Presented by OVEX

How to invest in a bear market

Cryptocurrency market incumbents Bitcoin and Ethereum as well as their smaller risk-on counterparts (like XRP) are swinging up and down regularly, and wildly too. More recently, however, we have seen far more down then up driven by a broader market sell-off.

This as investors react to rampant inflation only exacerbated by a global supply chain crisis. Now fears of a recession loom and expectations of aggressive rate hikes from global central banks sit firm on the horizon.

Just weeks ago the The US Fed raised its main interest rate by 75 basis points, the largest increase since 1994. Many respected analysts have ramped up their bearish bets on global growth.

The Federal Reserve Chair Jerome Powell recently testified in front of congress and was very clear that the U.S. central bank must “go ahead” and continue to raise interest rates to get inflation down, even if that means that the economy faces higher unemployment and a potential recession.

Bear markets present a challenge to even the most seasoned investors. Whether you have $1,000 in the market or $1 million, losing money hurts. You may consider abandoning your investment plan altogether as the declining market tests your patience.

If not patience, fear may have you in a frenzy as even investments designed for stability – like cryptocurrency protocols UST and more recently USDD – go belly up. But now is not the time for panic.

Terra Luna’s UST and TRON’s USDD may have seemed unstoppable when the sun was shining. But when it starts to pour – only the projects that have real utility will weather the storm. Those with cracks will waterboard and may never recover. As was apparent when UST crashed and may yet become apparent if USDD follows in its footsteps.

CEO of OVEX, Jon Ovadia, says the following should be front of mind in these otherwise tumultuous times:

  • When in doubt. Zoom out. The average stock bear market lasts 2 years compared to cryptocurrencies 11 months (so far). Bull markets generally persist for 3X longer. This is why it is important not to panic sell at a loss.
  • In fact – all forms of emotional trading is a BIG no. Learn to manage your emotions. Downturns in the crypto market can be emotionally challenging. If you’ve lost money in markets, you may be tempted to revenge trade to get it back. This is a sure-fire way to get burnt.
  • This does not mean you shouldn’t be looking for opportunities (within your means). Yes investors are pulling money out of every market – safe havens and risky assets alike – but this could very well be a sign of true market capitulation. In other words, sentiment is now so negative that we might be near the bottom of the market – something you might be tempted to capitalize on. As the Oracle of Ohama once said: “be fearful when others are greedy, and greedy when others are fearful”.
  • Do not try and time the bottom. Almost no one pulls this off. Especially when there is so much global macro-economic uncertainty. Rather dollar cost average (DCA) into projects you believe in long term. DCA means investing smaller, fixed amounts on a regular basis over an extended period of time, rather than investing all of your capital in one go.
  • When things go pear-shaped, lessons are learnt, and people build back harder. Bear markets are times when projects with little utility fail and those that can actually make a difference begin to shine.
  • Take a deep breath. Give yourself a pat on the back. Yes Crypto bear markets can be tough to weather, but if you’ve hung around this long, you’ve come further than most. Just remember to never invest more than you can lose.

Other than treading with caution and adopting the above mindset. Ovadia also recommends finding safety in stablecoins as a hedge against broader market capitulation and FIAT wealth deterioration.

Why is your FIAT wealth deteriorating? Well first off – unprecedented quantitative easing as a result of reckless monetary policy has resulted in rampant inflation that shows no signs of abating. Throw in the mix a global economy in disarray following a global pandemic and now the Russia-Ukraine conflict.

This means the average savings account rate of 4.88% in SA can barely keep up with inflation currently over 5.8%. OVEX was the first to offer a stablecoin savings accounts in SA which has proven popular amongst the exchange’s investors looking for a low-risk/high-yield solution even in this uncertain environment.

The Stablecoin Debate: Are Stablecoins a hedge against the current market rout?

Stablecoins are a type of cryptocurrency whose value is tied to an outside asset, such as the U.S. dollar or gold, to stabilize the price.

During bearish markets, stablecoins offer investors a safer means to earn yield on their digital assets through lending or liquidity mining in Decentralised Finance (DeFi) while mitigating the impact of the speculative price volatility inherent in the cryptocurrency.

This coupled with the possibility for yields unheard of in traditional finance has led to the stratospheric rise of stablecoins as of recent with their circulation increasing by over 1000% in just under a year.

OVEX, for example, offers US Dollar stablecoin Interest Accounts where depositors can earn 8.5% yield and therefore hedge against not only a depressed Rand, but also rampant inflation.

This is made apparent in the following graphic that compares OVEX Cryptocurrency Interest Account yields for its USD stablecoin holders when compared to other forms of traditional ‘saving’.

What is more; stablecoin interest is paid out daily compared to traditional finance’s monthly repayments. The withdrawal period is only 14 days compared to the months one is accustomed to in traditional finance. The annual percentage rate (APR) of 8.5% can go as high as 14% in some cases which is dependent on the users deposit size.

Not all stablecoins, however, are created equal. Some stablecoins have proven not so stable and have even upended the entire crypto market when they eventually crashed. These ‘not-so stablecoins’ maintain their peg by using smart contracts that increase or decrease their supply based on their current market value.

They are known as algorithmic stablecoins and are infamous for both their meteoric rise and subsequent fall from grace.

Remember UST and USDD from earlier. These are two examples of algorithmic stablecoins; one which recently went to zero and the other which had its first real test only recently. The catastrophic collapse of UST and its native token LUNA saw over $40billion wiped from its ecosystem within 2 days. UST de-pegged from the US Dollar. Lifesavings were lost.

Ovadia says OVEX had no exposure to neither UST nor LUNA, on its own balance sheet, although it did offer clients the opportunity to purchase LUNA by listing it on the OVEX exchange, as a purely speculative crypto asset.

“We always strive to list assets on OVEX that have real promise and we undertake extensive due diligence before deciding which projects to list. It is important to remember that picking the top is the job of traders, our users. We are platform builders. As builders we have always put our users first. This is one of the reasons we charge ZERO trading fees and boast the tightest spreads”.

“Unfortunately, a lot of people assume all stablecoins are likewise at risk, which they are not”.

OVEX listed stablecoins are different in that they are fully FIAT collateralised. Fiat-collateralized stablecoins are, as the name suggests, are actually backed by sovereign currency such as the pound or the US dollar.

This means that equivalent fiat money is held in reserves as collateral for every digital coin issued to you. These stablecoins are responsible for the biggest flows in the crypto sphere and have truly bridged the gap between activities in the world of traditional finance and the world of crypto.

The role they play in this space is becoming increasingly prevalent and in a recent report by J.P. Morgan the share of market cap that stablecoins hold in the crypto-sphere reached a new historical high:

Ovadia says some hard lessons are being learnt as the aggressive sell-off weeds out weak players. “The first lesson is that not all stablecoins are created equal. We never offered our clients exposure to UST because we didn’t like what we saw.”

“We do offer clients exposure to other stablecoins that are reliably backed by hard assets, such as Tether (USDT), Binance USD (BUSD), True USD (TUSD) and USD Coin (USDC).

Our clients can purchase these stablecoins and earn annual percentage yields of 8.5% to 14% and even higher in some cases, but these are not algorithmic stablecoins. These are stablecoins that are fully collateralised and audited.”

“Many of the less viable crypto projects  – like algo stablecoin UST – are going to get weeded out, and that is a good thing for the space going forward. Capital can now be deployed to projects with real use cases. Secondly, I see a great deal more due diligence being undertaken by clients, particularly institutional clients. Especially stablecoins that are now under a ferocious amount of scrutiny.”

“Remember, the reason you invest in a stablecoin such as USDT or TUSD is because they offer sanctuary from the volatility of more speculative coins such as BTC and ETH. If a coin professes to be a stablecoin, then you want to make sure that it is backed by collateral and not some fancy algorithm.”

“I believe we are going to see as lot of good come out of this situation. I think regulators are going to find themselves under pressure to provide some form of ground rules for this new asset class and that is a good thing.

Clients must demand greater accountability and transparency from cryptocurrency firms. Regulators must step in and lay down ground rules. These are all necessary obstacles that need to be cleared in order to securely transition to what will become the new normal.”

Brought to you by OVEX; Africa’s leading digital asset prime brokerage

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How to invest in a bear market