The market is down when the asset price is down or low – that’s a common belief. But then how is it possible to earn during the declining market?
Or is it the best way to hold the asset in hopes that its price will increase sooner or later?
Market movements in cycles
The thing is, no market moves in a straight line. Every asset price is influenced by investor sentiment and economic cycles. And investors usually make money from these fluctuations if they build their strategy correctly.
The top strategies to make money in the down market are the following.
Dollar Cost Averaging (DCA)
Although the name of this strategy sounds complicated, the reality is investing small sums at regular intervals rather than investing all available funds at once. This achieves two goals:
They build stronger positions.
They average the negative effects of short-term price fluctuations.
The best way to reach the dollar cost average is by using crypto bots. You set them up to buy when certain conditions are met, and they do. This eliminates the emotional component and avoids spontaneous investment decisions.
This is the best strategy for beginners who do not yet have the necessary experience to judge when it is better to buy. It is also suitable for long-term investors who do not have time to track rapid price changes and are committed to a specific asset.
However, this strategy is not suitable when prices are trending steadily in one direction or another. And it only works if we assume that the asset price will eventually go up.
Also, you should consider that the transaction costs will be higher if you opt for the DCA strategy instead of buying an asset in bulk.
Trading a downtrend
It is one of the most used strategies to earn in a down market. Every investment or trading activity has a rule: buy low, sell high (BLSH). When trading a downtrend, sell first and then buy.
For example, you have BTC and its price is moving down. Your BTC is now worth $20,000. You expect it to fall. So you sell your BTC and get $20,000.
The next day, BTC price dropped to $19,500. you buy it So you have the same amount of BTC, but you sold it for $20,000 and bought it for $19,500. Your profit is $500.
Short selling is one of the most common ways to trade a downtrend.
The principle of short selling is the same, with the only difference being that traders borrow money to trade.
So instead of selling your own BTC, you borrow the crypto from a broker, sell it, and then buy the same amount of coins as their price falls. You return the borrowed money to the broker and keep the profit.
But this strategy comes with increased risks because if the asset goes up, you have to buy it for more money than you sold it.
For example, if BTC grows from $20,000 to $25,000, you need to buy it at the new price to repay the loan. Your loss is $25,000 – $20,000 = $5,000.
In addition, you must also pay the interest generated by the loan.
Short selling can yield virtually unlimited returns when used correctly, but the losses are also unlimited if you don’t calculate everything correctly. Because of this, this strategy is only recommended for advanced traders.
Lending, staking and yield farming
Less experienced users can try lending, staking, and yield farming to earn income from the funds at their disposal.
Lending is much safer than trading. If you have free coins, you can lend them to other users through a lending platform. Those who borrow your coins pay interest, and you get your share.
Staking is when you lock coins on a platform and get rewards. After the blocking period has expired, you will receive your coins back. There are staking plans that have no lock-up period.
This means that you can withdraw your money at any time. But usually the rewards are lower there too.
Some platforms pay their users for providing liquidity. You lock your coins in a platform’s liquidity pool and in return, the platform rewards you with their native tokens. This way of earning money is called yield farming.
It is important to remember that these activities are only profitable when the rewards are greater than the losses caused by the token price drop and/or when the token price is expected to eventually increase increases.
For example, you lend 1 ETH worth $1,000 at an interest rate of 5%. By the time the loan needs to be repaid, ETH is down 10% and is trading at $900. You receive your 1ETH (worth $900) + $50 in interest.
So instead of generating income, you lose $50 (you lend the equivalent of $1,000 and get back $950).
Therefore, lending as well as staking and yield farming are only profitable if the price drop does not exceed the percentage you get for your coins.
scalping
Given the volatility of the crypto market, scalping can yield significant profits during the bearish market. Scalpers profit from selling and buying crypto within very short periods of time, thus earning with very little price fluctuations.
Multiple trades are placed in a very short period of time, so small profits from individual trades add up to significant sums.
Scalping requires a deep understanding of the market and an underlying asset. Therefore, this activity is not recommended for beginners.
Conclusion
While no one knows for sure when a bear market will end, all previous bear markets have consistently been followed by a bull market.
While many traders create a portfolio and develop a long-term plan unaffected by short-term market downturns, others rely on more active practices to overcome adverse circumstances.
Whichever option you choose, remember a saying that quick money can be made in a bullish market, but wealth is built in a bearish market when the asset price is low.
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