By Jason Choi
Compiled by: TechFlow
The following content discusses tactical responses to a possible bear market.
First, most ordinary crypto investors have a binary view of bull and bear markets.
Unlike the strict definition of "bear market" in traditional financial markets, ordinary investors have no consensus on bull and bear markets in the crypto market!
For example, if the market drops 50% but recovers a month in one day, is that a bear market?
As another example, if the market as a whole falls 30%, but that decline is gradual over a six-month period with little relief, is that a bear market?
For example, if only Bitcoin rises in six months, is this a bull market or a bear market?
The main reasons for this lack of precision are:
We are all emotional creatures.
The high volatility of cryptocurrencies. Based on volatility alone, most traditionally defined “bull and bear cycles” can play out within a week;
Misunderstanding of time frames. As the time to liquidity in cryptocurrencies shortens, high-risk, early-stage projects have publicly traded quasi-equity in their seed rounds, further confusing the situation.
In short, you are in an environment where founders promote on a ten-year cycle, VCs invest on a three-year cycle, traders short-term on a one-month cycle, and scammers pump and dump in four hours.
Are you still wondering why people are confused?
However, having a binary view is not the reason most investors fail. The real problem is the inability to reconcile these conflicting ideas across different time frames.
For example, holding the view that "I am bullish on cryptocurrencies" and using this as a reason to go long with high leverage is why bull speculators in every super cycle were eliminated in the last cycle.
Another example is the belief that "meme coins are overvalued" and based on this, shorted every major meme coin last year, which was also the reason for failure.
Also, thinking that “AI and crypto are the future” and investing in every multi-billion dollar AI crypto project that has not yet launched a product and has a four-year lock-up period is why we will see some terrible returns on investment (Distributed Profit Index, DPI).
All of the above may be correct in a few years, but what’s the point if you lose everything betting on them in a few weeks?
The whole problem is that cryptocurrencies themselves may be a long-term megatrend, but the market already knows this and has already reflected it in the price.
The confidence the market has in this so-called knowledge depends on which stage of the cycle we are in. This is why it is important for investors to understand what stage we are in. While it is impossible to accurately predict price movements, probabilistically identifying the market state we may be in is the key to deriving excess returns.
The difficulty is identifying these changes in market states – the turning points from bear to bull and back again are often only apparent in hindsight.
Sophisticated investors are able to keep this in mind and act in a probabilistic manner, constantly reassessing their views based on new information every day because the future depends heavily on these new inputs.
“Wait, if it’s not ‘bull market = buy, bear market = sell’, what are we supposed to do?”
CT (Crypto Twitter) is not the place for detailed analysis, so hopefully these tactical and theoretical examples will help illustrate my point.
simple way:
I think a bear market is coming.
Sell everything, go short, and tweet bearish messages every day.
Common method:
I think a bear market is coming but I am bullish on cryptocurrencies long term.
Sell the positions you are least confident in to free up cash so that you can add to your positions when prices fall.
Proven method:
I have good reason to believe that we are more likely to enter a bear market in the next 6-12 months, and the value at risk (VaR) in this scenario is more than I can tolerate.
However, in 1 month's time, there are some credible catalysts that could prove me wrong and the market could move significantly higher.
I am very bullish on cryptocurrencies in the long term, with a time horizon of 5+ years.
Sell most of the spot positions to free up cash, buy 1 month call options to hedge the portfolio delta, tighten risk parameters and shorten the time frame of any trade, deploy a 5 year long growth strategy when prices overreact.
etc.
Although the above examples are simple, I hope they can illustrate how probabilistic perspectives can be transformed into practical operating strategies.
I have personally seen how different risk management styles can perform differently in the market. For example, in a bull market, cautious investors (i.e., “bears”) may outperform optimistic investors (i.e., “bulls”). Similarly, in a bear market, optimistic investors (i.e., “bulls”) may outlast pessimistic investors (i.e., “bears”).
Finally, remember that all this market talk pales in comparison to the metagame:
Winning public acceptance of cryptocurrency is key.
Without this foundation, it doesn't matter whether it is a bull market or a bear market.
Because then, there would be no game to play.
Have fun everyone and good luck.
