Life has ups and downs, and so do markets. These ups and downs within financial markets are called trends which indicate the overall direction a specific market is heading. But, how does that work?
When the prices of most assets are increasing, the market is experiencing an uptrend. And if this uptrend persists, we can assume that we’re now in a Bull Market. The same logic applies to bear markets. When the prices are decreasing, the market is undergoing a downtrend. And if this downtrend continues for some time, we can say that we’re now in a Bear Market.
Recognizing the overall market trend is quite useful for traders as they can use different trading strategies to benefit from both market situations.
In this article, you’ll learn about the differences between a bull and bear market and common methods and strategies for each to minimize your risks while maximizing your profits. Let’s start!
In a bear market, the assets will experience price declines that may last for an extended period of time. Based on the common definition, the prices should fall by 20% or more from the recent highs for the markets to enter a bearish period.
In this situation, investors and traders believe that the prices would continue their fall, causing the market sentiment to be quite negative. This creates a ripple effect, pushing more market members to sell their assets which will sharpen the price declines even more.
A bull market, on the other hand, indicates a market situation where the assets experience appreciation in value over a long period of time. This creates a positive market sentiment as investors and traders believe in more upward price movements, buying more assets to benefit more from the situation and as a result, pushing the prices even higher.
According to history, bull markets usually tend to last longer than bear markets. For both markets, it’s not easy to see the bottom or top formation until they happen.
Let’s go through some of the well-known bear and bull market examples throughout history for both traditional and crypto markets.
The aftermath of the tech bubble in the early 2000s, the financial crisis in 2008, and the stock market crash in 2020 are some of the most notable examples of a bear market for traditional markets in recent history.
The crypto market also went through multiple bear markets in its relatively short life. The sharp crash of Bitcoin in 2018 probably is the most notorious incident in the crypto space which led to a prolonged bear market lasting till 2020. Bitcoin hit $20,000 in 2017 but lost more than 60% of its value in a few months, settling below 3,000 in late 2018.
The most recent crypto winter was triggered as different organizations started expressing their concerns over environmental, social, and corporate governance (ESG) issues the asset inflicted. The bear market was deepened with Terra Luna’s crash as TeraUSD, its associated stablecoin started de-pegging from the US dollar.
The incident was followed by the bankruptcy of multiple major crypto companies such as Three Arrow Capital, Celsius, and Voyager which put more downward pressure on the market. The crypto market started to slowly recover, however, the shocking collapse of FTX, a prominent cryptocurrency exchange, pushed the price of Bitcoin down to $15,000, making it even more unclear when the crypto winter would eventually end.
The real estate sector experienced a significant bull market from 2002 to 2008 which led to the mortgage crisis in 2007 and the following bear market.
The longest bull market to date, however, belongs to the stock market which started after the housing crisis in 2009 and lasted until the beginning of the COVID-19 pandemic in 2020.
Many believe that Bitcoin has also been in a macro bull market since its creation in 2009. If we want to be specific though, the crypto market started its recent bull run in late 2020 with the asset topping its famous $20,000 mark in December and going as high as $68,000 in November next year.
Let’s go through the main stages of a bear or bull market:
Bear markets often go through these 3 stages:
According to John Templeton, a prominent investor and fund manager, “Bull markets are born on Pessimism, grown on Skepticism, mature on Optimism, and die on Euphoria.”
Different economic indicators can be affected during a bear or bull market. Let’s go through some of them together:
Investors stick to safe-haven assets as the prices keep on falling.
Investors are more confident in their portfolios as the prices keep on increasing. They will continue putting their money into riskier assets.
As the markets look gloomy, companies start laying off employees to cut costs which leads to a higher unemployment rate.
A thriving market provides opportunities for expansion which leads to a greater employment rate as companies start to accelerate their hiring pace.
Less work and a sluggish economy reduce the spending of customers.
Higher salaries and economic growth propels consumers to spend more.
In a bear market, supply is relatively higher than demand which leads to lower prices.
Unlike a bear market, demand is relatively higher than supply in a bull market which leads to lower prices.
Lower demands mean lower production and sales which will reduce GDP.
The increase in demand will cause an increase in production and sales which would eventually result in an increase in GDP.
A slower market means less economic activity
Companies’ expansion and growing GDP will result in more economic activities
In bear and bull markets, most investors fall victim to their emotions due to the extreme conditions. As an investor, you have to learn how to control your emotions, namely the extreme greed in a bull market and the high level of fear in a bear market.
One of the most common ways of benefiting from a bear market is through short selling or shorting. In this strategy, you bet on the falling price of an asset and benefit from it. In the stock exchange, for instance, you borrow stocks and sell them at the current price as you believe they would decline further. As the market goes in line with your prediction, you can then buy the borrowed stocks at a lower price and keep the difference as your profit.
In a bull market, on the other hand, you can do the opposite. You borrow stocks and wait for the price to go up and hit your prediction. At that point, you sell your stocks at a higher price, pay the borrowed stocks back, and keep the difference as your profit.
But never forget that investment in extreme market conditions is associated with excessive risks therefore always invest the amount you can afford to lose and always Do Your Own Research (DYOR).