When we say that someone is “bearish,” it means that they have a pessimistic view of the crypto market. They expect prices to go down, or for there to be a general downward trend in asset values. On the other hand, a “bullish” investor is optimistic and expects prices to go up. These terms come from the way that bulls and bears attack their opponents. A bull charges with its horns up, while a bear swipes down with its claws.
So, a crypto bear market would be a period where the prices of digital assets are generally going down. The exact opposite is true of a bull market.
- How you know you are in a bear market
- The 4 Technical indicators that help you understand if the crypto market is becoming bearish
- The two types of bearish trading strategies
- Crypto Winters vs. Bull Runs
- How to avoid getting crushed in a bear market
- Factors influencing bearish trends
- What is causing the current bearish market sentiment in crypto?
- What have previous crypto bear markets looked like?
- Origins of “Bearish”: how the word came about
How you know you are in a bear market
From a technical perspective, a bear market is generally considered to be a sustained period of downward price movement in the market. There are a few different ways to define this period, but it is generally agreed upon that a bear market is characterized by a decline of at least 20% in market prices from the recent highs. This definition is similar to what they use in the stock market. However, in the cryptocurrency market it is relatively easy for this to happen so you need to assess wether this trend will persist or not.
One way to do this is to look at technical indicators.
The 4 Technical indicators that help you understand if the crypto market is becoming bearish
Technical indicators can be useful tools for identifying when we are officially in a bear market. There are four common indicators you should keep an eye out for.
1. Moving averages
A moving average is a statistical calculation that shows the average price of an asset over a certain period of time. When the current price falls below the moving average, it can be a bearish signal.
2. Relative strength index (RSI)
The RSI is a technical indicator that measures the strength of a particular asset’s price movement. When the RSI falls below a certain level, it can be an indication of a bear market.
3. Trend lines
Trend lines are lines drawn on a chart to show the direction of an asset’s price movement. When the asset’s price falls below a downward trend line, it can be a bearish signal.
4. Candlestick patterns
Candlestick patterns are specific patterns that can appear on a chart and provide clues about the direction of an asset’s price. Some bearish candlestick patterns include the bearish engulfing pattern and the bearish harami pattern.
It’s worth noting that these indicators should be used in conjunction with other market analysis techniques and should not be relied upon in isolation. Additionally, it’s important to remember that the cryptocurrency market is volatile, and these indicators can sometimes give false signals.
Now, you might be wondering why anyone would want to invest in a bear market. Well, it all comes down to investment and trading strategies.
The two types of bearish trading strategies
If you want to attempt to make money in a bear market there are two main trading strategies: short selling and buying put options.
- A short position is when you borrow shares of an asset, sell them, and then buy them back at a lower price later on to return to the lender. This can be a good strategy if you think the price of an asset is going to go down.
- Buying put options is similar, but instead of borrowing and selling actual assets, you’re buying the right to sell an asset at a certain price in the future. This can also be a good strategy if you think the price is going to go down.
Now, there are pros and cons to both of these strategies.
- Short selling can be risky if the price of the asset goes up instead of down, because you’ll have to buy it back at a higher price than you sold it for.
- And buying put options can be expensive, especially if the price doesn’t go down as much as you thought it would.
Crypto Winters vs. Bull Runs
One thing to keep in mind when investing in the crypto market is the concept of “bull runs” and “crypto winters.”
A bull run is a sustained period of price increases, often accompanied by bullish sentiment and strong demand. These can be exciting times for traders and investors, as they can potentially see significant gains in a short period of time.
In a bullish market investor psychology is extremely positive. Early investors who spot the signs of a market bull run make returns. The fear of missing out (FOMO) on the opportunity prompts others to enter the market causing a price increase.
On the other hand, a “crypto winter” is a prolonged period of bearish market conditions and declining asset values. These can be challenging times for traders and investors, as they may see the value of their assets decrease or struggle to make profitable trades.
It’s important to keep in mind that bull runs and crypto winters are a natural part of the market cycle. No market moves in a straight line. There will always be ups and downs. That’s why it’s important to have a long-term perspective and to be prepared for both bullish and bearish markets. For more on this read my article on why is cryptocurrency worth anything in the first place.
How to avoid getting crushed in a bear market
There are two ways to tackle a bear market
1. Diversify your portfolio and dollar cost average
The first is to have a diversified portfolio. This means investing in a variety of asset classes, such as traditional stocks, real estate, exchange-traded funds (ETFs) or index funds. Yes, crypto and stocks are currently in a free fall but not all assets are following a bearish trend.
For example, stocks, bonds and crypto are not faring well in the current bear market. Had you invested a portion of your wealth in an energy index you would be less impacted by the downturn overall. The same is true of gold, real estate and commodities whose prices are increasing due to inflation.
By spreading your investments across different asset classes, you can mitigate the risk of a downturn in any one particular asset.
Have a long term view of the market
It is also important to have a long term view. The world will keep on growing. If you invest a little each month you can own some of that growth over a longer period of time. With a 20-30 year horizon you can lay back and not care so much what will happen in the next weeks, months or years in between. You just invest a set amount each month in a mixed portfolio of assets and sit and watch your wealth increase. This is known as dollar cost averaging. I found this book extremely useful in understanding how to diversify your portfolio: How to Own the World by Andrew Craig
Having said that, bearish market conditions can be a good time to buy assets that you think are undervalued. Just be sure to do your due diligence and research the assets you’re considering before making any investment decisions.
Mind you, you want to buy low but you don’t want to catch a falling knife i.e. to buy a token or coin whose price will continue to drop.
The way to intuit this is to learn how to practice momentum trading. This is a way riskier strategy that requires more time and effort. It could be rewarding if you do it right but most people lose money.
2. Momentum trading
When it comes to the crypto market or other financial markets, investor sentiment can have a huge impact on market trends. If a lot of people are feeling bearish or bullish about a particular asset or the market as a whole, it can have corresponding impact on prices.
Understanding momentum trading involves doing technical analysis on indicators and looking at charts to figure out where the market is going in the coming days, weeks and months accordingly and have a trading strategy in place. The best book that I have read on this subject is The Crypto Trader by Glen Goodman.
Factors influencing bearish trends
So, what causes bearish trends in the cryptocurrency market? There are a number of factors that can contribute to bearish trends, such as economic or political events, regulatory changes, or even market manipulation.
For example, if there’s negative news about a particular cryptocurrency, it could lead to a decrease in demand, resulting in lower prices. Or, if a government introduces new regulations that make it harder to buy a particular cryptocurrency, it could also lead to bearish trends.
What is causing the current bearish market sentiment in crypto?
The current bear market is due to a broader market turn down. This is caused by
- Post-covid high inflation across the globe
- China’s continued strong-arm policy on COVID which has disrupted supply chains and
- The war between Ukraine and Russia which is sending energy prices skyrocketing.
Because crypto is volatile and high-risk, people are pulling out of the crypto market more so than stocks. This, in turn, has caused token prices to drop 80-90% from their highs.
The market drawdown led to a catastrophic turn of events for many of the large crypto players and protocols in the market. The first to topple was the Terra-UST algorithmic stablecoin. You can read up in more detail what caused Terra to collapse and wipe out $50Bn in assets. This led to a chain of events that caused other entities to come crashing down. Celsius Network, a savings and lending platform, was the first to default. But many others faced liquidity issues as well.
More recently FTX had a showdown with Binance that caused them to also default wiping out another $150Bn from the market. FTX was one of the largest crypto exchanges. Some say that these events are closely intertwined with those of Terra. Since the FTX debacle, both BlockFi and Genesis have defaulted. So if you want to be in with the crypto trading slang you could say, “things are looking really bearish for crypto”.
What have previous crypto bear markets looked like?
To get a better understanding of bearish trends in the crypto market, it can be helpful to look at past performance. Bear markets in the crypto world have tended to last anywhere from a few weeks to a few years, depending on the circumstances. Some have been more severe than others, with prices declining significantly over a shorter period of time.
It’s also worth noting that bear markets in the crypto world don’t always happen in isolation. They can sometimes occur alongside bear markets in traditional financial markets, like stocks or commodities. And of course, the opposite is also true. Bull markets in crypto can sometimes occur alongside bull markets in traditional financial markets.
Origins of “Bearish”: how the word came about
The terms “bearish” and “bullish” have been used to describe market trends for hundreds of years. They are believed to have originated in the world of stock trading, but have since been adopted by traders and investors in a variety of financial markets, including the cryptocurrency market.
The terms “bear” and “bull” are thought to have been chosen because they represent animals that are naturally aggressive and territorial. Bulls are known for charging forward and attacking with their horns. Bears, on the other hand, are known for swiping downward with their paws. These characteristics are thought to reflect the upward and downward movements of market prices, respectively.
Another theory is the term “bear” was shortened from “bearskin jobber”. Bearskin jobbers were middlemen who sold bear skins before they received them. They would only sell if they expected to buy the bearskin at a lower price later.
In conclusion, bearish markets in the crypto world refer to a downward trend in prices, where assets are generally decreasing in value over time. These markets can be influenced by investor sentiment and a variety of other factors, such as economic or political events, regulatory changes, and market manipulation.
Bearish markets can present both risks and opportunities for investors. It’s important to consider the volatile nature of the crypto market when making investment decisions. Bear markets can eventually recover and turn into bull markets. However, it’s important to be prepared for the possibility of sustained periods of lower prices.
By keeping these things in mind and seeking out expert opinions, you can be well-equipped to navigate bearish markets in the crypto world and make informed investment decisions.