When assessing most financial markets, the terms "bull" and "bear" market tend to be frequently used. Just like stocks and commodities, cryptocurrencies and digital assets can experience "bullish" and "bearish" territory. But how do these two animals help us understand the markets? 🐂🐻
At a fundamental level, a bull market is simply a market on the rise, while a bear market is a market on the decline. Similarly, bulls are the term used to describe individuals or organizations that take actions such as buying assets in anticipation of price increases. In the same vein, a bear is seen as a person or organization that takes actions such as selling in anticipation of a price reduction.
Both terms, alongside "bullish" and "bearish" market conditions, tend to be determined over at least a couple of days, and up to 20% in gains or losses.
What is a bull market?
A bull market basically refers to a financial market on the rise. In the context of crypto, a bull market is a period in which the price of assets are either already rising or expected to rise. It’s believed that the term originated from a bull’s usual fighting style - thrusting its horns upwards.
Bull markets, or bull runs, are characterized by increased buying of assets, demand outweighing supply, increasing confidence in the market's trajectory - all of which leads to a corresponding increase in prices. It is driven by bulls, whose confidence in the markets usually inform actions and a chain of events that inspire confidence in other investors - causing prices to keep increasing.
High employment rates, a strong GDP, positive market sentiments that generate strong demand for assets are the usual indicators for a bull market. Investors usually invest in riskier assets with high growth potential in anticipation of a bull market.
One of the memorable bull runs in recent times was the increase in Bitcoin's value from around $900 to around $19,000 within the year 2017.
What is a bear market?
Bear markets basically refer to a financial market on the decline - the opposite of a bull market. In bear markets, confidence is low, supply is greater than demand for assets, and prices decrease steadily. It’s believed that the term came from a bear’s fighting style of swinging its paws downwards in attack.
When prices of assets fall by 20% or more, it's widely recognized as bear market territory. This must not be confused with market corrections, which refer to a decline in value of 10% or less
This market condition is also driven by bears, who have a pessimistic outlook on the economy and the lack of confidence in the markets. This makes them extra cautious, as bear markets tend to be notoriously hard to predict.
The tell tale signs of a bear market include:
- Slower economic growth,
- A decline in revenue/profit forecasts,
- High inflation rates,
- High unemployment rates,
- Higher Supply than demand
Bear markets usually cause investors to liquidate their positions from more volatile assets into those perceived to be more stable in anticipation of a sustained price decline.
Ethereum’s journey from a high of about $1,382 in January 2018 to a low of around $116 that same year was a great example of a bear market. This was the same fate as bitcoin during the same period.
One thing to remember about bear and bull markets is that they are both natural parts of market cycles. There are also times when the markets are neutral, neither on the rise or on the decline. In all this, you have the choice of trying to time bull and bear markets or embrace strategies that have you in profit regardless of the market cycles.