How to Handle a Bear Market in Bitcoin, Cryptocurrency and Stocks as the Fed Tightens

Bitcoin
BTC
the price is down more than 59% (YTD) from its 2021 high and just over 71%. Generally, if an asset is down more than 20% from its recent high, investors consider that asset to be in a bear market. In contrast, the SP500 is down 23.68% YTD and the Dow Jones US Real Estate Index is down 30% YTD. Many unhedged and overweight investors in these assets have experienced a painful contraction through 2022, and the bear market looks set to continue.

One of the most prolific investors alive, Warren Buffett started investing at the age of 11 in 1941 when the SP500 was in a bear market that hit -35% in 1942. Since then, it has traded in 13 bear market cycles. , and he has increased his investment activity in each of these bear markets. He believes it’s best to buy quality assets when prices are cheap, and that strategy has served him well over the years.

The average bear market lasts 289 days. In March 2020, the longest bear market lasted 929 days, and the shortest lasted 33 days. How long will the current bear market last? Well, nobody knows.

What causes a bear market?

The current bear market can largely be attributed to the Fed’s aggressive tightening monetary policy to curb inflation, which appears to have peaked at 9.1% in June and slowed to 8.3% in August.

The tightening policy included the unwinding of all COVID-related quantitative easing programs that successfully ended in March, followed by an aggressive series of interest rate hikes that saw interest rates rise from 0.1%-0.25% in March to the current 3.25%. .

The high inflation environment has put pressure on consumer budgets as households spend more of their income on high-cost food and energy costs, leaving them with less disposable income. This has affected companies that sell discretionary products as consumer demand has slowed. In addition, investors were left with less money to buy risky assets such as stocks and cryptocurrencies.

The war in Ukraine, together with OPEC+’s policy of tightening supply, has led to a sharp increase in oil and gas prices. This led to higher production costs and consequently higher retail prices. According to a recent Reuters article by Caroline Valetkevitch, giant companies like Amazon
AMZN
and Netflix
NFLX
they missed earnings expectations due to the impact of high oil prices.

Additionally, as interest rates rise, investors are turning to bonds because yields are rising and bonds are lower risk than stocks. The yield on the 2-year US Treasury bond rose from 0.786% at the beginning of the year to 4.068% today.

So how do you navigate a bear market?

First, I’d like to point out that the ability to switch to inflation-proof or energy stocks is likely gone or diminished. A quick look at the YTD performance of SP500 stocks in 2022 will show that stocks in the energy sector are the winners with stocks like Occidental Petroleum.
OXY
The corporation grew by 111%. All other sectors are mostly in negative territory with some select gainers in the healthcare, aerospace and defense, consumer protection and utilities sectors.

As a bear market bottoms out, valuable assets like Bitcoin, tech stocks, and real estate stocks start to look cheap, and it’s probably a good idea to start researching and creating a watchlist.

A good strategy for investing during this phase of a bear market involves dollar cost averaging (DCA) on low-priced high-confidence assets. This involves receiving small amounts at regular intervals, such as monthly or even weekly. When this is done consistently over a period of time, the investor achieves a fair average purchase price for the selected asset.

When is a bear market expected to bottom?

Determining the bottom of a bear market is a difficult task. It can also be a frustrating challenge where what you think you’re thinking about drops even further, and when you’re trying to time it, the prices drop to the lowest level.

The logical approach, in my opinion, is to look for signs that could signal a change in the fundamentals driving the bear market. For example, keeping a close eye on the inflation rate is a good start. If inflation falls significantly toward the Fed’s 2% target, the Fed may be forced to stop tightening, triggering another bull market.

A sharp focus on the oil market and indications of lower oil prices could mark the bottom of the bear market and lead to another decline.

Besides, following the money has always been a sound strategy in investing. On an individual level, you may not have the resources to do massive research compared to behemoths like BlackRock
BLK
and Goldman Sachs. When major financial institutions direct money in a certain direction, it’s often a sign of what their research is pointing to.

For example, the spike in Bitcoin trading against Sterling on Monday last week was a significant indication of where the money was going. According to Reuters, the BTC/GBP pair averages 54.1 million pounds per day. Hoeever, trading volume rose to 846 million pounds on Monday after the UK government intervened in bond markets to save overstretched pension funds.

Disclaimer: Investing in the financial markets is not suitable for everyone and the content used in this article is for educational purposes and does not constitute investment advice.

Disclosure: I own bitcoin and other cryptocurrencies.