Crypto Bear Market Explained
Introduction
The Cryptocurrency market moves in trends. And so as a trader, it is vital to understand the differences between these trends in other to make better decisions. Why? You may ask. Well, let’s say different market trends can often result in wildly different market conditions. So if you have no idea what the underlying trend is, you will definitely find it very difficult to adapt to changing conditions.
A market trend can be defined as the overall direction in which the market is headed. Which means in a bear market, prices are generally declining. Bear markets tend to be a very challenging time to trade or invest in, especially for newbies in the crypto space.
In this article, we are going to discuss what a bear market is, how you can prepare for its arrival, and also how you could take advantage of it.
Definition of a bear market
A bear market can be defined as a period of declining prices in the Cryptocurrency market. Inexperienced traders tend to find it extremely tough and risky to trade during this period. Bear markets can easily result in massive losses and can even end up scaring investors from ever returning.
Have you ever heard of the popular saying amongst traders: “Stairs up, elevators down.” It simply means that while moves to the upside may be slow and steady, moves to the downside tend to be more rapid and often violent. Why? You may ask. This is because when the price of crypto assets starts crashing, majority of traders rush to exit their positions in a bid to cash out or secure profits from their long positions. This often results in a domino effect where sellers rushing to the exits leads to an even greater number of sellers exiting their position and so on. The drop can then be further amplified if the market is highly leveraged. Mass liquidations then engineers an even more pronounced cascading effect, resulting in a violent sell-off.
So while bull markets tend to have phases of euphoria during which prices are increasing at an extreme rate, and majority of crypto assets prices are skyrocketing simultaneously, in a bear market investors are “bearish”, meaning there is a general expectation for prices to decline. This also means that general market sentiment is low. Although this doesn’t necessarily mean that all market participants are actively shorting the market. It only means that they expect a decline in prices and so may be looking to take position accordingly as soon as the opportunity presents itself.
Difference between a bear market & bull market
Aside from the obvious fact that in a bull market, prices are going up, while prices fall in a bear market. Another notable difference may be that in bear markets there tends to be these long periods of consolidation, i.e., sideways or ranging price action. During these times market volatility is quite low, and there’s little trading activity. This is because prices declining for an extended period isn’t attractive for investors.
How to trade or take advantage of the bear market
One of the simplest strategies for any trader in a bear market is to stay in fiat(or stablecoins). Especially if you are not comfortable with the decline in prices, you can simply wait until the market exits bear market territory. You can always return when the bull market resumes. But if you are a long term hodler with an investment timeframe of years, a bear market doesn’t necessarily signal that you should sell. Instead you can dollar cost average(DCA)into your desired assets.
Usually when it comes to trading, it is advisable to trade in the direction of the market trend. This explains why it is often lucrative to open short positions in a bear market. In this way, traders can profit off the decline in prices of crypto assets when the market is going down. Let’s take note of the fact that there are times when certain traders will be looking for “counter-trend” trades, meaning trades that are against the direction of the major trend. Let me explain.
In the case of a bear market, this would be entering a long position on a bounce. This move is sometimes called a “bear market rally” or a “dead cat bounce”. These counter-trend price moves can be notoriously volatile, as many traders may jump on the opportunity to long a short-term bounce. However, until the overall bear market is confirmed to be over, the assumption is that the downtrend will resume right after the bounce.
This is why successful traders will take profits (around the recent highs) and exit before the bear trend resumes. Otherwise, they could be stuck in their long position while the bear market continues. As such, it’s important to note that this is a highly risky strategy. Even the most advanced traders can incur significant losses when trying to catch a falling knife.
Conclusion
Having discussed what a bear market is, and how traders may protect themselves and profit off bear markets. In summary, the most straightforward strategy is to stay in cash in a bear market — and wait for a safer opportunity to trade. Alternatively, many traders will look for opportunities to build short positions. As we know, it’s wise to follow the direction of the market trend when it comes to trading.
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