“Bull market” and “bear market”.
You’ve probably heard crypto investors using these terms, perhaps that they’re either “bullish” or “bearish”. But if you’re wondering what on earth bears and bulls have to do with cryptocurrency, you’re not alone.
These terms are long-standing symbols of confidence and scepticism, originating from the early stock market, and are now widely used in all financial markets, including bonds, real estate, commodities and of course, crypto. They are used to describe large fluctuations in the market, generally prolonged periods of appreciation (bullish) or depreciation (bearish). Understanding the characteristics and differences between these two terms is a must for anybody getting into crypto, and that’s exactly what we’ll be covering.
Bullish vs Bearish. Source: InvestmentU
What is a bull market?
Traditionally, a bull market (or bull run) refers to a market that is on the rise and is generally accompanied by a strong gross domestic product (GDP) and low unemployment rates. During a bullish period, people are often enthusiastic about investing and spending their capital. When someone is described as bullish or a bull, it means they are optimistic that asset prices will continue to trend upwards over a given time period.
When it comes to stocks, analysts generally agree that a bullish market is one that’s sustaining a 20% or higher price increase from its most recent low. For example, if prices rise 25% after two 15% declines take place, it would be considered bullish.
What is a crypto bull market?
Things are a little different though when it comes to cryptocurrency. Crypto markets are notorious for their volatility, with price swings of 20% or more being a frequent occurrence. This means that indicators for a crypto bull market lie moreso in a prolonged market uptrend rather than any momentary swings. Crypto markets are also unique from traditional markets in terms of the strength of their bull markets.
To imagine what this looks like, let’s take a step back to the summer of 2017 and 2018. During this period, Ethereum rose from $577 to $1,805 in the span of 31 days across December and January, after four months of trading sideways. Assets rising by 300% within such a short window is unprecedented in traditional markets.
ETH Dec 2017-Jan 2018. Source: CoinMarketCap
With this in mind, crypto bull markets are generally stronger and provide a higher profit ceiling for existing investors. At the same time, while stock bull markets are used as an opportunity to invest in as many projects as possible to gain profit, a crypto bull market (eg. when Bitcoin reaches an all-time high) is different in that it offers less opportunities for new investors to profit from.
Crypto bull markets can be spurred on by a wide range of factors due to the size and speculative nature of crypto markets. These factors include a positive media presence, support from mainstream culture, economic conditions, institutional & business capital investments, and the confidence of investors.
Causes of a crypto bull market. Source: CryptoSpend
What is a bear market?
If bull markets are fueled by confidence and optimism, bear markets are the complete opposite. The bear market traditionally appears when market prices drop by 20% or more from recent highs, and typically connotes economic slowdown, financial insecurity, and high unemployment rates.
During a bearish period, there are very little gains to be made, and losses are frequently experienced by investors. When someone is described as bearish, it means they are pessimistic about the future of an asset or market, and are convinced that prices will decrease further.
What is a crypto bear market?
Similar to a crypto bull market, a 20% price drop is arbitrary when describing a crypto bear market, given how volatile cryptocurrencies are. Rather, a crypto bear market can be more accurately characterised by a prolonged period of consistent price declines.
BTC Nov 2021-Jan 2022. Source: CoinMarketCap
Some crypto traders see bear markets as an opportunity to purchase crypto at a bargain, based on the assumption that prices will eventually increase again. This lends to the popularity of the phrase “Buy The Dip” among crypto investors. The issue with this though, is that it can be difficult to know exactly when the dip will end, or how far the prices will drop. With that being said, the low prices will usually draw in more investors once a definitive conclusion to the bear trend is established. The increased trading activity will gradually bolster investor confidence, which will allow a bear market to transition back into a bull market.
Crypto bear markets can arise from a wide range of factors, such as negative public sentiment, new regulations & laws, backwardation, and geopolitical crises.
Causes of a crypto bear market. Source: CryptoSpend
The Bottom Line
A good rule of thumb for differentiating these two counterparts is that bulls thrust their horns upwards, characteristic of a rising market, while bears swipe their paws downwards, reminiscent of a falling market.
Another thing to remember is that both bull and bear markets offer unique opportunities in the crypto space but also risks. Doing your own research (DYOR), maintaining rational (not emotional) thinking, and focusing on fundamentally sound assets will ensure that you’re making the best possible decisions. Remember, rather than chasing the candles, it’s better to focus on the fundamentals.
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