC and other cryptos come out the other end stronger, then you will have accumulated a profit. It is a simple method, but it is also a tried and tested one, offering investors a way to build a portfolio without worrying too much about the daily ups and downs of the market. Regardless, though, you should bear in mind that nothing is guaranteed.
