What makes a crypto market bullish or bearish? And why do investors shout HODL and FUD during one and ‘Bitcoin to the moon’ during the other? The Wall Street jargon might confuse you at first, but it’s simpler than you think.
Prolonged periods of strenuous selling or buying pressure means that the market is in a trend. Trends can last for as short as a week or for as long as a year. But what both short and long trends have in common is direction. If buyers throw more liquidity at crypto than sellers, the market will thrive and vice-a-versa.
Markets thrive on trends and the best an investor can do is identify one. In this article, I explain the signs of bear and bull markets in crypto.
A bull market happens when demand is higher than the supply. Buyer confidence is at an all-time high and coins move from exchanges to private wallets. The market’s strength compounds as more buyers join the buying spree and proclaim the market bullish.
The mania sometimes causes the asset to appreciate much higher than its fundamental value, which leads to bubbles and bull runs. Assets rarely dip during a bull run and they soon recover when they do. Even bull markets deal with fluctuations but as long as the trend holds, buyers have nothing to fear.
However, knowing the difference between a dip and trend reversal can make or break your portfolio. Greedy investors who don’t know any better commonly set their sights on a short time frame and see the crash as a momentary price slip up. But those who observe the asset at longer time frames can tell if the dip is part of a series of dips.
When the 2017 bull run lost its steam near the year’s end, everyone thought that Bitcoin was headed for new highs and that buyers would quickly step in. But as history has shown, one dip turned into two and soon enough the whole market crashed.
Bull markets are bound to crash at some point because their speculative value differs from their fundamental value. Once assets reach extreme valuations, the market becomes a game of musical chairs. The last one who buys loses.
When the curtains drop and buyers leave the theater, everyone left sitting gets to watch the sequel: the bear market. A bear market is a period when investors have no confidence, prices continuously fall, and supply outweighs demand. Every self-proclaimed genius and investing whizz faces a terrible trading environment as the books are empty and volatility reaches all time lows.
Bear markets are much more unpredictable than their counterpart. Assets switch between trading in a 0.5% range and falling via steep drops. It’s not abnormal for a market to bounce during a bear market, but investors are better off shorting than longing.
Crypto investors think of 20, 30, and 40 percent price drops as bear markets. But the truth is that bear markets are crueler than that. By the trend’s end the asset can fall anywhere between 50% and 80% from the top. The famous 2017 BTC bull market hit an ATH at $20,000 but retraced back to $3,500 nearly a year later.
Bear markets end after the asset returns to its fundamental value, or after sellers become exhausted. Crypto markets often mimic equity markets and rebound as soon as stocks do.
Is a bear market completely useless for investors? Of course not. Bear markets offer a prolonged accumulation period to those who believe in another bull market. Think of it as having year-round black Friday deals. Since predicting the bottom is difficult, some opt for a dollar cost averaging strategy to fight bad volatility.
The exact origins of bull and bear markets remain unclear. One story claims that Wall Street investors named the trends after the way bears and bulls attack. Bulls thrust their horns up into the air while bears swipe down. Both actions resemble the way prices move during each trend.
Another theory suggests that the middlemen who sold bearskins from trappers were called ‘bears.’ They would sell skins at a higher price before they received them hoping the trappers’ price would drop in the meantime. Since bull and bear fights were once popular, investors thought it was smart that bulls stand at the opposite side of bears.
How do you determine whether an asset is in a bull market or a bear market? I mentioned the telltale signs before, but some are not obvious until they happen. Although market sentiment and seller/buyer exhaustion serve as great indicators, the best way to determine the market’s trend is by applying technical analysis.
Technical analysis is the art of analyzing market data and using indicators to spot patterns and predict price action. All you need to do is read charts, draw trendlines, and spot zones of interest like support and resistance levels. If you want a quick walkthrough I recommend reading my technical analysis course at Shrimpy Academy.
If you want to learn more about market cycles, explore the following articles:
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