Bull and Bear Markets: What's The Difference

An investor's profit largely depends on their ability to correctly assess the current market trends. These trends determine the general direction of price movements of the cryptocurrency market in general and individual assets in particular. Therefore, traders need to keep a close eye on the market to develop their trading strategies.

A trend is the general direction in which quotes are moving. Usually, such movements occur in a wave-like manner. It is possible to determine the general direction of the movement on the chart by drawing a trend line. This line is drawn on the minimum or maximum daily or monthly prices on the chart, depending on the scale. If the line is drawn on the lows and each new low is always higher than the previous one, the trend line will be going upward, indicating a rising trend. Conversely, a trend line drawn along the highs will be going downward in a falling market. In the investment world, these trends are called “bullish” and “bearish”, respectively.

Key Takeaways

• A bull market is characterized by a general optimism of investors and expectation of rising prices
• During bear market, investors believe that prices will fall and that is why many close their positions
• A bear and a bull market are determined by various factors, such as supply and demand, investors sentiment, GDP, stock prices, job market, etc.
• While trading both on a bear or a bull market it is better not to time the market and diversify portfolio well

Bull Market vs. Bear Market

A bull market is defined as a period when asset prices are rising. Investors who buy assets in expectation that prices will continue their increase are known as “bulls”. It is important to note that a bull market does not necessarily mean that prices do not fluctuate. A bull market may see both dips and consolidation in asset prices, but overall there is an uptrend over a broader time frame.

Most investors are optimistic during the bear market and expect prices to go further up. However, as practice shows, no matter how optimistic investors are, at some point their confidence begins to decline. Usually the negative sentiment is caused by some negative events, such as tougher regulation, the COVID-19 pandemic or collapse of such major projects as UST and Luna.

The resulting decline in market optimism leads to sell-offs, oversupply, and a resulting drop in prices, which causes the market to enter a so-called “bear” phase. Pessimistic investors who believe prices will continue to fall are called “bears”.

Price declines in bear markets can be quite sharp and rapid. As the market moves in a downtrend, many traders abandon their positions, sometimes it leads to massive liquidations. This causes the market to move further downward as more sellers try to close their positions.

The duration of the bear market is difficult to predict. The recovery is typically a slow and unpredictable process, which can be influenced by many external factors such as the world economic and political environment, investors mood, and various news or events.

Characteristics of a Crypto Bull Market

We can distinguish a number of features that characterize the bull market:

• A high level of investor confidence;
• Frequent positive mentions of cryptocurrency in the media, as well as in social networks;
• Strong demand and limited supply;
• Rising prices over a long period of time (a few months to a year, as a rule);
• Overbought nature of some assets and emergence of market bubbles;
• Possible price drawdowns are quickly recouped by investors;
• Interest in cryptocurrency among influencers, politicians, celebrities who did not express interest in cryptocurrency before.

Characteristics of Crypto Bear Market

Indicators of a bear market are as follows:

• Decline in investor confidence in the market (often in response to negative news);
• Distrust in cryptocurrency or its active criticism among economists and politicians;
• High supply with limited demand;
• Prices fall (often by 90-95%) for a long period of time (usually a year or more);
• Many crypto projects are reducing the number of their team members or even closing down;
• The frequency of cryptocurrency mentions in the media, as well as on social media, decreases significantly;

How Do Bull Markets and Bear Markets Differ?

The simplest and most obvious difference between a bear market vs bull market is the general direction in which the quotes move on the chart. The direction is determined by a myriad of factors, some of which we will present below.

Supply and Demand

In a bull market, the demand for cryptocurrencies is always high. Apart from individual investors, institutional investors come to the market, investing hundreds of millions in certain assets. At the same time, the supply in the market is limited, as those who bought cryptocurrency earlier are not ready to part with it. This of course leads to further price increases.

In a bear market, on the contrary, most individual and institutional investors sell than buy. Demand is lower than supply, causing prices to fall further.

The market reversal happens largely because many professional investors start selling assets in advance, sometimes even in the midst of a bull market. So they go against the “crowd” not willing to take risks. The same rule applies to a bear market:, successful investors start buying cryptocurrencies at the bottom, waiting for the uptrend.

Market Scenario

Rising GDP marks a bull market, while falling GDP indicates the emergence of a bear market. The reason behind this correlation is that GDP increase is accompanied by the increasing companies’ revenues and rising wages of employees. Ad a result, consumer spending grows, too. On the other hand, low corporate profits coupled with declining or stagnating wages and rise in unemployment lead to the fall of GDP.

Impact on Economy

The bull market is mostly determined by the state of the real economy and the economic policies pursued by the major economies, especially the United States. For example, in 2020, amid the pandemic, the U.S. Treasury's cash balance rose to an astronomical sum of $1.812 trillion, a record high for the entire history of the U.S. financial system. This happened due to the U.S. government's decision to launch large-scale programs to help people and businesses during the pandemic. As a result, a significant part of this money was directed by the population and businesses to buy cryptocurrencies, which caused a significant growth in crypto prices.

At the same time, the ensuing bear market was largely caused by the fact that amid rising inflation, the Fed began to raise interest rate in order to withdraw money from circulation and tame inflation.

Outlook of Investors

Professional investors are always engaged in analysis and forecasting. Thus, if investors agree that the market is ripe for growth and a bullish phase, i.e. investors become “bulls”, they start buying cryptocurrencies, causing the market trend to reverse.

At the moment the bear market starts, most professional investors, as a rule, have been selling their portfolios for some time, because they saw the reversal coming. Thus, the pessimistic mood of many investors, among other factors, also leads to a decline in the market.

Stock Price

The cryptocurrency market largely, though not always, correlates with the traditional stock market. It is safe to say that if we see a strong growth in stocks, then the cryptocurrency market will also be bullish. It also works the other way around.

Furthermore, it is also worth noting that the cryptocurrency market often shows reversals or corrections before the stock market does. This is primarily due to the fact that cryptocurrencies are currently less fundamental assets than stocks. That is why, in case of crises, investors prefer to get rid of cryptocurrencies first and only then of stocks.

Liquidity

During a rise in quotes, a huge amount of money enters the market, which greatly increases the liquidity of cryptocurrencies. Thus, the volatility of cryptocurrencies is reduced and in case some investors choose to exit in the midst of a bull market, it will entail a relatively insignificant decrease in quotations.

On the other hand, when a bear market has been going on for months and many investors are out of the market, there is a liquidity crisis and the volatility of cryptocurrencies increases significantly.

International Investments

As mentioned above, bull markets are characterized by steady price increases due to liquidity inflows. Thus, every year, more and more investors and traders from different countries come to the cryptocurrency market.

At the same time, some countries are tightening crypto regulation in response to problems and fraud in the cryptocurrency market. Some countries may even complete ban crypto trading. Such policies force residents of these countries to sell off their assets. Consequently, the bearish trend can start or intensify in the market.

Job Market

Market trends also depend on the unemployment rate. Low unemployment tends to boost the price of assets such as cryptocurrencies. However, even the smallest growth of this indicator can turn the situation upside down. Thus, on October 7, 2022, quotes of the first cryptocurrency failed at the level of $20,000 after a report on the level of unemployment in the U.S., thereby strengthening bearish sentiment.

What Is a ‘Bull Run’ in Crypto?

A bull run is just another name for a bull market. It is an extended period on the crypto market during which priced of the digital assets are rising.

It is worth mentioning that cryptocurrency market cycles are closely connected with Bitcoin halving. Historically, after each halving, the Bitcoin price shows a significant rise. Since BTC is the leading cryptocurrency and dominates the market, halving it is the perfect indicator of the bull market.

Many investors and experts expect the beginning of a bull cycle and a renewal of historical highs after halving. Here's what prominent people in the crypto industry are saying:

Huobi CEO: “The next halving will be in 2024, and growth can be expected after that... Crypto winter could last until 2025”.

CEO Morgan Creek: “No bull run until halving, wait until 2024”.

CEO Bitkub: “The “golden period” of Bitcoin won't happen before 2024”.

Thus, a crypto bull market is characterized by the same characteristics that we mentioned above in the article. And the halving and observed cyclicality of the market increases investors' optimism in advance and even serves as a kind of self-fulfilling prophecy.

What Marks the End of a Bull Market?

A bull market can last many months, but sooner or later there has to be a reversal. A reversal can start for many reasons, from negative changes in the global economy to a drop in confidence in cryptocurrencies amid the collapse of popular projects. Most often, the market reversal happens against the backdrop of unfavorable events, which act as a trigger. Therefore, a successful investor should not focus only on the cryptocurrency market, but expand their horizons and pay attention to the global environment as a whole.

Also, overbought cryptocurrencies become one of the main reasons for market correction. If investors become aware that the capitalization of projects in the market is several times higher than their real value, they begin to fix profits. Thus, it is important for investors to evaluate the fundamentals of cryptocurrency projects, to be able to predict the burst of the market bubble.

Another wake-up call is the market sentiment. When the market is in a phase of euphoria and greed, it is no longer economics, but blind faith that begins to drive prices up. This is well indicated by the Crypto Fear & Greed Index, for example. Therefore, as an investor, you must not be part of the crowd, blindly following the trends, but identify the market sentiment with a cool head.

Thus, it is critical to scrupulously assess the current state of the global market, the news background, as well as the dominant sentiment in the cryptocurrency market. A good analysis will help to avoid falling into the “Forever To The Moon” trap. As the growth will end anyway, it is better not to have risky investments in your hands at that moment.

How Should You Invest in a Bull vs. Bear Market?

When investing in a bull market, it is always better to recognize the trend early on so that later you will be able to sell at higher prices when the market reaches its peak.

At the same time, if you sense the emergence of a bear market, it is better to reduce your positions, especially in illiquid altcoins. It may be better, at least temporarily, to move your assets into stablecoins or Bitcoin, to reduce potential losses.

Investing during a bear market is naturally risky because prices are lower and investor confidence in cryptocurrencies is minimal. However, this risk is also associated with the possibility of higher profits in the future. So keep an eye on the prices and take the opportunity to increase your investment.

As we see, one way or another, both strategies involve risk. However, there are universal guidelines for investing in both bull and bear markets.

1. Don’t Try to Time the Market

It is true that many professional investors and traders constantly try to predict market movements, and do so with varying success. However, the best advice for the average investor is not to try to time the market. The market is unpredictable, and trying to time it is a risky business.

In fact, no one has ever predicted the market movement successfully over several business or stock market cycles. Consistent predictions of the highs and lows is a myth. In fact, by making forecasts, people have lost more money than gained.

If you don't need the here and now, it doesn't really matter if the market is currently bullish or bearish. The most successful strategy more often than not is a simple “buy and hold” strategy.

2. Rethink Your Strategy

However, using a buy-and-hold strategy doesn't mean you should abstain from making trades completely. Every month, new promising cryptocurrencies appear on the market with other old projects dying out. So it would be odd either to miss a new opportunity or hold a coin of a project that has had obvious problems.

Also, using a strategy like, for instance, dollar cost averaging (DCA) can help reduce the impact of market volatility on your portfolio and avoid emotional investing.

3. Diversify Your Portfolio

The idea of portfolio diversification follows logically from the previous point. Add or subtract some cryptocurrencies from your portfolio based on your goals and risk tolerance, not on current market sentiment.

The Bottom Line

When the market is dominated by a long-term downtrend, it is called a bear market. Conversely, a long-term uptrend characterizes a bull market. There are several important differences between these two types of markets, but investors have many opportunities to make money in both markets. The main thing to remember is that different strategies have to be applied in bull and bear markets. To choose the right strategy, you need to identify the current market phase first. For this, investors use various technical tools such as trend lines.

That said, cryptocurrency investments always carry certain risks. To minimize these risks, one should develop a personal trading strategy and update it regularly. Also, it is not advisable to try to predict every market movement. It is more wise to spend the energy on diversifying your portfolio by selecting the most promising cryptocurrencies. These tips and other information from this article can help you learn how to make profit under any conditions.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.