By Hassan Mehmood (Saudi Arabia)
A bear market occurs when the valuation of cryptocurrencies has decreased by at least 20% and continues to decrease. For instance, investors watched Bitcoin collapse from $20k to $3k in only a few days in December 2017 during the notorious cryptocurrency meltdown.
Drops of 20% or more from prior highs indicate a deteriorating bear market in the stock market. As a result, prices remain low and continue to fall. The declining trend also impacts investors’ attitudes and promotes a continuous declining tendency. There is a theory that the word “bear” was coined because of a bear’s technique of fighting: beginning high, then hitting with its claws and all of its body.
The economy is sluggish, and unemployment levels are quite high while the marketplace is in a bear market. These situations may contribute to poor financial strategies, geopolitical crises, market bubble bursts, and even global calamities.
As a result, bear markets lack the broad sense of excitement and assurance that most traders experience in bull markets.
Typically, cryptocurrency traders want to buy assets during a bear market, particularly when the market is at its lowest point. However, it may be difficult to determine when a bear market has concluded, making it challenging for traders to incur the risk of purchasing low-value cryptocurrencies that may or may not rebound in value.
The price of a certain cryptocurrency or asset tends to fall as soon as the market hears about its bad news. Because of people’s conviction that terrible news is imminent and that there is an urgent need to prepare themselves for the worse, more individuals delay making investments. Some investors even liquidate their assets in a state of fear, contributing to the declining trend. Bear markets usually settle down gradually, and traders gradually acquire trust, launching a new bullish cycle again.
Defining Features of Crypto Bear Market
The following are the usual attitudes and behaviours that define a bear market:
- A long-term trend of falling pricing.
- There is a surplus of goods rather than a shortage of demand.
- Market uncertainty; a lack of investor faith.
- There is no mention of cryptocurrencies in both mainstream media and social media.
- Fear and distrust among economists, strategists, and those in the business of conventional finance for digital currencies.
- A return to higher highs after the release of positive stories.
- When terrible news comes, the lows drop even lower.
Why Do Crypto Bear Markets Happen?
Price declines are often the trigger for the onset of a bear market. Investors have less and less belief that prices will rise, which feeds the downward spiral.
It is common for a bear market to begin when there is an increase in tensions between countries or political instability. Government involvement may also be responsible for the onset of a bear market. In cryptocurrency, on the other hand, it’s considerably more difficult to anticipate when a bear market would begin depending on historical patterns. In contrast to the stock market, which has decades of research to draw from for financial professionals, the cryptocurrency market is still in its infancy.
Bear markets have a variety of reasons, but several typical indications point to the beginning of one.
The following are some signs that a crypto bear market is about to emerge:
- Reduced trading activity often indicates that investors hedge their bets against market volatility by keeping their coins and tokens in their wallets.
- A recent example of this occurred when JPMorgan CEO Jamie Dimon declared Bitcoin a “fake” in 2017, only months before the cryptocurrency surpassed $20,000 per unit and then fell immediately after that.
- When an asset crosses the 50-day moving average to the 200-day moving average, it’s known as the “death cross.”
- Backwardation occurs when the asset’s value in the market is lower than the asset’s value in the existing markets.
- Modifications in the fed funds rate are the interest rate on which the banks lend and borrow their surplus reserves daily.
- Intervention by regulatory bodies: One illustration of this is the Chinese government’s limitations on cryptographic software and mining operations. Such actions cause several mining activities to go offline, producing significant confusion.
What to Do in a Bear Market?
It’s difficult to maintain your composure when cryptocurrency assets post losses in the double digits. Take advantage of the current bear market opportunities by following these easy procedures rather than hiding yourself. Using the dollar-cost average, take advantage of the downturn in the cryptocurrency market.
- Buy the Crypto Dip
Market volatility may make it all too possible to lose money on a cryptocurrency transaction, but you don’t have to witness your money go day by day.
A “buy the dip” opportunity will arise for investors with a fiat currency or stable coin reserve on hand or who have access to cash in their checking or savings account. With this widely used expression, investors refer to when the market has a substantial negative correction and buys many cryptocurrencies.
According to the strategy, when prices rebound to their earlier highs, the dip purchasers stand to make a tidy profit. According to the iconic stock trading figure Warren Buffett, who reportedly remarked, “When there’s blood on the streets, you buy,” this is an example of a buy-and-hold strategy.
There are many methods for purchasing a dip, the most common of which is known as “dollar-cost averaging (DCA).” Using this strategy, you’ll divide up your savings into smaller amounts and make many transactions over some time.
Consider the following scenario: you have $1,000 in emergency money. A good DCA technique would be to split the money up into five or ten small tiers, each of $100, and then conduct trades with those smaller sums.
The reason for this is that it is very difficult to predict when an item has dropped out (reaching its lowest possible price before rebounding), thus rather than investing all of your cash at once, it is typically best to purchase a little bit and observe whether the product drops in price anymore. If it does, purchase a little amount more, and so on.
By spreading your cash over many trades, you may expect greater returns than you received by placing all your eggs in a single basket.
- Invest in a Variety of Cryptocurrencies
A bear market bottom can’t be predicted with certainty, and the same holds for the 17,000+ cryptocurrencies that make up today’s market.
DCA may be used for many crypto assets as a strategy to spread your risk. You may have to lower your transaction sizes even more, but the real risk you face will go down. To be sure, just selecting crypto assets at random and investing in them is not sufficient. The first step in purchasing any cryptocurrency asset is to conduct thorough due research on it. Pay attention to the following indicators:
To some degree, a particular cryptocurrency’s previous all-time high might guide the asset’s possible implications. Trading View may help you determine how well the product has recovered from past collapses by looking at its price graph. In other words, does it tend to outperform most of the top financial assets? It’s impossible to predict what will happen in the market in the future, but it can offer you a fair notion of what could happen.
Another factor that might help an asset bounce is the release of a significant upgrade or future development. Transforming, launching the mainnet, or forming a new relationship are all examples.
- Use Indicators to Find a Good Entry Point
Some indications may be used by investors who know technical analysis — the process of forecasting an asset’s price fluctuations depending on chart trends, signals, and patterns.
No indication will always tell you when to purchase a drop in the market.
One of the most often used indicators is the Relative Strength Index (RSI) — an indicator with a channel and lines that vibrate into or out of the channel. This tool has two essential components:
An investment’s valuation is deemed overbought if the indication line falls out of the channel, indicating that price levels are likely to decrease shortly.
Excessive selling or undervaluation of an asset occurs when its indicator line breaks out below the channel. This indicates that the asset is “excessively selling” or undervaluing itself, typically indicating that prices will climb shortly.
Even though these two indicators may be effective, they are less reliable when applied to shorter time frames, such as the four-hour, hourly, or thirty-minute range. The RSI split approach is a superior option.
The RSI tends to move in lockstep with the price of an item, meaning that if the price drops, so does the RSI line. The two lines can travel in different directions, though. An RSI divergence sometimes signals the onset of a trend reversal.
To identify a bottom, the RSI line must reach a greater high than the matching price low. Larger-scale time frames, such as the daily, should have an RSI line close or in the oversold area to indicate significant reversing opportunities.
- Do Not Panic
While it may seem obvious, controlling your emotions during a bad market is more difficult. To the point that many consider it to be the most difficult factor in learning to trade effectively.
As Benjamin Graham famously said, “Individuals who cannot deal with their emotions are ill-equipped to benefit from the investing process.” To succeed in trading, it is critical to know that greed and fear are potent sources of motivation that may often lead to rash decisions that result in losses. Becoming profitable or losing money may be as simple as formulating a strategy before entering the market.
Another simple but tough skill to perfect is financial flight. Anxieties about the asset’s price rising might cause you to stay in trade over your stop-loss level out of greed. If you don’t use stop-loss orders, you risk losing money on the transaction. Cryptocurrency markets are very unpredictable, and even if you missed the chance to purchase the drop this time around, another crypto meltdown is sure to occur. Take gains, maintain a cash reserve for collapses, and maintain your composure when the bear attacks.
- Bear vs. Bull Market: What’s the Difference?
So, how can you tell whether it’s a bull or bear market in the cryptocurrency market? Investors should be aware of certain important distinctions even though the price movement of cryptocurrencies tends to characterize both. Like equities, cryptocurrency is subject to the same ups and downs of the market.
Because of the volatility of cryptocurrencies, movements in the market vary from those in the stock market. Whenever a bullish or bearish market trend takes hold, the cryptocurrency market generally moves quicker. When it comes to equities, it’s also easy to distinguish between bull and bear markets. Due to the unique nature of bitcoin investors’ input, it may be a different storey regarding cryptocurrencies than it is with regards to traditional investments.
Think of the crypto market as having recovered from a period of underperformance, for instance. Thus, an investor would normally shift into a bullish attitude near the end of a bear market. Because of this, cryptocurrency values will rise considerably quicker. Bull markets in cryptocurrencies tend to move faster than stock markets. Furthermore, they seem short-lived, spanning anything from some days to a few weeks.
Then, when the bull market gains traction, investors will begin to sell the currencies and take money out, resulting in a gradual drop. In light of this, crypto’s increased unpredictability and the rapidity of its trades mean that it is more vulnerable to the ups and downs of stock markets.
The following are some of the most noticeable contrasts between bull and bear markets:
Law of Supply and Demand
Cryptocurrencies are in high demand, but supply is limited during a bull market. Many investors are interested in purchasing cryptocurrency, but only a small number are prepared to part with their money. Increased demand from investors pushes up prices even further.
Conversely, when the market is a downturn, there are more sellers than buyers. Prices continue to fall as a result of a lack of demand.
Market Situation
When GDP increases, the stock market goes up; the stock market goes down when GDP decreases. This is because GDP normally rises in tandem with revenue growth for businesses and growing wages for workers. Collectively, they encourage more people to spend money.
On the other hand, GDP declines when corporate profits are poor and wages are reduced or stagnate. As a result, two sequential quarters of GDP declines are characteristic in bear markets.
Monetary Ramifications
A struggling economy is a sure sign of a bear market. Profits fall and hurt the economy when companies fail to perform sales targets, and people do not invest sufficiently. Similar apprehensions about trading and investing in crypto and equities may be seen in both markets.
The opposite is true in that a bull market is associated with a robust economy, in which customer spending is stronger, and earnings are high insignificance. There is an upsurge in stock and cryptocurrency trading during a bull market.
Investors’ Expectations
The success of the cryptocurrency market and trader psyche are intertwined. The rise in cryptocurrency prices increases investor confidence during a bull market. Because of this, more and more investors are enticed to engage in the market to make big returns.
When the market is in a downturn, traders’ outlooks tend to be pessimistic. As a result, some people fear and liquidate their investments, causing prices to fall even more.
It’s easy to tell if the market is bullish or bearish by examining the current crypto values. Another sign of an impending bull run is increasing asset values. On the other hand, falling asset values signal a lack of confidence and the beginning of a bear market.
Liquidity
Liquidity is stronger in a bullish market, allowing equities to exchange at reduced transaction costs since investors are confident in rapid and stable gains. However, a negative market has reduced liquidity due to a lack of faith in the prevailing market circumstances.
International Investments
Consistent price gains define bull markets. Since the persistent upswing is more widely accepted, more investors are ready to take risks. On the other hand, a bear market is characterized by falling prices and a corresponding decline in investor optimism.
Market for Jobs
Unemployment statistics are also closely linked to market movements. Unemployment rates fall during a bull market because of a stronger economy and more buying power amongst individuals. The unemployment rate rises during a bear market because firms tend to cut down on their workforces. For the same reason that customers are making less money, businesses are making less money, prolonging the bear market.
Conclusion
When it comes to cryptocurrency markets, numerous variables come into play. With fewer investors and more volatility than the stock market, it’s important to remember that there are a few distinctions between trading in bullish and bearish markets. During weak markets, crypto investors tend to purchase cheap and hang on to their investments to reap large rewards when the market recovers. Keep updated with the latest news and learn from professionals by studying their best practices. It doesn’t matter whether you’re investing in a bull or bear market; there are always dangers connected with every investment approach.
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