You’ve probably overheard people using the terms “bull” and “bear” while discussing the cryptocurrency and stock markets. But what do these market stages actually represent, why are they termed that, and how must you react to each one? Continue reading for the answers.
What is a Bull and a Bear Market?
To put it simply, a bull market is one in which asset prices are growing or are expected to rise as a result of solid economic fundamentals and an expanding business cycle.
A bear market is defined as a market in which asset prices have dropped by 20% or more due to the widespread belief that economic fundamentals will continue to weaken and the business cycle would contract.
What Causes a Bull Market?
The expansion of a country’s economy is the primary force behind a bull market. This expansion may take the form of higher GDP, a higher employment rate, or lower interest rates.
Nevertheless, aside from these quantitative metrics, market sentiment — which is the general view of the financial market as a whole — also plays a big role in the way investors think and behave in particular market conditions.
When these measurements appear to be trending in a positive direction, investors are prompted to make purchases as a result of the bull market cycle. The prices go up as a result of an increase in the number of investors who want these limited assets.
Characteristics of a Bull Market
- Consistently high GDP
- Excellent employment statistics
- Increasing interest in purchasing assets
- Financial markets are currently experiencing optimism
- Mainstream media shows widespread curiosity about cryptocurrency
What Causes a Bear Market?
In some cases, a bear market will begin even before or after a recession has officially begun. Nonetheless, the factors might change.
For instance, widespread closures and rising unemployment rates were indications of a bear market as the COVID-19 epidemic loomed over the world.
While rising interest rates and inflation can cause a bull market, declining economic fundamentals like layoffs, slower corporate growth, higher inflation, and higher unemployment rates are more likely to cause a bear market.
Most investors would take these as early warnings of an impending economic downturn. As a result, many people will start selling their riskier possessions and putting their money into precious metals or government bonds. They will go into a mode where they are more concerned with preserving their capital as opposed to maximizing their revenues.
Once selling activity begins, the market’s upward momentum slows even further, causing additional anxiety among other investors and market participants. Therefore, the greater the number of investors that start selling, the more quickly the demand for assets evaporates, and the supply overwhelms the market, which causes prices to fall even further.
Characteristics of a Bear Market
- Increased rates of inflation
- High rates of unemployment
- Decreasing rates of economic expansion
- There is an excess of supplies relative to demands at the present time.
- Predicted revenue declines for major corporations
- Differences Between Bull and Bear Market
Distinctive features of bull markets compared to bear markets include:
- Supply and Demand
In a bull market, cryptocurrency demand exceeds supply. Few investors are willing to sell crypto. As investors fight to buy, prices rise.
Bear markets have more sellers than buyers. As a result of demand is lower than supply, prices will continue to fall.
- Market Scenario
In general, a rising GDP indicates the beginning of a bull market, whereas a falling GDP indicates the beginning of a bear market. This is because a rise in GDP is often accompanied by a rise in business income and wage growth. Added together, they make it possible for people to spend more money.
On the other hand, GDP declines when business revenues are low and pay growth is slow or nonexistent. This is because both of these factors contribute to wage stagnation or decline. As a result, bear markets frequently follow economic downturns in which the GDP declines for two straight quarters.
- Impact on Economy
The economy usually reflects the strength of the market, hence a bear market indicates a poor economy. Profits fall and the economy suffers when businesses and consumers both do not spend enough money. Similarly, individuals are hesitant to trade or invest in cryptocurrencies and stocks.
A bull market, on the other hand, is associated with a healthy economy, in which profits are higher and consumer spending is higher. Increased trading volume is seen in the stock market and in cryptocurrencies when they are experiencing bull runs.
- Investor Expectations
The state of mind of investors has a direct effect on the state of the cryptocurrency market. During a bull market, rising cryptocurrency prices give traders even more reason to be optimistic. Consequently, more people are likely to put their money into the market in the expectation of a return.
Investors are often pessimistic about cryptocurrencies during bear markets. So some investors sell their assets in a panic, sending prices even down and prompting additional investors to sell.
- Stock Price
If you want to know if the cryptocurrency market is bullish or bearish right now, all you have to do is check the price. More importantly, a bull run can be expected if asset prices are going up. Instead, a bear market is approaching when asset prices are falling.
- Liquidity
Since buyers and sellers of stocks are more numerous in a bullish market, investors can buy and sell stocks with reduced transaction costs. However, in a negative market, liquidity is reduced because investors are pessimistic about the market as a whole.
- International Investments
Consistent price gains are the key characteristic of a bull market. As a result, more traders are confident in the rise and willing to take chances. During a bear market, when prices are falling, investors are also less optimistic.
- Job Market
The unemployment rate is also highly sensitive to market fluctuations. As the economy improves and consumers’ spending power rises, the unemployment rate falls during a bull market. However, during bear markets, businesses cut back on staffing, which increases the unemployment rate. Since individuals and businesses alike are experiencing decreased income as a result of the bear market, this factor often contributes to its longevity.
Is It Better to Purchase During a Bull or Bear Market?
When markets are bearish, crypto traders typically make purchases to take advantage of the reduced pricing. Therefore, individuals stand a better possibility of making a substantial profit when bullish markets become prevalent.
On the other hand, investing in a bull market has its advantages. If you buy while the market is rising, you may help sustain that trend and reap the rewards of rising prices as the market continues to rise.
Neither approach is risk-free, but then again, neither are any of the other strategies used in the trading world. Thus, it is crucial to be familiar with past trends and up-to-date on cryptocurrency news. Since it’s quite possible that you’ll come across both bulls and bears throughout the course of your cryptocurrency investment career, it’s in your best interest to diversify your holdings by purchasing both bull and bear markets.
How to Invest in a Bull or a Bear Market?
Early recognition of a positive market trend is crucial for capital gains. If you wait until the market is at its top, you can make a profit. In a bull market, any losses are likely to be short-lived and small.
But what if you detect a bear market developing because of some unforeseen event? The best course of action is to decrease your exposure, especially to less established cryptocurrencies. Putting your money in gold, cash, or another safe haven asset could be a good idea while you figure things out. This is due to the increased likelihood of their survival in the event of a collision.
Keep a keen eye out, since cryptocurrency values tend to drop during the tail end of bull markets, providing an opportunity to add to your holdings.
The reduced pricing and lack of trust among investors in the cryptocurrency market during a bear market make any investment riskier. However, with this risk comes the potential for greater rewards down the road. For this reason, it’s a good idea to buy cryptocurrencies when their prices are low and sell them at the height of the next bull market.
When the market begins to show signs of a downturn, some investors will sell their holdings and wait for the price to drop further before repurchasing.
When a bear market is caused by a recession or other economic factors, it is impossible to predict how long it will endure. The problem, then, is not knowing how long the dip will stay or how low prices can go. As a consequence of this, you run the risk of making a rushed purchase or of missing out on an opportunity to make a profitable investment.
Conclusion
There are numerous factors contributing to both bull and bear markets in the crypto industry. It’s important to differentiate between bullish and bearish market trading in the cryptocurrency market because there are lesser investors and more volatility than in the stock market.
One useful strategy is to keep an eye on bear and bull market patterns from the past. You can use this information to prepare for potential market shifts or at least anticipate possible outcomes. Reading up on the newest crypto news and gaining knowledge from the insights of industry experts is another good practice.
Bear market and bull market investors alike should keep in mind that each investment approach carries some degree of uncertainty. As a result, we strongly suggest that you conduct your own analysis so that you can be certain that the choice you choose is the most appropriate one given the circumstances.
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