From early birds to experienced traders and seasoned professionals, one thing we can all agree on is the high amount of scare that flies around when there is a “bear market in crypto”. Basically, all crypto investors are usually tense during a bear market. This is because, during this time, everybody’s cryptocurrency portfolio loses its purchasing power.
The bear market stage is one of the major hurdles that every crypto investor must be willing to scale through. Now, you may be wondering – what is bear market in crypto all about?
In this article, we’ll be discussing all you should know about the bear market and how you can secure your crypto capital during this stage.
What’s a bear market?
A bear market occurs when there’s more supply of assets in the market than demand from investors. It is the moment when the market experiences downtime due to previous norms. Basically, when you hear any investor complain of a bear market situation, it means that the prices of assets are dropping. This implies that the value of whatever asset investors are trading on the market is experiencing a decline.
In practice, investors make use of numerous technical and fundamental factors to deduce if they are in a bear market situation. Technically, chart analysts make use of moving averages to define when the prices of assets extend into bear territory. If the prices of an asset class plunge below standard trendlines, technical traders expect the prices to continue to decline.
Also, bear markets are mainly characterised by negative moods and attitudes such as fear, depression, and pessimism. You may observe that many investors are not eager to make any investment moves during this period, let alone beginners trading crypto.
Most times, bear markets occur during economic stressing situations. Problems like high rates of unemployment, inflation, and even war can dwindle investors’ excitement about an asset. Hence, during this period, many investors prefer to play safe by holding tightly to any asset they have, in case the situation persists. Experts predict that sustained bear markets are likely to have far less liquidity and trading volume.
What is a bear market in crypto?
A bear market in crypto is when the cryptocurrency market faces what we described above as ‘the bear market’ situation. Basically, when a crypto bear market occurs, the standard prices of Bitcoin (BTC) and other cryptocurrencies decline considerably and continue to spiral downward. Also, you may notice more negative stories about crypto in the media during this period.
A crypto bear market is likely to be more volatile than a stock bear market, hence, crypto prices may decline further than normal. Also, it takes less capital to move cryptocurrency up or down and this results in more drastic losses during the bear market period. Additionally, since the crypto market attracts mostly speculative investors, it may plunge harder than the regular stock market.
Many crypto-centric factors can help crypto investors to determine if they’re in a bear market. Since it is possible to view transaction data on the blockchain, many companies research on-chain data. For example, crypto analysts can monitor Bitcoin network hash rate on the blockchain. This enables them to determine the number of Bitcoin miners that are keeping the crypto secure. The lower the hash rate of Bitcoin, the greater the probability of a bear market in crypto.
Blockchain specialists frequently observe how the number of tokens that flow back into centralized exchanges, as this signals an intense sell pressure. Analysts can also assess network congestion as well as the average day-to-day crypto transactions to determine the number of people that are using different blockchains.
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Bull market vs. bear market
Bull markets are simply the opposite of bear markets in crypto.
Basically, a bull market implies that the prices of assets are increasing. Not only are asset prices increasing, but investors generally have a more optimistic vibe during a bull market. People feel very comfortable investing in crypto or stocks and taking on huge risks. Also, you will observe a rise in trading volume and overall positive economic data. The economic data include high GDP, low employment rate, and strong consumer sentiment.
How to recognize a crypto bear market
In reality, there is no particular crypto trading strategy to determine the shift between the bull and bear market. However, investors watch out for various features to deduce whether they’re stuck in a crypto bear market. It can take a few weeks or in worse cases, months before crypto investors admit that there’s an actual bear market. A few features often occur during this time. They include:
1. Lower highs and lows
If the prices of crypto are stuck in a bear market, investors will see that the prices will continue to move downward. So even if the prices increase for a while, they are still likely to hit a strong resistance before they continue to spiral downwards. In a situation where cryptocurrencies keep making lower highs and lows on numerous timeframes, they’re probably in a bear market.
2. Decreasing on-chain activity
When there’s a crypto bear market, you likely won’t be seeing too many people making use of blockchains frequently. However, this is the opposite during a bull market. A considerable drop in network activity indicates that people have less interest in cryptocurrency. This usually explains why there is a low demand for digital assets.
3. Limited or negative news coverage of crypto
Media sites generally run fantastic stories on crypto during a bull market trend. However, this is not the case during a bear market in crypto. When there’s a crypto bear market, there are usually fewer outline stories about the crypto industry. To make matters worse, the few stories about crypto during this period will be negative.
4. Increase in the issuance of stablecoin
When traders want to reduce risk, they usually swap their crypto possession into stablecoins. During a crypto bear market period, you are likely to see an increase in the stablecoin market cap. This is because more crypto investors will be sitting on the sidelines and trying to protect their assets.
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How long does a crypto bear market last?
Nobody knows the exact duration of a market cycle will last. However, most crypto bear markets that investors experienced in the past have lasted for as long as 37 months. This was the case before the 2017 Bitcoin bull market happened. Some traders refer to long crypto bear markets as ‘the crypto winter’.
According to the four-year cycle theory, the prices of crypto rise after Bitcoin halves for only a few months before it crashes and declines into a bear market. This is in line with the common belief that digital assets tend to rise and fall alongside Bitcoin halvings. Hence, most crypto investors anticipate a sharp increase in price when there’s a decrease in Bitcoin’s block rewards every four years.
While this theory is popular, it’s not an actual science. This is because the crypto market is relatively new and has a short price history, unlike the regular stock market. Hence, it is too early to conclude that the four-year cycle theory will play out after every Bitcoin halving. Nevertheless, the four-year cycle has occurred in the past so most people regard it as a self-fulfilling prophecy. This implies that the cycle only happens because most investors believe it will happen.
Managing a crypto bear market
Crypto bear markets can be very frustrating for long-term investors. However, it is important to always remember that bear markets happen across all classes of assets. Hence, they are completely normal.
Also, another thing to give you hope is that every bear market will resolve at some point, even the worst ones.
On the brighter side, crypto bear markets provide traders with a perfect chance to buy digital assets at a good discount. Even if traders don’t buy the absolute bottom, they rest assured they aren’t purchasing a coin at the top.
Many long-term crypto investors use the bear market period to buy coins they speculate may have a bright future. This is known as the dollar-cost average (DCA). Basically, DCA is a popular investment strategy that mainly involves the purchase of small increments of a particular asset at regular intervals. Long-term crypto traders use the DCA strategy to regulate crypto volatility and create evenness in average price.
Since the prices of assets are pretty low during a bear market period, it’s not advisable to sell off your possession during considerable corrections. Unless you urgently need money or have completely lost confidence in your digital assets, it’s best to exercise patience and anticipate the bull market period.
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Final Thoughts
It is very easy to know when you are experiencing a crypto bear market. Whenever there’s a persistent decrease in crypto prices and everyone expects the prices to drop further, you are in a bear market.
Although crypto bear markets tend to create a very gloomy atmosphere, major crypto projects will continue to generate during these times. These projects will be done mostly by long-term investors who use the dollar-cost average (DCA) strategy.
Whenever you experience a bear market in crypto, one thing is certain, tides will certainly turn at some point.
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