Bear markets can be tough periods for investors, who are frequently faced with seeing much of their holdings collapse in value alongside a dwindling number of opportunities to turn a profit.
For some, bear markets are worrisome times that threaten to snatch back all of the returns captured in previous months, whereas for others, they present a wealth of opportunities that few have the risk appetite to execute.

Whatever your view, one thing is certain — acting irrationally and not properly mitigating risks can lead to disastrous consequences. As such, it’s a good idea to take some time to understand how to protect yourself in a bear market — whether that be from external threats, unknown risks or even your own bad decisions.

Here’s how you stay safe in a bear market.

Consider Decentralized Insurance

Cryptocurrencies are well-known to be an incredibly volatile asset class that can be used to secure extraordinary profits or lock in shattering losses.

While many traders are well equipped to deal with cryptocurrency volatility, thanks to their careful position sizing, clearly defined entry and exit strategies, and thorough understanding of risk-to-reward ratios, few consider the security risks that come with using both centralized and decentralized platforms.

In the last three months alone, several major centralized cryptocurrency savings platforms have buckled under pressure, while a variety of DeFi platforms have been hacked. The common result here? Many investors suffered near-total losses.

As the bear market continues, there is a chance that a few of the more popular cryptocurrency investment platforms will collapse in the months ahead.

Though it can be difficult to tell which platforms are most at risk, it is now possible to almost completely mitigate the risk of losing funds due to an adverse event through the use of decentralized insurance platforms.

These platforms allow users to defend against hacks, theft, smart contract failures and more through a range of decentralized coverage products.

By paying for coverage, users will be protected as defined in the terms and conditions of their policy, which can save them from potentially catastrophic losses in some situations.

With that in mind, it’s important to note that many decentralized insurance platforms have a discretionary payment system, which sees whether to pay out claims based on the terms and wording of the coverage policy. That being said, incentives and penalties are usually in place to ensure that assessors act honestly.

Get Rid of Overvalued Assets

If you’re anything like most investors, odds are you’ve got at least a handful of assets in your portfolio that have little to no chance of returning to their former glory. Nonetheless, you hold on to them because you don’t want to lock in your losses, or you are still holding out for that slim possibility that they might suddenly embark on a meteoric run.
Unfortunately, assets that trade significantly above their intrinsic or utility value rarely do so for long. This is commonly seen when stocks trade well above their P/E ratio for some time before returning to a more reasonable number, and it’s seen when fundamentally weak cryptocurrencies lose their hype and sell pressure begins to mount.

By periodically tracking the fundamentals underlying your assets of choice, including development status, utility, funding, community size and sentiment, liquidity and public perception, you can begin to identify assets in your portfolio that are likely to struggle over your time horizon.

With this in mind, it’s always a good idea to define an exit strategy for each asset you hold, and when the need arises — cut your losses as early as possible. You might want to enforce your exit strategy automatically by setting your limit sell orders just below crucial support points or simply market selling where liquidity allows.

Selling in a loss can sting, but holding onto losing assets over the long term can result in potentially devastating losses. You should be intensely aware of the so-called “disposition effect” which sees investors hold on to assets when they know there is essentially no chance of recovery, and sell assets that have more potential upside early to lock in profits.

Without being too rash, it is a good skill to be able to exit losing positions early without getting overly attached. Likewise, avoid the urge to revenge trade — this can, and often does, lead to further losses.

Pay Close Attention to Valuations

During a bull market, well-hyped cryptocurrencies have a tendency to achieve extraordinary market valuations — often dramatically exceeding their intrinsic value.

As you might expect, this value typically comes crashing down in a bear market, as cryptocurrencies that are far removed from their intrinsic value begin to see their price collapse.

Unfortunately, few traders pay attention to the valuation of the assets they hold. Instead of seeing overblown valuations as a foreboding of things to come (i.e. a collapse), they instead believe it is a sign of strength.

The delta between the circulating market cap (calculated as token price * circulating supply) and the fully diluted valuation (calculated as token price * total supply) usually shrinks over time as a greater proportion of the token supply is unlocked.

Because of this, it is wise to pay attention to fully diluted valuations in bear markets, as excess supply caused by vesting unlocks, ecosystem grants, marketing tokens, etc., can negatively impact its value — doubly so if demand dries up.

This can be easily tracked via the coin’s overview page, where we detail the circulating supply, total supply, market capitalization and fully diluted market cap (fully diluted valuation) of most cryptocurrencies. If there is a large difference between market cap and FDV, this can be a warning sign.

Consider Liquid Staking

Staking is an incredibly popular way to earn an often reasonable yield on POS or DPOS-based digital assets.

But this yield does come with an opportunity cost — most staking protocols require users to lock their assets for a fixed period of time. This could be days, weeks, months or even years in some cases (e.g. Ether).

During this time, potentially lucrative opportunities could arise, such as the price of the asset skyrocketing for no good reason. But because of the forced lockup period, you would be unable to sell your asset to capitalize on this. Likewise, an adverse event could affect the asset or its underlying blockchain, leaving you unable to exit your position.
This was demonstrated when LUNA lost its value following the collapse of the UST stablecoin. LUNA stakers were locked into a 21-day staking period and forced to watch their tokens fall from over $86 to less than $0.001 in the span of a week.

Liquid staking provides a potential solution to this challenge. There are now a number of platforms that allow users to stake their tokens without sacrificing their liquidity. These platforms vary in the way that they work, but they generally provide users with an equivalent number of fully liquid derivative tokens when users stake their native assets. These derivative tokens can be sold, traded or used without restrictions, or can be used to redeem the underlying staked tokens after a given time window has elapsed.

Lido is currently by far the most popular liquid staking provider, but other well-known names include Ankr, Socean and StaFi.

That said, it should be noted that liquid staked tokens typically trade at a slight discount to native assets, and the discount tends to increase when the underlying asset experiences sharp volatility.

Up Your Research Game

One of the best ways to improve your investment and trading performance is to simply be better informed. Practically, this means tapping the right data sources and using the right tools to extract actionable insights.

After all, a well-informed investor is often a successful one — doubly so in a bear market where wrong moves can result in exaggerated consequences.

Fortunately, there is a wealth of information available to help you not only stay on top of the market but also access insights that other people miss. Ranging from the dozens of analytics platforms available to the wealth of research materials available, it is now possible to be well-read on most projects, markets and trends.

At CoinMarketCap, we provide a wide array of tools and resources you can use to keep abreast of new opportunities and keep tabs on your favorite projects. For example, you can:

Create a portfolio and keep tabs on your favorite cryptocurrency picks.
Stay on top of the best and worst-performing cryptocurrencies in the last 24 hours, 7 days or 30 days.

Browse important upcoming events using the CoinMarketCap events calendar.
Use the upcoming sales feature to follow upcoming NFT sales.

Leverage the CoinMarketCap app to set alerts and keep tabs on your investments.
For those that want to take a more data-heavy approach to their investment strategy, several platforms provide on-chain analytics and tracking. Many have a free plan (or at least a free trial) and can be used to spot trends early and identify entry/exit points, in addition to potential warning signs.

Some of the most popular of these platforms include Nansen, IntoTheBlock, Glassnode, Dune Analytics and Santiment.

Diversify Your Portfolio

Cryptocurrencies have the potential to produce incredible returns or gut-wrenching losses. As with any investment strategy, your goal is to ensure your wins outweigh your losses.

Diversification is one of the best ways to accomplish this. Rather than putting all your eggs in one basket and hoping for a single coin/token to go parabolic, it is safer to hedge your bets by splitting your funds over a variety of uncorrelated assets.

Unfortunately, this is easier said than done when it comes to cryptocurrencies — since the vast majority of cryptocurrencies follow Bitcoin’s lead when it comes to price action. However, you can potentially reduce category risks by splitting your investments across a variety of different sectors — such as DeFi, L1 coins, L2 solutions, governance tokens, metaverse assets, etc.

By doing this, you help to ensure that your portfolio can resist sudden shocks to any specific sector, while still retaining the upside that can come with picking winners in other sectors. With a mixed bag of assets, you can help your portfolio absorb losses better while giving you exposure to potential growth across a range of uncorrelated sectors.

A number of platforms have emerged in recent years to help make this a simpler process. One of the simplest of these is a tokenized portfolio — which allows you to gain exposure to multiple assets through a single token. These include the Crypto20 tokenized index fund which allows diversification to the top 20 cryptocurrencies by market capitalization, as well as the DeFi Pulse Index, which tracks a range of DeFi tokens.

Some also opt to leverage a range of investment methods and modalities to mitigate risks. For example, using derivatives to hedge risks on spot positions during times of extreme volatility or splitting investments over a range of platforms to mitigate the risk of black swan events — such as hacks, downtime or exploits.

As the investment landscape grows in complexity, the number of potential attack vectors increases. It would be wise to take protective measures if your positions are exposed to these kinds of risks.

Unfollow Influencers and DYOR

The cryptocurrency industry is, unfortunately, rife with self-proclaimed experts and savants — many of which genuinely believe they can predict the future, and make sure that their audiences think the same.

But while some influencers are ethical and thoroughly discuss their limitations and fallibility, others have developed a seemingly cult-like following that will buy essentially anything they promote with little-to-no additional research.

The truth is, most cryptocurrency influencers do not come from a financial background and the vast majority lack the experience needed to separate truly promising projects from the short-term hype jobs. More than this, many influencers are simply paid to promote the next well-heeled memecoin or half-baked project, and rarely make it clear that they are on the payroll.
Under the popular catchphrase “not financial advice (NFA)”, many influencers speak highly of particular projects to an often naive and impressionable audience, many of whom will buy in and hope for the best. As you might expect, these users often get burned, and most end up losing funds.

Always take a skeptical view when anybody tells you to buy anything — particularly when they don’t have a long history of success in the industry.

Remember: everybody is an expert in a bull market. During times of peak hysteria, it is often tough to go wrong with any cryptocurrency investment. Because of this, it’s important to take the time to do your own research (DYOR), which means using primary information sources, data providers, and whatever other analysis systems you believe can help give you an edge.