Why Do People Buy Crypto in Bear Markets? 

Traders and investors understand the upside potential of cryptocurrency. For example, consider Bitcoin’s meteoric rise in 2017 and again in 2021. These wild fluctuations are nothing to be scoffed at. Indeed, over the past five years, Bitcoin’s price is up 365.99%, or $17,018 .71 (at a late-August ‘22 trading price of $21,668.70). At its peak, Bitcoin approached $68,000 before it plunged spectacularly to its current trading levels, approximately two-thirds lower.

While thousands of cryptocurrencies are on the market, most traders monitor the big five, including Bitcoin, Ethereum, Tether, USD Coin, and BNB. These days, Bitcoin averages 39.6% market dominance, with Ethereum comprising 19.9%. Combined, that’s over 60% of a $1 trillion market. Believe it or not, what happens with Bitcoin and Ethereum largely determines the price direction of thousands of other digital currencies. In recent months, we have seen a strong correlation between the performance of equities markets and cryptocurrency. 

Since South Africans can trade cryptocurrencies online, we explore this topic in greater detail. 

Why Buy Crypto in Bear Markets?

People buy crypto in bear markets for many reasons, but three stand out: 

1. Profit potential during market recoveries 

2. Diversification of portfolios 

3. Protection against inflation and economic uncertainty

 # 1. Profit Potential During Market Recoveries 

Crypto is a volatile asset class, meaning prices can move sharply in both directions. For example, Bitcoin fell from its high of nearly $20,000 in December 2017 to below $4,000 by December 2018—a decline of more than 80%. However, the following year it rallied back above $13,000. Similarly, Ethereum fell from around $1,400 in January 2018 to around $100 by December 2018—a decline of more than 93%. It then rallied back above $200 by January 2019. Now, it’s well over $1550. These rebound rallies following sharp declines offer profit potential for investors who are patient and have a long-term perspective. 

# 2. Diversification of Portfolios 

Cryptocurrencies can help diversify investment portfolios and reduce overall portfolio risk. This is because crypto prices tend to move independently of other asset classes, such as stocks, bonds, and commodities. For example, when stock markets experience a sharp sell-off, cryptos often hold their value or even increase in value. This happened during the global financial crisis of 2008 – 2009, when Bitcoin prices rose while stock prices plunged. Similarly, when the stock market rallied strongly in 2019, cryptos fell sharply. This diversification benefit has led some institutional investors to allocate a small portion of their portfolios to cryptocurrencies. Now, however, there’s a strong correlation between crypt and stocks. Experts don’t expect this to last beyond the market’s inflationary phase. 

# 3. Protection Against Inflation and Economic Uncertainty 

Investors sometimes view cryptocurrencies as a hedge against inflation or economic uncertainty. This is because interest rates or government policies do not directly affect cryptocurrency prices. For example, if a country’s central bank prints large amounts of money (quantitative easing), this often leads to higher inflation rates. However, this does not directly impact cryptocurrency prices since they are not fiat currencies. Furthermore, cryptocurrencies can also protect against geopolitical risks such as trade wars or currency devaluations. We are at an interesting juncture with crypto and stocks experiencing similar bearish momentum.

Should You Buy Crypto During Inflationary Times with Bearish Stock Markets?

The answer to these questions, it’s not as straightforward as it may seem. In general, it is advisable to diversify one’s investment portfolio to mitigate risks associated with any one particular asset class. However, there are a few things to consider before investing in cryptocurrency during inflationary times: 

• Cryptocurrencies are volatile asset classes, and prices can move sharply in both directions. Therefore, investors should be prepared for the possibility of substantial losses.
• Cryptocurrencies are not backed by any government or central bank and are not considered legal tender. As such, their value is entirely dependent on market forces of supply and demand.
• Investors should clearly understand the technology behind cryptocurrencies and the potential risks involved before investing.

What About the Exchange Rate Risks?

There’s no doubt that the South African rand is exceptionally volatile. With Bitcoin and other cryptocurrencies priced in dollars, whipsaw price movements are possible.  

When making any investment, it is essential to consider exchange rate risk. This is the risk that the value of your investment will decrease due to changes in the exchange rate. For example, if you invest in a foreign currency and the value of that currency falls relative to your home currency, then your investment will be worth less in your home currency. 

Exchange rate risk is especially relevant when investing in cryptocurrency since most cryptocurrencies are not pegged to any fiat currency. This means that their value is entirely dependent on market forces of supply and demand. Therefore, investors should be aware of the potential for substantial losses due to exchange rate fluctuations.