More than $300 billion has been wiped from the crypto market in the first month of 2022, leading many crypto investors to believe a crypto bear market is coming. The Fear and Greed Index suggests sentiment is low, with the majority experiencing extreme fear over market conditions. For seasoned investors - a crypto bear market is nothing new. There are plenty of strategies you can use to get through it relatively unscathed if you play your cards right. In fact, you can even use a bear market to your advantage when it comes to your crypto taxes. We’re looking at everything you need to know about a crypto bear market including some common FAQs, whether we’re in one, crypto bear market strategies and tax loss harvesting.
Each crypto investor will have their own opinion on what precisely a crypto bear market is. In traditional bear markets, a broad definition is any time market prices fall more than 20% from a previous high.
However, as the crypto market is no stranger to historical highs and lows in any given day - this definition isn’t as helpful. So a crypto bear market is better defined as a prolonged period of time (around 3 months) where market confidence is low, prices are falling and supply is greater than demand.
While much of 2022 was undeniably a bear market for crypto, whether that continues into 2023 remains to be seen. We could see a continuation of the bear market - or crypto winter, depending on who you ask, or we could see some steady recover and even a return to a bull run in 2023. In other words, watch this space. Demand may soon increase, balancing out supply and stabilizing prices or investors may continue to sell pushing the price lower.
It’s important to remember - even if we do enter a bear market - that bear markets are as natural as bull markets. They’re a consequence of several different factors working in combination. These include:
It’s impossible to predict how long a bear market will last in a newer market. But we can look at the performance of popular cryptocurrencies in previous bear markets as an indicator.
On average it takes BTC around 1,000 days to recover from the drops we’ve seen recently. However, we also need to bear in mind the bigger picture. Though BTC is down from historic highs, it’s still up by around $10,000 from the beginning of the 2021 financial year. In other words, for long-term investors the market isn’t quite as bleak as it might seem at a glance.
Your first crypto bear market can be stomach churning, especially if you’ve bought at some of the historic highs during the recent bull market. But for seasoned investors, it’s all part of the ride. For many experienced investors, a crypto bear market presents unique opportunities and benefits for their long term strategy - including tax benefits. Let’s go through some of the most popular crypto bear market strategies.
You’ve probably heard investors crying "buy the dip". It’s the most beloved strategy for a bear market.
Many investors hold back a reserve of stablecoins or fiat currency for the sole purpose of buying crypto assets while the price is down. It simply refers to the practice of buying a given amount of cryptocurrency when the market is sufficiently bearish.
This means when the prices return back to previous highs - or new highs - those who bought at the dip reap the rewards.
It’s not a strategy unique to the crypto market either. Stock trading icon Warren Buffet famously said, “when there’s blood on the streets, you buy.”
You can buy the dip in a single trade - like using all your funds to invest in a particular cryptocurrency. But the safer way to do this is to use dollar-cost averaging (DCA). This strategy involves separating your reserved capital into smaller sections and making several trades over the length of a bear market.
So for example, say you held 1000 USDT and you wanted to buy ETH while it was low. A strong DCA strategy would split this fund into five different sections of 200 USDT and invest in different dips of ETH. This increases the likelihood of you buying at the bottom of the dip - where the cryptocurrency has reached its lowest price before it starts climbing again.
Dollar-cost averaging generally gives much better results than if you buy early in a dip before the price has bottomed out, unless you were lucky enough to go all in at the perfect point in time!
We know in the example above we looked at just buying Ether, but the reality is the more diverse your portfolio, the lower your risk during a bear market. Different cryptocurrencies will see both larger and smaller drops. For example, while BTC and ETH dropped 40% over the last 90 days, LUNA and AVAX saw a humble rise.
This doesn’t mean go out and invest in every shitcoin you can find. It means don’t put all your eggs in one blockchain. There’s more than 17,000 cryptocurrencies to pick from - not all of them will be winners, but not all of them will be losers either.
Don’t randomly invest. Use the following indicators of performance:
Technical indicators give you an idea of the performance of an asset, or indeed the wider market, based on statistical analytics. They can help you figure out the best point to both buy and sell. There are a lot of crypto technical indicators available - but some of the most popular include:
Dwindling gains aren’t ideal for any crypto portfolio. But if you’ve got a long-term strategy to hold, you can cushion decreasing prices by staking your crypto so you earn on it.
You’ll lock your crypto into a given blockchain for a certain amount of time to generate passive income - letting you earn regardless of value. Even with the potential bear market looming, many exchanges and DeFi protocols are still offering excellent APYs for staking.
There is, of course, risk in staking too if the underlying asset is not growing in value. But even in these instances, you’ll still increase your overall assets by staking. Your best way to reduce risk is to opt for a shorter-term staking period, pick a platform where staking rewards are paid out regularly and avoid anything that sounds too good to be true.
We’ll preface this by saying anyone who doesn’t fully understand the risks that come with derivatives and margin trading shouldn't be considering this option. First go do your research, then contemplate whether the benefits outweigh the risks for your unique circumstances.
This said, derivatives allow many experienced investors to minimize their risk and make money even in a bear market. The most common products are futures and options and they work in a similar fashion. An investor borrows an asset - like ETH - and anticipates selling it before a given date at either a higher or lower price. They can help reduce individual risk as if the close of the position would be a loss, you simply choose not to execute it. You’ll lose a relatively small amount for purchasing the product, but protect yourself from a larger loss.
Similarly, margin trading can help experienced investors profit in a bear market by shorting - where you bet on the price of an asset decreasing. Like with derivatives, margin trading is not without its risks.
Crypto losses aren’t all bad news as you can use them to reduce your tax bill. In the US, there’s no limit on how many investment losses you can offset against your capital gains and you can carry forward any losses you don’t use indefinitely. You can even offset up to $3,000 of investment losses against income to further reduce your tax bill.
In even better news for US investors, the wash sale rule doesn’t apply to crypto (yet!). This is because crypto is classed as a property, and the wash sale rule only applies to securities. So you can sell your crypto at a loss to harvest the capital loss and reduce your tax bill and then buy it back at the lower price point.
So if you harvest your losses now, you can use these to offset any gains for the 2022 financial year when the market eventually recovers - potentially saving you thousands of dollars in Capital Gains Tax for the 2023 tax deadline.
A crypto bear market is bleak - especially for new investors. But if you’ve bought at a peak during a bull market, one of the worst things you can do is panic sell.
Bull and bear markets are normal. Having a concrete plan to deal with both is the best way to manage your crypto portfolio. Just like investors get too greedy in a bull market and over leverage themselves creating losses, panicking at the thought of a bear market will end in the same result.
Come up with a long-term strategy, never invest more than you’re willing to lose and don’t go down the rabbit hole scouring different exchanges at all hours of the day to check performance. A simple crypto portfolio tracker like Koinly can help you manage all your assets from one spot, as well as help you identify unrealized gain and loss opportunities.
Koinly works as both a crypto portfolio tracker and a crypto tax calculator - letting you track all of your crypto investments from one platform, as well as easily calculate any crypto taxes.
All you need to do is sync all the crypto wallets and exchanges (or blockchains!) you use with Koinly via API or by importing a CSV file of your transaction history. Koinly supports more than 350 exchanges, 50 wallets, 6,000 cryptocurrencies and many other crypto services. You can see a full list of our integrations here.
Once you’ve synced the wallets you use, you can view your crypto portfolio performance from your Koinly dashboard. This includes your total value, cost basis and unrealized gains or losses.
You can even track individual asset performance in Koinly like so:
When it comes to tax time - the news is even better. Koinly calculates your capital gains, losses, income, expenses and more. You can see all this on the tax summary page and download a pre-filled tax report for your location to make filing your crypto taxes a breeze.
We support a variety of tax reports from around the world including the IRS Form 8949 and Schedule D, the ATO myTax report and HMRC Capital Gains Summary.