The terms ‘bull’ and ‘bear’ markets describe the upward and downward trends in financial markets respectively. A bull market indicates sustained growth with investor confidence leading to higher demand than supply, pushing prices up. A bear market, conversely, reflects a downturn with declining confidence and excess supply, resulting in falling prices.
Identifying the onset of these markets is crucial for making smart investment decisions. Bull markets, marked by a 20% rise after a decline, are driven by factors like mainstream popularity, innovative capital, economic expansion, or shifts from traditional financial instruments. Bear markets, indicated by a 20% fall, can be triggered by loss of popularity, environmental concerns, or economic crises.
Investing strategies differ for each market type. In bull markets, buying early and selling at the peak is ideal, while bear markets offer opportunities to buy at low prices or short sell. However, predicting the end of these markets is challenging, with no exact indicators to rely on.
Successful investment hinges on understanding market trends and investor sentiment, which often act as self-fulfilling prophecies. Tools like TradingView and CoinGecko can help analyze historical data, while staying informed on market sentiment can guide better predictions and investment choices.
Regardless of whether you engage in the real estate business, the cryptocurrency market, the stock market, or any other financial market, you will undoubtedly come across the terms bull and bear. These two terms describe the general characteristics of the market, a specific company, or a specific asset class at a given period of time. More precisely, they denote whether the market or an individual asset appreciates or depreciates in value as a general trend.
We only need to look at Bitcoin’s price movements to realize how volatile the cryptocurrency market is. So, if you want to make smart investment decisions, you need to pay close attention to the market’s current direction. Whether the market is bearish or bullish will tell you what to expect from the market in the near future. In this article, you’ll learn how to interpret these two market conditions.
What Is a Bull Market?
A bull market means the market is experiencing sustained or substantial growth. In other words, in a bull market, the majority of the investors are buying or holding assets. This keeps the demand higher than the supply, hence pulling the prices up.
The general movement of the crypto prices in a bullish market is sudden and upward, similar to the way a bull attacks its opponent by thrusting its horns up in the air.
There is no single formula to determine the bull market, but one of the most de facto indicators is when the coin prices rise 20% or more following a previous +20% decline and then followed by another +20% decline. As you can see, what determines the bull market is not only the general increase but also the preceding and the following decline. Most of the time, you can only point out the bull market period in retrospect.
The main determinant of a bull market is investor confidence, i.e. when investors believe the actual value of a crypto asset is higher than its current value, thus creating a positive feedback loop. Investor confidence is determined by a complex variable web called the real world. However, we can identify some general trends that set a bullish market going:
- The mainstream popularity of the coins. For example, Ellon Musk could create a spike in DogeCoin prices just by tweeting about it.
- The introduction of innovative capital, such as new technology in mining or smart contracts as a new way of doing business.
- A general period of expansion in the economy.
- Other factors, such as the COVID-19 pandemic recession, undermined the trust in traditional financial instruments, resulting in a flow towards the cryptocurrency market.
How to Invest in a Bull Market
The best thing to do is always recognize the bull market trend early on so you can benefit from the expansion and sell when the market is hitting its peak. Bull markets tend to last longer. According to this article from Forbes, the average bull market lasts 2.7 years, while a bear market lasts 10 months on average. So, even if you lose in the short-term, the long-term long position gains offset those small losses.
Having said that, the end of the bull market is not an if question; it’s a when question. Usually, the end is prompted by some kind of crisis or regulatory intervention that brings a halt to the expansion period. When you sense that the bull market is coming to an end, the best thing to do is to reduce your positions. You might want to sell out the less reliable coins and move your assets temporarily towards stablecoins such as Tether (USDT) to see if a crash is coming.
Finally, good traders can even turn the end of a bull market to their advantage by purchasing new coins at significantly reduced prices and holding onto them until the next bull market happens.
How Can You Tell a Bull Market Is Coming to an End?
The bullish markets have to come to an end eventually, as the stock prices can’t keep increasing forever, and investor confidence will begin to decline at some point. Even during a bull market, it is normal to see fluctuations, dips, and corrections for overshooting prices. But the key part is to be able to tell whether these declines are just minor volatilities or signals for the bull market coming to an end.
No one can predict the future prices in the cryptocurrency market for sure. If you do a quick search on the internet, no matter whether the bull market is over or just starting, you will find a number of speculations. The best thing you can do is to educate yourself on the market indicators and make an informed estimation.
In order to understand the trends and patterns in the cryptocurrency market, it’s always a good idea to have a look at the historical data. TradingView is a great tool for that, or you can use services such as CoinGecko.
What Is a Bear Market?
A bear market means the market is experiencing a constant recession or a downtrend. The majority of the investors think the prices are in a state of a downturn. The supply exceeds the demand during bear markets, which pulls the prices further down, creating a negative feedback loop. Because the general trend is down during a bear market, it gets its name from the bears’ way of swiping their claws down on their prey.
Much like the bull market, there is no exact formula to determine the bear market’s start and end. A general indicator is a prolonged price decline that can be described by a 20% or more fall in the prices from recent highs.
The main determinant of a bear market is the declining confidence in the coin or share prices. This decline could be triggered by either an external shock to the market, such as an economic crisis, governmental limitations, or an internal feedback loop started by a crypto whale. It is impossible to completely unfurl the reasons behind the market trends. However, here are some of the factors that may have a direct effect on the market to enter a downward trend:
- A decline in the popularity of cryptocurrencies as an investment tool;
- Increasing negative environmental impacts of cryptocurrencies;
- A global economic crisis.
How to Invest in a Bearish Market
The overall market attitude might be pessimistic during a bear market. However, it can also present traders with some opportunities.
If you are a long-term investor, you can buy during the bear market and enjoy its payoff when the cycle reverses. If you are a short-term investor, you can look out for temporary price spikes or corrections. But for that, you should catch the assets around the bottom price.
Another strategy used by bearish investors when they are confident the price of a coin will drop further is short selling. It is a way of selling the asset at the current price without actually holding it but by promising to provide it after a period of time.
In other words, you sell borrowed assets, and you buy them when the timeframe is fulfilled. If the price is actually lower, you buy the assets for a lower price than what you have sold them for and enjoy the profit of the price gap.
How Can You Tell a Bear Market Is Coming to an End
Rebounding from a bearish market is a slow and unpredictable process, and it’s an impossible task to pinpoint the bottom price and the end of the bear market. Many different factors determine the prices of cryptocurrencies, but as they decrease more and more, some investors start to think that it is a good time to start buying those assets, which creates minor upward sways.
Additionally, you can also check metrics like economic growth, interest rates, market sentiment analytics, world news and events, and past performance of the coins to predict their effects on market trends.
A Few Words Before You Go…
The ultimate decision-maker on your investment strategy is you. It depends on your expectations, how long you want to invest and how much risk you are willing to take in the cryptocurrency market. Both bearish and bullish markets can be profitable if you know your trading strategies.
The bottom line is that the bear market and bull market are not definitive periods where one can draw the lines on the edges. You can think of these terms as a way to describe the general trend and expectations in the market. The exact period of a bull or a bear market is not definite, and you shouldn’t trust anyone who claims to tell you the turning point of the cryptocurrency market.
However, when the majority of the investors think the prices will go down, they withdraw their investments, actually causing a bear market. In other words, bearish and bullish investors attract the same kind in what looks like a self-fulfilling prophecy. For this reason, it is worth checking out the general opinion among the investors to make better predictions for better future results.