The cryptocurrency market has had its share of ups and downs over the years, and while cryptocurrencies can be volatile any time of the year, it’s always difficult to understand how things will turn out during the ups and downs. When the market is down, it’s called a bear market.
Definition of a Bear Market
A bear market can be defined as a strong market downturn or drop in crypto prices. It represents a huge drop in the price of digital assets over a short period. The crypto market is more volatile than traditional stock markets due to the huge gains or losses that can occur quickly.
In the crypto space, it is normal to see prices drop by 85% in a prolonged bear market. In a bear market, digital assets endure high and extended drops in value, and the prices of an asset class can drop by 20% or more from its most recent high. In these cases, the significant drop is usually related to fear, uncertainty, and doubt (FUD) around the market or a project. This is also known as negative sentiment. Bear markets can also happen during a global or national economic crisis or recession.
Understanding Bear Markets
We can agree that the current price of a digital asset typically reflects its future price expectations. Normally, future expectations are postponed when the prospect of growth starts to drop, and in turn, the value of the token begins to drop.
Several factors can lead to a drop in the price of a digital asset. However, the most important factors are investor concerns and market movements via the daily chart. These factors can cause the value of cryptocurrencies to drop by at least 10%, which is the main mechanism for a correction in the digital currency market drop in the value of a coin.
Some bear markets can last for months because investors abandon speculations and prefer going for bets, meaning they bet against the market. Other factors that can cause a bear market include pandemics, economic decline, wars, and geopolitical crises. Sometimes an action taken by the government or federal regulators can also result in a bear market.
Signs of a Bear Market
In bear markets, traders buy less and sell more. This is the quickest way to make money from trading digital assets. This is why traders must determine when a bear market kicks off and when it is about to end. These little details can make a big difference.
When it comes to the traditional stock market, economists have the privilege of determining the price action of stocks long before they are triggered. However, it’s not the same in the crypto space. Here are some of the common signs of a crypto bear market include:
• Low trade volume: a lower trading volume could mean that people have started to hold their tokens due to the uncertainty in the market.
• Backwardation: Backwardation occurs when the value of a digital currency in the futures market drops below its market price at the time.
• Death cross: a death cross is a technical indicator for the 50-day moving average (MA) of a digital asset. The 50-day MA will cross the 200-day MA.
Benefits of a Bear Market
There are five key benefits of a bear market including making quick and big gains, being able to buy more assets, diversifying your portfolio, and increasing your long-term investments.
When an investor short sells during the bear market they are likely going to make gains. To achieve this, they try to sell off their tokens and buy them again for less. While this is a risky trading pattern that can result in heavy losses when it fails, it can be a lifeline for investors. In this case, your profit and loss are different from the price you sold and bought your tokens back at.
Ideal Time To Buy
A crypto bear market can be the ideal time to buy assets that could offer high returns in the future. There is only one problem: no one can tell how long a bear market can last. The same can be said about how much the price of the coin can drop. Therefore, it is often a huge risk to buy prematurely or miss an opportunity to invest wisely.
Diversifying Your Portfolio
An investor who decides to follow only one digital asset could use the opportunity to diversify their portfolio. Normally, it is not every token that dips at the same time during a bear season. An example here is when Elon Musk triggered growth in Dogecoin after abandoning Bitcoin (BTC). When you conduct well-studied investments during bear seasons, you can create a versatile portfolio.
Increase Long-Term Investments
A crypto bear market can serve to be a catalyst that creates an opportunity for long-term crypto investments. It can be a good time to add long-term investment to your portfolio, especially ones that have a high potential. When crypto prices are low, it won't be ideal to focus on investments that'll be fruitful in the short term.
While it may seem that most of the points above are in favor of bear markets, these suggestions also have downsides. Just as it is with most assets, digital currencies go through periods in which their stock increases and decreases. When it decreases, it is known as the bear market.
Both short and long-term crypto investors follow the market as a guide for their investments. Following the market allows them to create trading models that can either reward them greatly or minimize risk. There are many benefits to a bear market, however, it is always wise to research and review, and only invest what’s affordable for you.