Whether you’re new to crypto investing, or are a seasoned investor who understands the workings of the crypto industry, you should know what a crypto bear market is and what it means. When a market enters bear market territory, the entire approach an investor takes to making investments can change. Here's a more thorough explanation of the crypto bear market and how it can affect your portfolio.
What Is a Bear Market?
A bear market can occur with practically all assets, from stocks and bonds to commodities and real estate. Cryptocurrency can also enter a bear market when there's a downward trend with market prices. These downturns involve prices falling relatively sharply in a somewhat short period of time. Keep in mind, however, that crypto bear markets differ somewhat from traditional bear markets.
Even the strongest and most stable cryptocurrencies are volatile, which means the entire crypto market is considerably more volatile than most traditional markets. This volatility conveys that price drops need to be significant for the market to enter bear market territory. For example, it's common for certain currencies in the crypto market to drop as much as 85 percent in a short period of time, but that doesn't always denote that the entire crypto market has entered into bear territory.
When looking specifically at more traditional assets, a bear market usually occurs whenever the market as a whole experiences a 20 percent price drop within a period of 60 days. In most cases, this drop occurs when investors feel less confident about market conditions and the economy as a whole. Typically, this results in investors selling their holdings en masse, which only worsens market performance.
Even though a large drop in overall market prices is considered the first sign that a market is slipping into bear territory, the other indicators of a bear market are less identifiable. Analysts and traders tend to use technical indicators and measurements to determine what market conditions look like.
What Causes a Bear Market?
When taking both cryptocurrency and traditional assets into account, bear markets can have many causes. For instance, wars, pandemics and bursting bubbles can create a sizable downtrend in market conditions. It's also possible for high inflation to lead to a bear market, although this isn't that common. If the economy is performing poorly, markets are primed to enter bear market territory. The common signs of a worsening economy include less disposable income, a low employment rate, a decrease in business profits, and weak productivity.
With cryptocurrency, the causes of a bear market can include:
A drop in trading volume, which indicates investors are becoming more wary
Negative views of traditional finance options
Futures market prices that are lower than existing ones
The federal funds rate being changed
Regulatory bodies making changes that negatively impact the crypto market, which could lead to mining operations going offline
When an investor believes the market will perform poorly for an extended period of time, they will likely sell off shares to reduce the amount of losses that are incurred. Again, it's possible for a bear market to last anywhere from a few weeks to several years.
Phases of a Bear Market
There are four distinct phases to a standard bear market. The initial phase occurs when investor sentiment is great and prices are still high. At the end of this phase, you'll notice investors leaving markets with the profits they currently have. This means that some investors believe the market is performing as well as it can.
The second phase begins when crypto prices start to fall at a high rate. You'll also see corporate profits and trading activity drop. Economic indicators may be problematic as well. During this second phase, some investors will panic because of poor forecasts.
The third phase takes place when speculators begin to enter the cryptocurrency market and buy more crypto, which leads to some prices increasing and trading volume accelerating.
The fourth and final phase of a bear market is when crypto prices drop at a slower rate, indicating to investors that economic disaster isn't imminent. Prices are low — but they’re not dropping dramatically — so many investors will find the market more appealing.
Bear vs. Bull
As with any traditional marketplace asset, cryptocurrency can be trading in a bear market or a bull market, which are exact opposites. During a bull market, prices are increasing consistently, which leads to higher market sentiment among investors.
As traders become more confident, it's common for them to invest a higher portion of their assets, which results in prices continuing to escalate. Since 1929, the average loss in a bear market is 35 percent. On the other hand, the average gain in a bull market is over 100 percent.
Now that you know what bear markets are and how they differ from bull markets, you should have the information you need to determine if now is a good time to make a crypto investment.