Everywhere you turn, people are talking about the crypto market these days. The terms bullish and bearish are part of a trader’s basic vocabulary. Regardless of your level of investment experience, it is important to understand the difference between these two types of markets and how they can affect your income. In this article, we have explained what a bear market is. But let’s also see what bullish and bearish mean in a simple way.
Bullish vs. Bearish
A bull market is an economic situation in which the crypto market is rising, and most assets are increasing in value. The term bear market refers to a declining economy and a crypto market whose values are falling. In bull markets, investors are more optimistic and willing to pay a higher asset price than in bear markets. Investors are pessimistic and unwilling to pay as much for cryptocurrencies in bear markets.
Investor attitudes affect financial markets, so these terms also describe how investors think about the market and its future direction. The term “bull” refers to an investor who believes that a digital asset or the entire crypto market will go up. Investors who believe prices will fall are called “bears.” These terms originated from how these animals attack: bulls thrust their horns into the air, while bears swipe at their prey downward with their sharp claws.
The following chart shows examples of bull and bear stock markets.
Bear markets usually occur because of negative economic trends, such as inflation, recession, or lack of confidence in the markets. Bull markets are often caused by positive economic trends such as low-interest rates, low unemployment, and overall economic growth.
Characteristics of Bull and Bear Markets
Although the direction of asset prices marks a bull or bear condition, there are several accompanying characteristics, such as supply and demand for assets, investor psychology, and changes in economic activity.
Supply and demand: When an economy grows faster than supply, there is a shortage of goods and services (inflation). In such a market, cryptocurrencies offer profitable investment opportunities because their prices rise faster than inflation. Conversely, when economic conditions weaken and demand falls, digital assets become less attractive investments as their prices fall or stop rising altogether.
Investor psychology: during a period of rising crypto prices, investors believe that they will continue to rise, which leads others to invest more money. Increased demand pushes prices even higher, leading to more optimism and confidence
among investors, who in turn invest more in assets. Bearish is a condition in which asset prices fall, and widespread pessimism causes the value of digital assets to decline.
Change in economic activity: When economic activity changes — either up or down — it usually affects the stock or crypto markets. When the economy is healthy, assets tend to rise because investors are optimistic that companies will make more money, boosting profits and asset prices. Similarly, when the economy slows down or enters a recession, cryptocurrencies tend to decrease as investors become pessimistic about future earnings potential.
What happens in the bull and bear markets?
People’s willingness to take risks and invest increases significantly in a bullish cryptocurrency market. During this time, cryptocurrencies are generally considered safe investments because their value is relatively stable compared to bear markets. People want to invest their money because they expect profits.
Bear markets occur when investors dump riskier assets. They do this because they believe the market will continue to fall. The selling leads to an increase in supply and a decrease in demand, causing prices to fall even further. In a bear market, traders wait for the market to peak before buying more.
What you should do in a bull market
Most investors have a common saying, “When the market is growing, everyone is a genius.” That’s true because it’s easy to make a profit when most assets are growing. Here are some strategies — depending on your level of risk and profitability.
- Buy and hold
The classic strategy for investing in bull markets is to buy and hold. This option works well for investors who do not plan to sell their investments shortly. This strategy takes a long time to pay off, but it has proven its worth over the last century.
- Buy, hold and take some risks
The basic idea of this approach is the same, but it comes with additional risks. The point is that the investor separates part of the portfolio, for example, 10%, and puts it on more dangerous but potentially profitable operations.
Let’s say that the main portfolio consists of Bitcoin and Ethereum — it will not make much money, but it will provide a stable income. And a risky part can be invested in tokens of fast-growing projects, or you can play a trader and speculate on asset price fluctuations.
- Catch corrections
No matter how much the market rushes upward, corrections inevitably occur. A correction is a short period of time when asset prices fall by a few percent, sometimes as much as 15–20%. Usually, they recover quickly, but some investors wait and buy assets exactly in such moments because the percentage of return then becomes even higher. For example, the price of Ethereum fell to $1,813 in June 2021 before rising to $4,819 in November of the same year. Investors who bought ETH during the correction period would have earned 165.8%.
What you should do in a bear market
It’s hard to determine whether the market is about to fall or that a fall already in progress is the beginning of a bear market. One can only guess based on macroeconomic indicators, the level of volatility, etc. Here’s what to do if you think the market will go down.
- Diversify
Finding an effective portfolio depends on your goals, investment horizon, and risk tolerance. But simply having broad diversification and instruments of different types that are only weakly correlated greatly reduces risk and the degree of portfolio drawdown. This is how you achieve the optimal ratio of risk-return.
- Invest only free money
Investments are important, but not the same way as food and a roof over your head. Investing is a risk. Your capital can freeze for months or even years if a bear market hits. You need to invest free money. If you are interested in crypto assets, investing in them is worth at least a few years, preferably ten or more. Then the bear market will not be so scary.
It is quite dangerous to invest in stocks when you have debts and loans. When the markets are turbulent, the capital drawdown will weigh more heavily on the investor, leading to inefficient actions. Before investing, it is worth creating a financial cushion — money in case of force majeure, such as job loss or serious illness. This is usually an amount that will cover 3–6 months of your basic expenses. This money is better placed on a deposit, such as a Savings account at PointPay Crypto Bank.
- Bet on safe assets
Some sectors and companies are non-cyclical: they offer products that the consumer does not refuse even in a crisis. These are, for example, food, electricity, and medical services.
The revenue of such companies remains relatively stable throughout the business cycle. Such cryptocurrencies are considered defensive, and they sag less in a crisis than riskier digital assets.
Keep free money and catch opportunities. Bear markets provide an opportunity to buy great stocks at bargain prices. Furthermore, in anticipation of a recession, it is worth keeping at least 10% in stablecoins. It will also reduce the overall risk level of the portfolio.
- Hedge positions
Volatility and drawdown can be reduced by diversification, but it doesn’t eliminate them completely. Different asset classes have only a modest relationship with one another. Please, note that it also rises during falling markets, so you should check the correlation between the two different assets you want to invest in. For instance, in February 2022, the correlation between BTC and ETH reached all-time high values at press time, sitting at 0.902.
What you should keep in mind
A bull market can last for many years, but it will still end in a crisis one day. If the investor did not expect a fall, then the one can lose a lot of money on risky assets in the portfolio. Paying attention to market trends helps you make better trading decisions. You can see profits in bull and bear markets by knowing how to use each one to your advantage.
