The crypto space has many similarities with traditional financial markets like the stock and the forex market. There are similar rules, principles, terms and ways of behaviour among investors. Two of the essential terms in both markets are bull and bear markets, which play a crucial role when buying or selling an asset. This article will explore these two terms and how they affect your buy or sell orders.

Where did these terms originate?

According to Changelly, it all began with gold miners during the Gold Rush! Not financial experts. Being tired after a hard day of work and in dire need of a distraction, the miners created a disturbing sport to entertain themselves. They pin bulls and bears against each other in a fighting arena. 

During these fights, the miners realized that the bull attacked upwards with their horns, and the bears’ claws slashed downwards, pressing on the ground. Luckily, this sport became illegal but engraved the eternal confrontation between two powerful rivals, which the financial market later adopted to describe rising and falling markets.

What is a bull market?

Crypto bear VS Crypto bull picture

According to Coinbase, a bull market is a period where most investors are buying, the market confidence is high, and the prices are rising. In such a market, the demand always outweighs the supply and investor confidence is also high. As a result, this positive feedback loops back into the market, attracting more investment and causing the prices to rise further. Investors who believe that prices will rise are known as “bulls.”

In the crypto space, a bull market is typically a 40% increase in crypto prices (more so Bitcoin) over one or two days. While this might not be the case in traditional markets, it’s quite common in the crypto market since it’s significantly smaller than conventional markets and therefore more volatile.  

It’s crucial to note that the crypto bull market will continue if the demand outweighs the supply. Historical crypto prices show that crypto bull markets can run anywhere from one to three years. 

What causes a bull market?

Crypto markets are relatively new to the scene. As such, they are influenced by a different set of factors. However, the conventional factors still affect crypto prices. 

Investor sentiment

Most crypto bull runs are initiated by investors who feel that the prices will start and continue to do so for some time. As a result, they start buying up crypto assets at low prices, causing a ripple effect in the market. More investors start buying, making the demand higher than the supply, which pushes the price higher.

Strong Gross Domestic Product

Generally, favourable market conditions increase investor confidence, so investors are more willing to invest. 

Institutional Capital

The introduction of institutional capital also portrays increased investor confidence, attracting more buyers and increasing the demand for crypto assets. An excellent example is Microstrategy’s $2.7 billion worth of BTC

Mainstream and pop culture support

Celebrities also play a crucial role in initiating bull runs. Think of the 2017 Bull Run, which was initiated by celebrities like Paris Hilton and Dj Khaled alongside the Big Bang Theory show. 

The Bitcoin halving

Simply put, Bitcoin halving is the process of halving the rewards of mining Bitcoin, which happens after every four years. From historical prices, it’s clear that after each Bitcoin halving, crypto prices surge exponentially, entering a one to two-year bull run, but the period may vary.  

How to identify a cryptocurrency bull market

Crypto bull markets are usually characterized by:

  • Increased investor confidence
  • Increase in crypto prices over an extended period
  • Strong demand despite weak supply
  • High innovation in the cryptocurrency space
  • Increased job opportunities in the cryptocurrency sector
  • Overpriced cryptocurrency projects
  • Talks about cryptocurrencies on mainstream media and social media
  • General interest in cryptocurrencies among celebrities, influencers and sectors that were previously not interested in cryptocurrencies

The Bitcoin 2020 – 2021 crypto bull run is a case in point

The Bitcoin chart below depicts the 2020 to 2021 bull market that followed Bitcoin halving in May 2020. Despite the minor downtrend period, the Bitcoin market was in an uptrend up to May 2021, when it reversed to a downtrend. 

Screenshot from Trading view BTC Price chart.

What is a bear market?

According to Coinbase, a bear market is when the supply of crypto assets is greater than the demand, investor confidence is low, and prices are falling. Unlike bull markets, bear markets generally lack the optimism and confidence that most have in bull markets. In the crypto space, bear markets are characterized by a dip of 20% or more coming from prior highs. The dip percentage is lower than the surge percentage of bull markets since prices tend to fall much faster than they rise. 

Pessimistic investors who believe prices continue to fall are therefore known as bears. Bear markets are also tricky to navigate since it is very challenging to determine when the bear market will end and when the bottom price has been reached. Most beginners tend to fall for crypto bear traps ⁠— when crypto prices rebound only to fall further, leading to losses and liquidation. 

What causes a crypto bear market?

Unlike bull markets which require solid and relatively long-term factors to initiate an uptrend, bear markets are initiated by small factors which might have minimal effect on traditional stock or forex markets. Some of these factors include:

Negative investor sentiment

 If investors are pessimistic about a particular crypto asset and end up liquidating their holdings, the supply of the crypto asset will increase, causing the prices to plummet. Moreover, if investors simultaneously lose confidence that the asset will recover, the price falls further.

Political and Social factors

Events such as political crises, wars, pandemics and slow economies also trigger the start of a bear market. During these events, investors are more focused on holding on to their savings due to the increased uncertainty. As a result, the demand for crypto assets falls, bringing prices down. Moreover, crypto bans in any developed country constitute a significant cause of crypto crashes. 

Changes in federal rates

An increase in interest rates discourages individuals and organizations from borrowing. Consequently, the amount of money in circulation reduces, forcing people to hold on to their savings and avoid risky investments such as cryptocurrencies. An excellent example is the 2022 increase in interest rates

Negative sentiment from financial institutions and regulators

Traditional financial institutions have operated for over a century, and most investors value their opinion on investment vehicles. Therefore, any negative comment on cryptocurrency might result in a massive sell-off that would cause prices to plummet. An excellent example of this was when Jamie Dimon, the CEI of JP Morgan, called Bitcoin a fraud in 2017, just before it reached $20,000. The result was a massive sell-off that caused the BTC price to fall quickly. 

How to identify a cryptocurrency bear market

The typical characteristics of a bear market are:

  • Declining prices over a significant period
  • The Crypto supply is greater than the demand
  • There are no talks of crypto assets on mainstream media as well as on social media. Any discussions during this time often negatively impact crypto prices.
  • There is general distrust from financial institutions, analysts, researchers, and economists.
  • Lower highs in crypto charts. 
  • Another subtle characteristic is cryptocurrency whales moving their assets from wallets to exchanges to buy crypto assets at low prices. 

The 2021 – 2022 crypto bear market is a case in point

The 2021 – 2022 is the recent bear market, and most experts call it the worst crypto crash in crypto history. The crash is also considered the worst implosion since May 2021, and it measured up to the 2008 financial crisis or the 2000 dot-com crash.

Screenshot from Trading view BTC Price chart.

How to invest during a crypto bull market

Investing in a bull market is quite straightforward. All you need to do is recognize the trend early on so that you can buy early at a lower price.   Later on, when the prices rise, you can sell your crypto assets and take the profit. Bull markets tend to last long, and losses are usually minimal and temporary. 

However, as you can see from BTC’s bull market chart above, bull markets do not go up continuously. There are periods of lows followed by higher price peaks. These lows also provide an excellent opportunity to ride the trend. You can buy at these dips and later sell when the price increases again. While using this strategy, it’s always essential to ensure that the market is still in an uptrend. If, by any chance, the market reverse, you will end up losing your capital. 

Lastly, during this period, you can ride uptrends that result from positive news on a crypto asset. A crypto-asset will likely experience a short-term surge if it has positive press. You can buy such as asset early on and sell it when the hype is about to die down.

How to invest during a crypto bear market

Investing in bear markets usually involves more risk as prices drop and investors have low to zero confidence in crypto assets. However, this risk also provides opportunities to purchase crypto assets at lower prices. Most crypto veterans analyze prices on the basis long term returns. Therefore, when prices fall, they purchase more crypto assets through a technique known as the dollar cost average. They then hold these assets and await the next bull market to liquidate their assets. This can be in one or more years. 

Another way of manoeuvring a bear market is through short selling. According to Investopedia, short selling is an investment strategy that speculates on a cryptocurrency’s price decline. Although it sounds quite simple, short selling is an advanced strategy used by experienced investors. 

Final thought

Various factors cause crypto bull and bear markets. In this article, we have only gone through some significant factors that cause crypto prices to rise or fall. Generally, investors buy when prices are low during bear markets and sell when prices peak during bull markets. However, to find the best trading periods and strategies, novice crypto investors need to observe past market patterns of bull and bear trends to understand how the prices respond during each period. 

Whether you want to invest during a bull or bear market, it is always important to keep in mind that risk is involved with each strategy. As such, we advise you to do your research to ensure you’re making the best possible decision in each market.