How to Navigate the Bear Market in Bitcoin, Crypto and Stocks as the Fed Tightens

BitcoinBTC
The price is down over 59% year-to-date (YTD) and just over 71% down from the 2021 high. Generally, if an asset is down more than 20% from its most recent high, investors consider the asset to be in a bear market. In contrast, the SP500 is down 23.68% YTD and the Dow Jones US Real Estate Index is down 30% YTD. Many investors who are unhedged and overweight these assets have endured a painful contraction through 2022, and the bear market looks set to continue.

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

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

What causes the bear market?

The current bear market is largely attributable to the FED’s aggressive monetary policy of tightening to curb inflation, which appears to have peaked in June at 9.1% and slowed to 8.3% in August.

The tightening policy involved removing all covid-related quantitative easing programs, which were successfully completed in March, followed by an aggressive series of interest rate hikes, which has seen rates rise from 0.1%-0.25% in March to today’s levels of 3.25%. .

The high inflation environment has squeezed consumer budgets as households spend more of their income on expensive food and energy bills, leaving them with less disposable income. This has affected companies that sell discretionary products as consumer demand has slowed. In addition, investors were left with less money to buy risky assets such as stocks and cryptocurrencies.

The war in Ukraine, combined with the OPEC+ policy to tighten supply, has caused oil and gas prices to skyrocket. This has resulted in higher production costs and, as a result, higher retail prices. According to a recent article by Caroline Valetkevitch at Reuters, large companies such as AmazonAMZN
and NetflixNFLX
has missed earnings expectations due to the effect of high oil prices.

Additionally, as a result of the rising interest rates, investors are rotating to bonds because yields are increasing and bonds are considered to be low risk compared to stocks. The yield on the US 2-year Treasury bond has risen from 0.786% at the beginning of the year to 4.068% today.

So how do you navigate the bear market?

First, I’ll mention that the ability to rotate into inflation-proof or energy stocks is likely gone or thinning. A quick look at the SP500 stocks’ YTD performance in 2022 will show you that the energy sector stocks are the winners, with stocks like Occidental PetroleumOXY
The company up 111 percent. All other sectors are largely in negative territory, with some select winners in the healthcare, aerospace and defense, consumer defensive and utilities sectors.

As the bear market nears the bottom, value assets like Bitcoin, tech stocks, and real estate start to look cheap, and it’s probably a good idea to start researching and building a watchlist.

A good strategy for investing at this stage of the bear market involves dollar cost averaging (DCA) in valuable assets that are cheap. This involves buying small amounts at regular intervals, such as monthly or even weekly. When this is done consistently over a period of time, the investor achieves a reasonable average acquisition price for the chosen asset.

When is the bear market expected to bottom?

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

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

A strong focus on the oil market and indications of lower oil prices can mark the bottom of the bear market and trigger a new bull run.

In addition, following the money has always been a good investment strategy. On an individual level, you may not have the resources to do massive research compared to giants like BlackRockBLK
and Goldman Sachs. When major financial institutions push money in a certain direction, it is often a sign of what their research indicates.

For example, the spike in Bitcoin trading against the British 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. On Monday, trading volume rose to 846 million pounds after the British government intervened in bond markets to bail out overstretched pension funds.

Disclaimer: Investing in the financial markets is not for everyone and the content used in this article is educational and does not constitute investment advice.

Disclosure: I own bitcoin and other cryptocurrencies.