The global risk asset markets (i.e. anything other than the risk-free US T-bills) are naturally dominated by long-only investors. As a case in point, the largest asset manager by assets under management (AUM) in 3Q21, Blackrock, managed over USD $9tn, while the 58th largest, Wells Fargo AM, managed $588bn.1 To put this into perspective, the largest hedge fund by AUM, Bridgewater, managed just over $105bn as of 2Q21.2 These numbers have surely changed after the equity and bond markets sell-off in 2022, during which many sharp shooters like Bridgewater had made a fortune.3 Still, in the grand scheme of things – long-only investors’ AUM still far exceeds hedge funds’ AUM by orders of magnitudes. As a result, simple long-only stock indices have historically outperformed many hedge fund managers who have tried to time the market or prey on microstructure bets (long/short strategies, factor, correlation, etc).4 

This is a similar phenomenon seen in crypto – where asset owners, or bulls, historically outweigh and outlast bears in the long run. That said, the title long-only does not mean unhedged long-only, and asset owners can always employ derivatives to protect downside and/or magnify upside of their spot holdings. In TradFi however, such derivatives are often only accessible to qualified investors (e.g. large initial margin prerequisite, ISDA & KYC setup with brokers) that naturally shut out main street investors. In CeFi & DeFi, retail investors can enjoy the full benefits of such instruments, although a good understanding of these strategies in addition to tight risk control measures are necessary when using them. 

This piece aims to lay out several bear markets principles and strategies which we think could be helpful for investors looking to accumulate assets during the downturn. We discuss both hedged asset buying strategies as well as synthetic upside-capturing trades with pre-defined costs. Such strategies are by no means bear market exclusive, as they can be used to speculate downside equally. As the saying goes, a sword is only as good as its wielder.   


Here are some of the principles to invest by that can help you to endure bear markets better –

Downside Management & Capital Preservation

If you fail to plan, you plan to fail. The human nature of loss avoidance can trigger investment decisions that do not generate positive expected return in the long term, e.g. buying high and selling low. A well-thought plan of downside protection and capital deployment, e.g. hedging, sizing, dollar cost averaging, can help investors mentally prepare for stressful market movements and thus not waste precious capital in the golden goose chase.

Asset Selection & Accumulation

The proper criteria that constitute the concept of “quality asset” are beyond this article. However, the general rule of thumb of answering “what to buy in bear markets” is usually to “stick with the blue chips”. TradFi blue chip stocks are commonly from profitable, cash flow-generating companies with a strong balance sheet; these stocks usually have a high market cap as well, making them very liquid. When it comes to crypto, market cap and level of adoption behind tokens are usually assessed when investors decide which are blue chips. BTC & ETH are the consensus blue chips in crypto space. 

Admittedly, blue chips can mean different things to different investors. Therefore, what we would like to convey under this principle is that investors can benefit from a high-conviction list of assets. Despite recognizing the importance of diversification, having evidence-backed conviction is conducive to weathering volatility and generating alpha from a concentrated positioning. 

Liquidity Optimization & Capital Efficiency

Bear markets are relentless to cash-striped investors, who might be eager to buy dips but lack the resources to do so. In such market conditions, leveraged positions are at a higher risk of being liquidated too while fiat currency funding cost is also higher in a Fed-tightening environment, which also means liquidity is more expensive. 

This principle calls for setting aside dry powder and utilizing the cheapest instruments at hand. Examples include active spot-futures switching, fiat/stablecoin yield generation, trading cost management, selective liquid staking, and more.

Strategies for Asset Holders

Strategies mentioned in this section involve ownership of spot non-stablecoin assets under at least some scenarios. For clarity, all strategies are assumed to start with stablecoin/fiat principal at inception. 

Linear Instruments

Long Asset + Leveraged Short Perps

Assume the max leverage offered on perpetual futures is 10x. This strategy requires segregated margin accounts and following the below steps: 

  1. Divide principal into 10 + 1 = 11 portions; 
  2. Buy spot asset with 10 portions in Account #1; 
  3. Short perp 10x leveraged in Account #2 with the remaining 1 portion as margin. 


  • Full downside hedge while only missing small upside until short perp is liquidated
  • Straightforward implementation & no need to roll hedges
  • No previous knowledge of option greeks required
  • Owned asset available to generate yields
  • Can be implemented both on-chain and on CEX


  • Short perp funding costs can be high from time to time
  • If asset rallies to where short perp gets liquidated and then sells off, long asset will lack hedge

Dynamic Spot-Futures Switch

For asset owners, the best case would be a positive perp funding rate, as the short perp hedges are paid for by long perp speculators. 

If perp funding rate dips into deeply negative territory, it might make sense to switch the spot long asset into long perp – with or without leverage, depending on risk appetite. Do ensure that your transaction costs are accounted for when evaluating spot-futures basis and net funding gains.   

Long Asset + Leveraged Short Farming

This strategy is implemented as such: 

  1. Buy spot asset with full principal; 
  2. Enter a leveraged farming position by borrowing the same amount of purchased asset; 
  3. (Usually executed by leverage farming protocols together with stage #2, but breaking down here for clarity) sell the borrowed asset into stablecoins; 
  4. Farm asset-stable LP. 

Note that entering an LP is inherently shorting volatility. To be prudent, one should compare APR (not APY) to implied and realized volatility to ensure the vol-adjusted LP yield makes sense.  


  • Straightforward implementation & no need to roll hedges
  • No previous knowledge of option greeks required
  • Automatic dip buying by nature of LP; no downside liquidation


  • Inherent risks relevant to smart contracts, blockchains, oracles etc.
  • APR changes frequently and might not be profitable on a vol-adjusted basis
  • Impermanent loss & upside liquidation. If asset rallies, LP owns fewer assets but the borrowed leg continues to accrue interest. 

Short Farming via Money Markets

This strategy involves following steps: 

  1. Deposit stablecoin into money market protocol e.g. AAVE as collateral; 
  2. Borrow asset; 
  3. Sell half of borrowed asset into stablecoin; 
  4. Farm asset-stable LP. 

Compared to Long Asset + Leveraged Short Farming which can be tuned to neutral/small long asset at inception, this strategy is net short asset by nature. We include it because, under certain circumstances, this strategy will still accumulate asset, as reflected in the chart below. 

Below is the NAV 1-month into trade inception, assuming stablecoin deposit APR 6%, asset borrow APR 12%, LTV at inception 60% and liquidation happens at 75% LTV. The step-down on blue series shows the time when borrow gets liquidated. 


  • Straightforward implementation & no need to roll hedges
  • No previous knowledge of option greeks is required
  • Automatic dip buying by nature of LP; no downside liquidation 


  • Inherent risks relevant to smart contracts, blockchains, oracles, etc.
  • APRs on both borrowing and LP change frequently and might not be profitable on a vol-adjusted basis
  • Impermanent loss. If asset rallies, LP owns fewer assets but borrowed asset continues to grow due to interest
  • Upside liquidation. If the bear market ends and asset rallies sharply, borrowing will be liquidated and assets need to rally further to make up for lost principal which equals to [100% – liquidation threshold].

Non-Linear Instruments

For clarity, our payoff profile below for any strategies involving options is proxied from Black-Scholes priced, European-style BTC options assuming spot BTC trades at $30k. The payoff profile only depicts the profit and loss upon expiration and it does not represent day-to-day changes for the position. We are also assuming that volatility remains constant through time and across all strikes. Option prices used to calculate the positions exclude slippage and transaction fees. Detailed option parameters are included under each graph.

Long Asset + Long Put / Put Ratio

This strategy requires: 

  1. Dividing initial principal into two portions; 
  2. A big portion buys asset; 
  3. A smaller portion buys put or put ratios5 to achieve delta neutral. Principal division ratio depends on the option premium required to achieve delta neutral.

Tenor and strike price can be tuned to individual risk appetite and market view, usually factoring in how fast and how much market will selloff and prevailing asset yields available (if yield is high, can afford more theta decay). 

Bearish put ratio should be adopted when expecting market crash (benefit from positive $vega), while bullish put ratio performs better in a grinding-lower market. For asset owners, it might make sense to implement bullish put ratios in physical-settled options, and elect to be assigned underlying when the puts sold expire in-the-money (ITM). 


  • Initial hedge cost is defined; hedge rolling frequency can be reduced if using longer tenor but more expensive puts
  • Implied leverage ratio can be higher than what linear instruments offer
  • High customizability to reduce upfront hedging costs, at a cost of taking more risks if spot price moves into certain ranges
  • Owned asset available to generate yields
  • Little to no maintenance margin required for long options trade


  • Subject to P&L from other greeks than delta, e.g. when buying puts during vol spike the $vega/$gamma can lose money when IV/short term vol mean revert
  • If using bearish put ratios, IV skew could increase option premium significantly
  • If using bullish put ratios, position will be exposed to full downside risks when spot price falls below the lower strike price
  • Requires knowledge of option greeks to fully understand implications

Fully Margined Short Put

This strategy is implemented as such:

  1. Choose a target price (lower than current spot asset price) for asset purchase;
  2. Post full principal ready and sell put with strike price the same as target price; make sure the options can be physical-settled
  3. Buy the asset if put expired ITM, at a discount price (strike minus premium received); keep rolling the same trade if put expired OTM


  • For asset buyers who want to get extra discount, put selling can benefit from IV skew greatly
  • Tenor and strike price are customizable


  • If only cash-settled options are available, we don’t recommend putting this strategy on for asset buyers: in case the put expires ITM, P&L will be taken from principal instead of allowing for cheaper asset purchases

Long Asset + Short Call (Covered Call) / Call Ratio

This strategy is implemented as: 

  1. Buy asset with 100% of initial principal; 
  2. Deposit part of the asset as collateral (required initial and maintenance margins vary by options exchange); 
  3. Sell out-of–the-money (OTM) calls/call ratios6 to achieve delta neutral. 

Again, tenor and strike price can be customized. However, significant amount of margins might be required for option selling, reducing the portion of asset which can be used to farm yields elsewhere. 

The payoff profile of covered call at option expiry is the same as that of shorting put, but different margin implications can lead to extra yield generated during the lifetime of options.  


  • Yield from call/call ratio selling is “locked in”, until option expiry date
  • Yield earned from selling options can be regarded as reduction on cost basis


  • Inefficient margin (large portion of asset might be needed to post as collateral to avoid liquidation)
  • In ongoing bear markets, IV skew is usually against call sellers
  • The assets are technically not hedged, but only bought at a cheaper price. If spot sells off too much, the next available strike of calls to sell might be below cost price.
  • Upside is forfeited depending on sizes of calls sold  

Synthetic & Asset Light Strategies

Strategies under this section only offer synthetic exposure to underlying assets. Assuming all options are cash (stablecoin) settled, these strategies will not result in ownership of spot assets. 

Linear Instruments

Long Perp Futures

Not for the faint hearted, this strategy requires perfect market timing to not get liquidated. We would consider more prudent strategies better suited to bear markets. 

Leveraged Long Farming

This strategy is implemented as such:

  1. Deposit stablecoin principal into leveraged farming protocol;
  2. Chose to borrow stablecoin;  
  3. (Protocol usually auto executes this step) buy asset with half the leveraged principal and farm asset-stable LP


  • No previous knowledge of option greeks required
  • Automatic dip buying by nature of LP; leveraged upside
  • Vol-adjusted APR could be more attractive than returned by strategies in section E below


  • Downside liquidation. Only suitable for late-stage bear markets when short-term rebound is likely. 
  • Impermanent loss on upside vs pure leveraged HODL. Again, assessing the vol-adjusted APR is key to determine whether this strategy is favorable

Non-Linear Instruments

Bullish Risk Reversal7

Long OTM call + short OTM put 

This strategy can be implemented with zero cost or even credit at inception under certain conditions. However given downside is not protected in this structure, we would consider more prudent strategies better suited to bear markets.

Synthetic Long Position8

Long ATM call + short ATM put

Yield Opportunities in Bear Markets

For the strategies above that free up owned assets, further yield can be generated. Depending on the stage of bear markets, more risky yield strategies can be suitable, but for this article we will focus on the safer ones. 

Liquid Staking


  • Inherent risks relevant to smart contracts, blockchains, oracles etc.
  • Depeg between liquid-staked receipts and unstaked tokens if liquidity is required immediately

Vault (Yearn, DOVs)


  • Inherent risks relevant to smart contracts, blockchains, oracles etc.
  • Same risks to selling calls if invested in DOVs; less yield from DOV than self-managed call selling as option dealers tend to front-run the predetermined DOV selling flows

Similar Assets LP


  • Inherent risks relevant to smart contracts, blockchains, oracles etc.
  • Depeg risks
  • Bridge risks, if one leg is a wrapped token



  • Counterparty risks, if deposited to CEX “earn” programs
  • Risks relevant to smart contracts, blockchains, oracles etc., if deposited to DeFi money markets
  • Counterparty risks, if lent directly to other counterparties without collateral 

Final Thoughts & How Treehouse Can Add Value

The bear market is a crisis, but also an opportunity! We hope this article helps both OGs and new investors accumulate their assets in a risk-controlled fashion. On top of selecting strategies that suit your risk appetite, picking the right tools is also critical to bear hunting. Harvest by Treehouse comes in handy when trading with the strategies mentioned above. We want to help you shoot sharp and shoot safe with our proprietary current and historical risk exposure and P&L analysis of on-chain assets, including LPs and borrowing and lending. Access it here.






5 1×2 bullish/bearish put ratio means buy/sell 1 puts at higher strike price, and sell/buy 2 puts at lower strike

6 1×2 bullish/bearish call ratio means sell/buy 1 puts at lower strike price, and buy/sell 2 calls at higher strike

7 Bullish Risk Reversal means buy one OTM call and sell one OTM put

8 Synthetic long position means buy one at the money (ATM) call and sell one at the money (ATM) put


This publication is provided for informational and entertainment purposes only. Nothing contained in this publication constitutes financial advice, trading advice, or any other advice, nor does it constitute an offer to buy or sell securities or any other assets or participate in any particular trading strategy. This publication does not take into account your personal investment objectives, financial situation, or needs. Treehouse does not warrant that the information provided in this publication is up to date or accurate.