Bear markets are inevitable, especially in crypto. It is hard to determine how long they will last and how severely they will impact the prices of your favourite crypto.
Bear markets are a natural part of market cycles and not only can you survive them, you can also position yourself to benefit from them.
Some people believe we could see a bear market in crypto that lasts for several years. Others believe we could see prices start to trend up again at the end of the year. Regardless of what happens, you should think about the possibility of a multi-year bear market and ready yourself.
Here are some techniques you can use to determine good projects and whether your portfolio can withstand the bear market and come back stronger.
1) Which protocols are generating revenue?
Ponzinomics and money printing will not work in an environment where no one’s buying.
You may have seen people becoming rich off Wonderland (TIME) awhile ago but that’s becaus e they were early and lucky. These crypto projects have died off and can never survive for the long term, they only went so far in the bull market.
You can sort and see how much revenue each protocol is generating. Another metric you can use to help judge a protocol is the P/E ratio which is calculated by taking the token’s price divided by its earnings per share (the lower the P/E ratio, the better the value).
2) Cash Reserves / Treasury
Running a protocol can be expensive. Salaries need to be paid out to employees, funds are needed for research and development to continuously evolve, you need money for marketing to get your protocol out there, and many others.
Hence, it is important to know how much cash reserves the protocol have and whether it is enough to survive a downturn.
One question to ask should also be “what is in the treasury?”. Imagine if their treasury consists of only native tokens, that’s one sure-fire way to capsize with the market when prices plunge.
3) Utility and use cases
Is there a real use case for the protocol to exist? What problem does it solves? How does it solve the problem better than its competitors?
Let’s take a look at Wonderland (TIME) again. It was simply a money printer with no utility at all. These projects may still gain interest in a bull market but will never survive a bear market.
Another good example is DOGE. DOGE pumped purely based on hype and Elon Musk’s tweet previously and is down more than 90% from its all time high currently. This is unsustainable and will only happen in a bull market.
4) Money locked up
One increasingly common tokenomic tactic is the option to lock native tokens up for years.
Some have chose to lock their tokens up in Curve Finance for up to 4 years while others have locked their tokens up in Bastion Protocol (Aurora) as part of the lockdrop.
When you lock CRV up, you get a voting token in return called veCRV. The more CRV you lock up, and the longer you lock it up for, the more voting power (veCRV) you get.
If you have enough voting power (i.e. you’re holding tons of veCRV tokens) you can vote to have your pool earn higher CRV rewards as compared to other liquidity pools.
Choosing to lock your tokens show confidence in the protocol and lowers potential selling pressure on the token itself.
By locking the tokens, this reduces the amount of circulating supply which will result in an increase in price.
The next criteria is the project’s roadmap.
What does their roadmap look like? Are they hitting their targets? How’s the developer activity?
This is to check if whether what they claimed is true and to see if the builders are still building.
Here’s a good guide on how to judge if a protocol can execute its vision. They basically talk about
- Challenges of execution (lack of execution, bright shiny object syndrome, dynamic environment)
- What to look for before launch (what the team has accomplished, Audit, who else invested?, looking at documentation, is the team communicating their vision?)
- What to look for after launch (Quality of work, transparency, how they are responding to setbacks?, constant pivoting?)
6) The team
Many teams and develops abandoned their projects in 2018 and I am sure you will see that happen again this time round should prices continue to fall.
Bear markets are tough mentally and not everyone is built for it. It is easy for an anonymous developer to disappear with their millions, and just come back with a new project in the next cycle than to continue building.
What you should you look for:
• Investors – Find out if they have any seed investors and who they are. If they’re backed by some big-name VC funds, they are less likely to abandon the project.
• Doxxing – A doxxed founder has his/her reputation on the line and is less likely to just leave the project.
• Communication – Is the team actively communicating and addressing the community’s issues and requests?
Watch out for potential slow rugs too. Projects that continuously miss deadlines, make excuses, before they start to slowly stop communicating at all.
These techniques mentioned are by no means foolproof. We have seen projects that tick the entire checklist but still failed (Terra, DeFi Kingdoms).
However, this will work for majority of the protocols and many of them do not fulfill the criteria to survive in a multi-year bear market.
So, should you still be holding them if you think we will continue this slump?
The bad news is most coins will never reach their all time highs again or they will go to zero if we were to see similarities in the 2018 bear market.
Founders lose interest and abandon projects as they do not have the required funds to continue operating. In my opinion, there are going to be new narratives in the next bull cycle.
Here’s the good news – some crypto will rebound and hit new all time highs again! We saw this with prominent projects such as Ethereum, Binance, VeChain and many others hitting new highs for fun last year.
I know some of your crypto may be down 70% or more from your average entry and it’s painful to cut them. But here’s what you need to think about – If you do not think they can survive the bear market, it may be worth it to salvage what’s left. It is better to save the remaining 30% than watch it go down further and only decide to sell them at pennies when it’s close to $0 in value.
[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]
Featured Image Credit: Chain Debrief