● Beginner Crypto Basics

What are Bull and Bear Markets

6 minutes 6 months ago

For any investor, understanding bull and bear markets is essential to knowing when a market may be primed for investing and when it may be a good time to rebalance or rethink your portfolio and positions.

In general, bull markets refer to when a market trends up over an extended period of time and bear market is when the market trends down over an extended period of time. It is important not to confuse bull and bear markets with corrections, pumps, dips or any other temporary price move. For example, if Bitcoin begins trading at A$5000 in January and then over the course of a year reaches A$25000 it could be considered to be in a bull market. Even if Bitcoin experiences a drop of 10-20% before it reaches A$25000, it could be considered a bull market. A 10% drop in the middle of a bull market is often referred to as a “correction” or “dip”. Corrections occur when the value of an asset moves too strongly in one direction and as such “corrects” to a more reasonable valuation.

What are Bull Markets and How to Identify Them?

As mentioned above, bull markets are when there is a sustained course of demand that outweighs supply that leads to an upward trending market that lasts an extended period of time. In trading terms, investors that believe that the price will continue to trend higher are called “bulls”.

A bull market can be identified by looking at the rate of growth and period of time. It is easy to mistake temporary price increases as a bull market, but it is essential to use longer time frames to ensure that when price increases occur in the market, it is not just a “pump” (when a price grows significantly in a short amount of time) or based on a one-off positive news piece. In those situations it may only lead to a temporary growth, and when those buyers dry up so will the price appreciation. Therefore, it is important to recognise the difference between temporary vs long term growth patterns. Generally bull markets are characterised by a renewed interest from investors, media attention, growth of new projects, and of course rising prices.

What are Bear Markets and How to Identify Them?

Bear markets are the opposite of bull markets and are a sustained downtrend when sellers outweigh buyers. Temporary dips in price can often be mistaken for bear markets. For example, in May 2020, many mistakenly identified Bitcoin’s price correction as a bear market, however by late July the market was already recovering. Looking at the longer term trend, Bitcoin was still in a bull market despite the crash that happened earlier in that year.

Bear markets can be difficult for investors and is often a time when there is little interest in the market. This was apparent in Bitcoin’s 2018 bear market when the price of Bitcoin went from ~A$24000 to ~A$4700 over the course of the year, and buyers and interest seemingly dried up.

For savvy investors, bear markets can present excellent buying opportunities as prices will be at their lowest points, however investors will need to exercise strong conviction to be able to withstand further price depreciation. Bear markets are characterised by smaller projects becoming defunct or bankrupt, a lack of investor interest, stagnant or dropping prices, and a slower growth of new projects.

Summary

Crypto just like any other asset class, has had its fair share of bull and bear cycles. However, unlike other more established asset classes like stocks where a bull market can last over 4 years, crypto bull and bear cycles happen quickly but are much easier to notice. It is important to understand your investment time horizon and be prepared for market reversals and rapid changes.

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