How to Earn During a Bearish Market

The market is bearish when the asset price is falling or is low - this is a common belief. But how then is it possible to earn during the bearish market?

Or is the best way to hold the asset in the hope that its price will grow sooner or later?

Market Moves in Cycles

The thing is that no market goes in a straight line. Any asset price is affected by investor sentiment and business cycles. And on these fluctuations, investors tend to earn if they build their strategy correctly. 

The top strategies for earning in the bearish market are the following.

Dollar-Cost Averaging (DCA)

Even though the name of this strategy sounds complicated, in reality, it is about investing small sums at regular intervals rather than investing all available funds at a single time. By doing this, you achieve two goals:

you are building stronger positions.

you are averaging the negative effects of short-time price fluctuations.

The best way to go about dollar-cost averaging is to use crypto bots. You set them up to buy when specific conditions are met, and they do so. With it, you eliminate the emotional component and avoid making spontaneous investment decisions.

This is the best strategy to use for beginners who don’t yet have the needed experience to judge when it is better to buy. It is also suitable for long-term investors who don’t have time to follow rapid price changes and are committed to a specific asset.

However, this strategy isn’t suitable when the prices are trending steadily in one direction or the other. And it works only if we expect that the asset price will ultimately increase.

Also, you shall consider that transaction costs will be higher if you choose to use the DCA strategy instead of buying an asset in bulk.

Trading a Downtrend

It is one of the most common strategies used to earn in a bearish market. Every investment or trading activity has one rule: buy low, sell high (BLSH). When you are trading a downtrend, you first sell, and then, buy. 

For example, you have BTC, and its price is moving down. Your BTC is worth $20,000 now. You expect it to fall. So, you sell your BTC and get $20,000.

The next day, the BTC price dropped to $19,500. You buy it. So, you have the same amount of BTC but you sold it for $20,000 and purchased it for $19,500. Your profit is $500.

Short-selling is one of the most common ways to trade a downtrend. 

The principle of short-selling is the same, with the only difference being that traders borrow funds to trade them. 

So, instead of selling your own BTC, you borrow the crypto from a broker, sell it, and then, buy the same amount of coins when their price drops. You return the borrowed funds to the broker and stay with the profit.

But this strategy comes with increased risks because if the asset price grows, you will have to buy it for more money than you’ve sold it for. 

For example, if BTC grows from $20,000 to $25,000, you will have to buy it for the new price to repay the loan. Your loss will be $25,000 - $20,000 = $5,000.

On top of that, you will also have to pay the interest generated by the loan.

Short-selling can generate practically unlimited returns if used correctly but the losses are also unlimited if you don’t calculate everything properly. That’s why this strategy is recommended for advanced traders only.

Lending, Staking, and Yield Farming

Less experienced users can try lending, staking, and yield farming to get income from the funds they have.

Lending is much more secure than trading. If you have free coins, you can lend them to other users via a lending platform. Those who borrow your coins pay interest, and you get your share from it. 

Staking is when you lock coins on a platform and receive rewards. After the locking period is over, you can get your coins back. There are staking plans that don’t have any locking period.

It means that you can withdraw your funds whenever you want. But normally, rewards there are lower, too. 

Some platforms pay their users for providing liquidity. You lock your coins in a platform’s liquidity pool and in return, the platform rewards you with its native tokens. This way to earn is called yield farming.

It is important to remember that these activities are profitable only if rewards are higher than the losses caused by the token price decline and/or if the token price is expected to grow eventually.

For example, you lend 1 ETH worth $1,000 with a 5% interest rate. By the time the loan has to be repaid, ETH dropped by 10% and costs $900. You receive your 1ETH (valued at $900) + $50 in interest.

So, instead of generating income, you lose $50 (you lend an equivalent of $1,000, and get back $950). 

Therefore, lending, as well as staking and yield farming, are profitable only if the price drop doesn’t exceed the percentage paid to you for your coins. 

Scalping

Given the volatility of the crypto market, scalping can bring significant profit during the bearish market. Scalpers benefit from selling and buying crypto within very short periods thus earning on very small price fluctuations.

Multiple trades are placed during a very short period, therefore, smaller gains from individual trades accumulate to significant sums.

Scalping requires a deep understanding of the market and an underlying asset. That’s why this activity is not recommended for beginners.

Conclusion

While nobody knows for sure when a bearish market is going to end, all the previous bear markets have consistently been followed by a bull market.

While many traders create a portfolio and develop a long-term plan that isn’t influenced by short-term market drops, others rely on more active practices to get over unfavorable circumstances.

Whatever option you choose, remember a saying that a quick buck can be made during a bullish market but the wealth is built in a bearish market when the asset price is low.