How To Navigate The Bear Market In Bitcoin, Crypto, And Equities As The Fed Tightens

How To Navigate The Bear Market In Bitcoin, Crypto, And Equities As The Fed Tightens

Bitcoin
BTC
price is down over 59% year-to-date (YTD) and slightly over 71% down from its 2021 high. Generally, if an asset is down over 20% from its recent high, investors regard that asset to be in a bear market. In contrast, the SP500 is down 23.68% YTD and the Dow Jones U.S. Real Estate Index is down 30% YTD. Many investors who are not hedged and are overweight on these assets have endured a painful contraction through 2022, and the bear market seems to continue.

Warren Buffet, one of the most prolific investors alive, started his investing at age 11 in 1941 when the SP500 was in a bear market that bottomed out at -35% in 1942. Since then, he has traded through a cycle of 13 bear markets, and he has increased his investing activity during each of these bear markets. In his view, it is best to buy quality assets when the prices are cheap and this strategy has served him well over the years.

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

What is causing the bear market?

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

The tightening policy involved removing all COVID-related quantitative easing programs, which was successfully completed in March, followed by an aggressive series of interest rate hikes, which has seen the rates rise from 0.1%-0.25% in March to the current 3.25% level.

The high inflation environment has pressured consumer budgets as households spend more income on highly-priced food and energy bills, thereby leaving them with less disposable income. This has affected companies selling discretionary products as consumer demand has slowed down. In addition, investors were left with less money to buy risky assets such as stocks and cryptocurrencies.

The war in Ukraine, coupled with the OPEC+ policy of tightening supply, has caused oil and gas prices to skyrocket. This has resulted in higher manufacturing costs and, as a result, higher retail prices. According to a recent article by Caroline Valetkevitch on Reuters, huge companies like Amazon
AMZN
and Netflix
NFLX
have missed earnings expectations due to the effect of high oil prices.

In addition, as a result of the rising interest rates, investors are rotating to bonds because the yields are rising and bonds are deemed to be low-risk compared to equities. The yield on the US 2-year treasury bond has gained from 0.786% at the beginning of the year to 4.068% today.

So, how do you navigate the bear market?

First, I would like to mention that the opportunity of rotaring to inflation-proof or energy stocks is probably gone or thinning. A quick look at the SP500 stocks’ YTD performance in 2022 will show you that the stocks in the energy sector are the winners, with stocks like Occidental Petroleum
OXY
Corporation up 111%. All other sectors are largely in negative territory, with some select gainers in healthcare, aerospace & defense, consumer defensive, and utilities sectors.

As the bear market approaches the bottom, valuable assets like Bitcoin, tech stocks, and real estate stocks are beginning to look cheap, and it’s probably a good idea to begin researching and building a watchlist.

A good strategy to invest at this stage of the bear market involves dollar-cost averaging (DCA) into high-conviction assets that are cheaply priced. This involves buying small amounts at regular intervals, say monthly or even weekly. When this is done consistently over a period of time, the investor achieves a fair average acquisition price for the selected asset.

When is the bear market expected to bottom?

Timing a bear market bottom is a hard task. It can also be a frustrating ordeal where what you think is the dip dips further, and as you keep trying to time it, prices fall into the dip of the dippity dip.

The logical approach, in my opinion, is to look for signs that may influence a change in the fundamentals that are driving the bear market. For instance, closely monitoring the rate of inflation is a good start. If inflation drops significantly towards the FED target of 2%, the FED may be forced to stop the tightening, and this could lead to the start of another bull market.

A keen focus on the oil market and indications of lower oil prices could mark the bottom of the bear market and trigger another bullrun.

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

For instance, the surge on Bitcoin trading against the Sterling Pound on Monday last week was a significant sign of where the money is going. According to Reuters, the BTC/GBP pair averages 54.1 million pounds per day. Hoeever, on Monday, the trading volume spiked to 846 million pounds after the UK government intervened in the 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 educational and does not constitute investment advice.

Disclosure: I own bitcoin and other cryptocurrencies.

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