As in any other field, investing in crypto has its own specific terminology. Novice traders repeatedly encounter phrases such as “bull market” and “bear market” when analyzing and predicting the behavior of asset prices. This article will define what a bear market is and how you can use this knowledge to your advantage.
What is a bear market?
A market that experiences a decline in prices more than 20% of its previous high is called a bear market. Simply put, market participants believe that the price will continue to fall, and only then will the situation improve. The phenomenon of panic, which occurs in the period of a deep bear market, is associated with a vicious circle. The traders begin to sell assets en masse, take short positions, or otherwise exit the market. Then the domino effect is triggered, as many traders are under the influence of “bearish” sentiment.
Bear markets usually reflect the general downturn in the economy. For instance, the U.S. stock market experienced this in 2008 and 2020, with losses of 56.8% and 33.9%, respectively. The market drop is often accompanied by an external negative factor such as a natural disaster, war, political instability, etc. The performance of companies deteriorates, leading to an adverse reaction in either stock or crypto market. As a result, investor confidence is declining. They start selling shares and wait for the market to recover.
Government intervention can also trigger a bear market. For example, a mining ban in China in the summer of 2021 led to a collapse in the hash rate and price of the leading cryptocurrency.
“Bulls” and “bears” in the market
These terms appeared in the stock market game in the 18th century.
- “Bulls” are called investors who play to increase prices at a certain point in time. They believe that the asset will rise in price now and in the future, which encourages them to try to earn from the growth.
- “Bears” — investors who, unlike “bulls,” are convinced that the price of an asset should fall. On this basis, they open positions to sell (short positions). When prices move down, this brings them the expected profit.
In other words, bulls are buyers in the market; bears are sellers. Their behavior determines the following pattern of price movement:
- The market grows when there are more buyers (“bulls”). Such a market is called a bull market.
- When the number of sellers (“bears”) prevails in the market, it falls and is called “bearish.”
Phases of a bear market
This phase precedes a clear market transition to bearish. At this point, investors are actively buying, or the market is expensive and growing. However, over time, interest in the rising asset fades. Market participants lock in their profits by selling previously purchased coins. Growth slows and comes to a complete halt, indicating the end of the phase.
- The fall
Sellers in the market gain an overwhelming advantage and exert a noticeable downward pressure on assets. In addition, economic indicators that are not very good for the issuer, the industry, the country, or the world as a whole can also contribute to the decline.
- Speculative phase
At this point, investors can fill the market with a lot of money. However, transactions at this time are usually open for only a short time. Accordingly, the asset price may rise, but not for a long time. Despite short-term corrections, the general trend remains downward (“bearish”).
- Fall slowdown
The market has been declining for a long time, and the price may be in the oversold zone. Investors see this and start buying assets on positive news. Thus, “bearish” sentiment is gradually offset by “bullish” sentiment, slowing the price decline.
- Slow fall
Investors believe that the asset becomes extremely cheap, making further selling unprofitable. This leads to a reduction in the number and volume of short positions. On important positive news, market participants switch to buying. The decline slows as much as possible; prices enter a sideways movement, most likely replaced by an upward trend.
Even though the crypto market is still young, it generally repeats the same cycles that are typical for the stock market. There are striking differences between a bull market and a bear market with securities:
- As a rule, any negative news related to assets triggers a panic attack among investors. It spreads almost instantly, forcing holders to divest themselves as quickly as possible of assets in danger of losing profitability or even going into negative territory. For this reason, significant price losses occur in a very short period.
- On the other hand, a positive value cannot immediately change the mood of potential buyers. For the prices of digital assets to rise, the crypto project must perform enormously, proving stability, building a good reputation, and presenting results that interest investors. Only then will demand on the particular asset increase and trigger further purchases. All of this leads to a smooth and leisurely price increase in times of the bull market.
Bear market vs. Correction
A correction is a short-term decline of up to two months when markets lose 10–20% in value. Corrections occur in a rising market and are an excellent time to buy assets for long-term investors who follow the buy the dip tactic, i.e., buy more on drawdowns.
Unlike corrections in a bear market, it is more difficult to determine the optimal entry point because it is almost impossible to decide on the bottom of the downtrend. Buying assets and building average positions can lead to losses: the depression may worsen, and prices will fall for many months.
How long do bear markets last?
Bear markets can last indefinitely. Investors distinguish between “cyclical” and “long-term” bear markets, which differ in their time frames. Cyclical bears tend to be short-term and last a few months. Bears that are “long-term” can last between five and 25 years. There is a delay before you can definitively declare the end of a bear market, since the bottom can only be calculated in retrospect after the market has recovered.
How to invest during a bear market?
- Use dollar-cost averaging strategy
Let’s say the price of a crypto asset in your portfolio drops 25%, from $100 to $75 per coin. If you want to buy more of these coins at a lower price, it might be tempting to time the market. The problem is, you are likely to be wrong. The digital currency has not bottomed at $75, but may have fallen 50% or more from its high. For this reason, it is risky to determine the bottom or “time” of the market.
A smarter approach is to regularly add money to the market through a strategy known as Dollar-Cost Averaging. Dollar-Cost Averaging means that you keep adding money in roughly equal amounts over time. This way, your purchase price is smoothed over time, so you do not invest all your money in a particular asset when it peaks, thus still benefiting from market declines.
2. Diversify your holdings
You should consider diversifying your portfolio, i.e., having a mix of assets, is another valuable strategy, bear market or not. It is common for all coins to fall during a bear market, but not necessarily by the same amount. This is why a well-diversified portfolio is so important. Investing in a mix of relative gains and losses will help minimize the overall losses of your investments.
Because bear markets usually precede or coincide with economic recessions, investors often prefer investments that generate more consistent returns during this time — regardless of what’s happening in the economy. This “defensive” strategy may mean adding less risky assets to your portfolio.
3. Focus on the long-term
Bear markets test the investors’ resolve. Although these periods are challenging to get through, history shows that you will likely not have to wait for a while for the market recovery. And if you are investing for a long-term goal like retirement, the bear markets you experience will be overshadowed by bull markets. Money needed for short-term goals, usually those you hope to achieve in less than five years, should not be invested in cryptocurrencies.
Explore other opportunities to earn cryptocurrency
You can earn on your digital assets not only through trading. For example, a PointPay crypto bank offers two other ways of making a profit. First, you can deposit your funds into a savings account and earn APY on different assets. Second, you can earn up to 20% staking PXP tokens while you are waiting for the markets to recover. Soon you will see your assets growing in line with the annual percentage return. Check other opportunities to generate more profit with the PointPay platform!