In a volatile and ever-changing industry where nothing can be taken at face value, where whole empires seem to get built and dismantled in a matter of minutes, traders have come up with a term that signifies that things aren’t looking up and that all actions should be taken under extreme scrutiny, if at all.
The term bearish market refers to a market state, both in crypto and traditional trading, where the inclination of the market is in freefall for a prolonged period of time and the prices of digital assets drop by a large margin, typically about 20%.
That being said, there are no set parameters to identify a bear market. The volatility of the crypto economy goes both ways, so the interest for a particular asset can go up while its value goes down. This is why large businesses and corporations invest a great deal of resources in monitoring and market data. They are placing themselves in the best possible position to anticipate and identify bearish markets before it’s too late.
Even though bearish markets are usually in sync with the global economy, this is not always the case, particularly in crypto. There have been instances where quite the opposite has taken place. Even though certain fields are under recession, the markets that surround them and their offering are facing upward. Why?
How Does a Bearish Market Work?
The decline of the market for a prolonged time and the considerable 20% drops usually go hand in hand with investors getting cold feet and backing off their land investments. Interestingly, some bearish markets can be foreseen and occur on an annual or bi-annual basis. These bearish markets are referred to as cyclical because of their repetitive nature.
Even though the term bearish market is usually thrown around when crypto investments are on the fall for a month or two, this doesn’t mean that bear markets are limited to a certain timeframe. Quite the contrary, there have been bearish markets that have lasted for years. Naturally, even the decline of the crypto market can be lucrative for traders that know how and when to react. Investors can make the most out of a market’s downfall by shorting assets as well as inverting their strategies.
Bear Market Characteristics
For traders to get a good understanding of how bearish markets fit into the crypto industry, they need to have some knowledge of stocks.
The traditional stock market is heavily based on expectations. A successful stock trader is an individual or enterprise that knows how to react to the upcoming tide. But how can anyone anticipate volatility? Does that even make sense? Well, in most cases, the writing’s on the wall, and all that traders need to do is have their ear to the street. There are common threads when a market starts facing downwards. Investors will usually make a run for it and act on fear to minimize their losses. But by knowing and anticipating their behavior, savvy traders can take advantage of the silver lining.
For example, even though a particular stock might have been on the downfall for quite some time, there is no guarantee that that same stock won’t skyrocket in a few years. The art, of course, is having that much foresight and being able to project strategies across extended periods of time.
Even though the term bearish market is mostly tied to market drops of 20% or more, this is by no means a hard rule. A market can drop by 5% and scare most investors off. So, in a sense, the term is not necessarily tied to a certain percentage but, rather, the investor climate surrounding the market.
Bear Market Phrases
Bearish markets are more often than not characterized by four phases.
The initial phase is when the going is good and the iron is hot. What goes up must at some point be some down, right? Traders that are noticing that a stock or market hot streak is beginning to plateau can anticipate the turn and make moves accordingly before the inevitable takes place.
The phase that follows is marked by a severe decline in interest, activity, and profits. This phase is the most dangerous and risky because it’s characterized by herds, fear, and panic. The investors that haven’t foreseen the turn of the tide are now firing on all cylinders in a desperate attempt to make it across the finish line unscathed.
The third bear market phase takes place when things have cooled down, there is little to no movement, and very low trading volumes. This is usually when companies or platforms go under and file for bankruptcy.
The final phase is characterized by a slow and steady drop in prices. However, this low point can also initiate some sparks because it’s the perfect time for the believers to purchase the stocks or assets at very low price points. This is the phase where bearish markets are overturned and give way to bull markets.
How to Survive a Crypto Bear Market?
The main mistake that inexperienced traders make is avoiding the bear markets altogether instead of focusing on taking a stance that will yield the best results. In fact, these rash decisions and swings only further the bearish markets along.
So, in a sense, instead of protecting their crypto investment, traders become a big part of the problem. The uncertainty usually cools off investments until things stabilize a bit and fall into their new molds. Traders in it for the long run usually defer from selling their shares to minimize their losses down the line.
Let’s see what else they can do.
Shorting is the most commonly utilized trading strategy in the wake of bearish markets. By employing this strategy, investors are looking to minimize their losses by turning around shares that they have had for very short periods of time.
The premise is simple: sell a digital asset or stock for a certain price and then buy it back as soon as its price falls lower down. It goes without saying that this strategy is very risky because things might not go as planned. This is because traders are usually borrowing the initial assets from an OTC brokerage and might struggle to cover them, should things go south.
The trader’s loss or gain is determined by the margin that they have managed to create between the purchase and selling price.
Another popular and widely utilized method of dealing in bearish markets is investing in ETFs. Traders might be incentivized to sell a certain asset for an agreed-upon price on a previously agreed-upon date. These forms of advanced asset trading lead to the speculation of asset prices in contrast to futures and underlined currencies. This is referred to as a put.
By acquiring puts, traders usually put themselves in a much more stable position because they know which asset they will be getting, at what price, and the exact date of when the trade is going to go down.
The Inverse ETFs turn all actions in their head and move the value of a certain contract or deal in the opposite direction. By investing in ETFs, traders are able to acquire huge gains on leverage trades. The ETFs also acquire value as assets by the speculation and bets on their trajectory.
It’s understandable that once a bearish market dawns upon a certain cryptocurrency, the holders of that digital asset will revert to shorting the digital asset because nine times out of ten the market for it will go even lower during the upcoming period. While this might be the logical step to take, the strategy comes off as is quite limited in the long run.
So instead of jumping ship, there is also a valid argument to buy into the bear market and acquire more crypto coins while their price is low. The prime example of this is none other than Bitcoin. The world’s most coveted cryptocurrency had significant and prolonged dips before rising to unprecedented heights. There was a long period of over six months in 2019 during which Bitcoin was on the downfall and no one could predict in which direction it would be heading. The traders that decided to double down and acquire more of it at a lower price are the ones that came out on top.
Because all of the approaches above come with a great deal of risk, a lot of traders that are facing a bear market decide to stake their digital assets on the currency’s blockchain and weather the storm through passive income. This is not a high reward strategy, however, it’s the most stable one of them all.
The term bull market or bullish market is the exact opposite of the bear market. The state takes place when a certain stock or asset comes alive and starts facing upward for a prolonged time. The term got its name for the charging nature of the animal and its upward-facing horns.
There have been times when market corrections have been mistaken with bearish market trends to the point where they have almost led to bearish market states.
Market corrections are open windows of time during which traders look for angles and entrance points into a certain stock or digital asset market. Opposed to bear markets, market corrections aren’t marked by instability or a slew of short sellers that are on the hunt to swap a sinking asset for a falling one.
A Few Words Before You Go…
Traders should always have multiple strategies in place that will help them weather even the most severe bear markets. At this point, there is extensive data on high volume plateaus, short-term investors, the volatility of stock prices, market prices, the financial markets, ever-changing interest rates, etc. Users should make use of this data because it all plays into the trajectory of the crypto market.
Even though stagnated price movements during a sustained period of time will sway investor confidence and force traders into changing their investment strategy, the bottom line is that gauging on past performance and financial crises such as the Great Depression, the COVID-19 pandemic, or the Wall Street market crash, gives investors the best insight and chance of making the most out of their position. Lucrative investment decisions can be made even in states of severe value decline.
So, instead of looking for ways to escape bearish markets, traders should keep even keel and work towards having a strategy in place for every imaginable scenario.