The market goes down: what to invest in to make profit in 2021

The crypto market has seen explosive growth over the past few months, attracting a lot of retail and institutional investors. However, the rally cannot last forever and from time to time the price of Bitcoin and other cryptocurrencies are experiencing a fall.

The price correction is a healthy response to a sharp rally and correction depth is largely dependent on recent results. For example, if the coin price surged by 100% and then fell by 20%, then this looks quite reasonable. This happens all the time in the stock market, for instance, with biotech stocks.

So if you see that the price of some cryptocurrency has dropped by 20% it is not always the end of the world or “crash”. The price can return to previous levels and even update its highs in a few days or weeks. In this case, the correction is a kind break or pause before another wave. This is exactly what happened in the first quarter of 2021 in the cryptocurrency market.

But as the history of the cryptocurrency market shows, such waves cannot be all the time. Ultimately, a deep correction must occur and it may take more than one year (2014-2015 and 2018).

Many investors are now wondering whether the deep correction will come in 2021 or it will be a year of bullish waves that drive crypto prices to new heights. Here’s what to pay attention to, looking at these possible scenarios.

Should we take a look at 2017 for hints?

Recently, the 2020-2021 rally is increasingly being compared to the 2017-2018 crypto boom. Over the past 6 months, the capitalization of the cryptocurrency market has increased 6 times — from $300 billion to $1.8 trillion.

For comparison, the cryptocurrency market peaked during the 2017-2018 rally on January 7 — about $830 billion. Six months before this, the cryptocurrency market capitalization was in the range of $ 100-130, which also shows an increase of 6-8 times. Does this mean that we are approaching the peak of 2021?

In fact, there are significant differences between 2017 and 2021. In 2021, the Bitcoin dominance remains at a fairly high level (about 60%), while in 2017 the dominance dropped significantly, as much as 30%. Now institutional investors are starting to play an increasing role in the cryptocurrency market when in 2017 only individual investors dominated the market. If in 2017 the largest growth was shown by ICOs, which were backed only by developers’ promises, then in 2021 the market has seen a real activity surge in DeFi projects. So, the potential of the cryptocurrency market in 2021 remains uncertain.

Still, the 2017-2018 rally could provide a hint of how investors might behave during a bearish cryptocurrency market. While the crypto market experienced a recession in 2018, the Bitcoin dominance grew steadily — from 38% to 52%. Ether and some stablecoins also faced significant support. Thus, investors’ money predominantly flowed into “more stable and established coins”, even when they were going down.

Of course, during the bear market, there were also winners among the little-known coins. For example, in the first half of 2018, ZRX (0x) performed well, and coins such as Hexx and Electra skyrocketed by over 3000%. But finding such coins during a bear market is quite lucky, so most people try to stay at the same level and wait for better days.

May the 2021 rally continue the whole year?

This is also possible. At the moment, Bitcoin is the main pendulum of the entire cryptocurrency market due to its domination level (60%). Therefore, if bitcoin has incentives for further growth, then it can drag the rest of the market with it. And vice versa.

As history shows, bitcoin demonstrates steady growth within 1-1.5 years after halving. The last bitcoin halving took place in May 2020, so in theory, bitcoin can support further crypto market rally (although past performance does not guarantee future results). The pandemic, stimulus economy packages in the USA and other countries, adoption among institutional investors — all this can also support bitcoin and the cryptocurrency market in general.

In such a case, the cryptocurrency market may continue to climb higher, experiencing short-term periods of healthy correction. Against the backdrop of general enthusiasm, investments in top coins by capitalization can also demonstrate a decent return. The biggest potential profit, as always, is shown by little-known coins due to low liquidity and high volatility. But it is worth remembering that investing in such coins may increase the risk as well.

Other options to benefit when the market goes down are crypto futures, options, and opening short positions on margin trading platforms. With these instruments, investors and traders can protect themselves from falling prices and even make money on it. Thus, you always have the opportunity to make a profit regardless of the direction the cryptocurrency market goes. But in order to go short, it is necessary to analyze and understand how deep the correction can be.

Usually shorting isn’t recommended for beginners because it involves higher risk. Also, if you decide to go short on some particular coin, make sure to stay up to date with current related events to anticipate any change in the price direction and make a profit.