If you’re waiting for massive price drops to confirm the start of a bear market, then you’re already late. But worry less! In this article, we will highlight seven warning signs that smart investors watch out for to catch a potential market downturn early, before it affects their portfolios.
7 Signs for Detecting a Bear Market
A Rise in Stablecoin Supply While Network Activity Declines
When the supply of stablecoins, such as DAI, USDT, and USDC, is rising, but network activity is falling, it means that traders/investors are no longer interested in allocating their funds to non-backed assets like Ethereum and Bitcoin. Instead, they are opting to hold stables in anticipation of a marketwide price correction.
But how do you access this on-chain data? Blockchain analytics platforms like CryptoQuant help users track key network activities, including stablecoin flows, trading volume on decentralized exchanges (DEXs), and more.
DEX Rewards Rise, but Volume Doesn’t
Given the growing competition, decentralized exchanges offer incentives to retain users and increase their trading volumes. However, when these rewards are growing, but the trading volume remains the same or drops, it’s a sign that market sentiment has turned sour and that conviction is low among traders.
Tools like De.Fi and Token Terminal monitor activity on various DEXs, enabling users to understand whether incentives are boosting trading volumes or not.
Volatility Intensifies Without Liquidity
When liquidity in a particular crypto trading pair is low, it leads to increased volatility. The wild price swings signal that traders are trying to exit a shallow market even at a loss. Such a situation usually occurs in mid- and low-cap cryptocurrencies.
To find out if volatility is rising due to insufficient liquidity in a trading pair, you will need to use a platform, such as Block, which features price volatility metrics and slippage charts. When slippage is high, it signals a lack of sufficient capital in the market. As such, it’s advisable to avoid investing until liquidity conditions improve. Otherwise, you might provide exit liquidity for smart traders.
Difference in Token Prices Across Chains
During a bull cycle, a multichain token tends to trade at uniform prices across blockchains because of deep liquidity pools that facilitate tight spreads. However, when a bear cycle begins, the uniformity breaks and different prices for the same token are noticed. When this happens, it means liquidity pools are thinning as investors leave the market.
To track the prices and liquidity pools of a particular coin, use a tool like Dexscreener. It will help you compare pricing spreads and understand the health status of associated pools.
Increased Withdrawals From Lending Protocols
Smart investors do not wait for red candles to start exiting the market. Instead, they de-risk quietly. One way to tell that investors are slowly leaving the crypto space is when large funds begin to flow out of lending protocols, such as Aave and Compound.
That said, it is critical to monitor Total Value Locked (TVL) on various lenders using a tool like DefiLlama. If you notice a significant drop in TVL, it could be a sign that whales are making withdrawals, possibly because they no longer find crypto yields attractive.
Buzz Around New Coin Launches Vanishes Quickly
In bull cycles, new coin launches excite crypto users, and the buzz around them can last for several weeks. However, during the early stages of a bear market, the excitement over the entry of a new token fades fast, and prices drop quickly due to increased selling by holders who don’t anticipate any further gains in the near future.
Increased Deposits Into Centralized Exchanges
When an on-chain analytics platform, such as CryptoQuant, reports a surge in crypto deposits into exchanges, smart traders usually consider this a sign that whales do not wish to hold their tokens any longer and intend to cash out ahead of a potential price correction.
Final Thoughts
You can implement a smart exit strategy by watching the right on-chain signals. So, ignore the noise on X and focus on liquidity trends, crypto flows on exchanges, and other critical metrics discussed in this article.
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