What is a bear market?

 Financial markets fluctuate as trends change. To make smarter investment decisions, it is important to understand the differences between different trends. Market conditions can vary greatly depending on the market. If you don’t understand the underlying trend, how can you deal with the ever-changing market environment?

Market trends refer to the overall direction of the market. In a bear market, prices fall overall. Bear markets make trading or investing more difficult, especially for beginners.

Most cryptocurrency traders and technical analysts believe that Bitcoin has been in a macro bull market since its inception. Even so, cryptocurrencies have experienced brutal bear markets many times, usually causing Bitcoin prices to fall by more than 80%, and altcoins to plummet by more than 90%. Faced with the dilemma of a bear market, how should investors deal with it?

In this article, we will discuss what a bear market is, how investors can deal with it, and how to make money in a bear market.

What is the spot market?

A bear market is a period of falling prices in financial markets. It is extremely difficult and risky for inexperienced traders to trade in a bear market. They can easily suffer serious losses and never have the courage to return to the financial markets. Why?

There is a popular saying in the investment circle: “Upwards, climb stairs, downwards, take the elevator.” It means that upwards are slow and steady, but downwards are often violent and turbulent. Why is this so?

Whenever prices plummet, many traders are eager to exit the market, whether to move to cash or to lock in gains on long positions. This can quickly trigger a chain reaction, with a large number of sellers selling and closing positions, which in turn leads to more closing operations, creating a vicious cycle. If the market is highly leveraged, the decline can even be doubled.

Large-scale forced liquidations will have a more serious chain reaction and trigger a frenzy of selling.

Similar extremes exist in bull markets. During bull markets, prices grow rapidly, the correlation between different assets is higher than before, and most assets rise in sync.

Generally speaking, investors are “bearish” in bear markets, expecting prices to fall, and market sentiment is quite depressed. However, some market participants will not blindly short. These participants simply anticipate a fall in prices and may choose to go long if a good opportunity arises.

Bear Market Example

As mentioned above, many investors believe that Bitcoin has been in a bull market since it was first traded. Does this mean that there was no bear market during this period? The answer is no. After rising to around $20,000 in December 2017, Bitcoin fell into a sluggish bear market.

After the bull run in 2017, Bitcoin plummeted.

Before the bear market in 2018, Bitcoin also plummeted 86% in 2014.

Compared with the peak in 2013, Bitcoin has fallen by as much as 86%.

As of July 2020, the low point of the previous bear market, the range of around $3,000, was tested again, but it did not fall below. If it falls below this critical range, it will undoubtedly strongly prove that the multi-year Bitcoin bear market has not ended.

Bitcoin is testing its all-time bear market lows again.

Given that the lows have not been breached, we believe that the plunge on COVID-19 fears is just another test of this range. However, certainty cannot be obtained through technical analysis, only probability.

Other noteworthy examples of bear markets come from the stock market. Whether it is the Great Depression, the 2008 financial crisis, or the stock market crash caused by the global COVID-19 epidemic in 2020, they all deserve attention. These natural and man-made disasters caused heavy losses to Wall Street, and the entire stock market suffered a huge impact. During this period, market indexes such as the Nasdaq 100, the Dow Jones Industrial Average (DJIA), and the S&P 500 also fell sharply.

What is the difference between a bear market and a bull market?

There are significant differences between bear markets and bull markets. Prices rise in bull markets and fall in bear markets.

A significant difference between the two is that bear markets may have longer periods of sideways movement, or consolidation or adjustment in price action. At this time, market volatility is quite low and trading activity is almost non-existent. While consolidation can also occur in bull markets, it tends to be more common in bear markets, where continued price declines discourage most investors.

Another thing to consider is whether a short position in an asset can be established from the outset. If traders do not have the ability to short an asset using margin or derivatives, they can only express a bearish stance by selling for cash or exchanging stablecoins. This can trigger a longer-lasting downtrend, with minimal willingness from traders to buy and tepid price action consolidation.

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How to trade in a bear market?

Holding cash (or stablecoins) is one of the simplest bear market trading strategies. If falling prices are keeping you awake, it’s better to just sit back and wait for the market to shake off its bearish streak. If you expect that a new bull market may arrive at some point in the future, you can invest in the market again at that time. At the same time, if you hold for the long term, spanning years or decades, a bear market invariance is a sure sign that you should sell.

Generally speaking, it is wise to trade and invest in line with market trends. Therefore, a strategy for profiting in a bear market also includes opening short positions. In this way, when asset prices fall, traders can take advantage of the trend and profit from it.

Whether it is day trading, swing trading, or position trading, the main goal is to trade based on market trends. Having said that, many contrarian traders tend to trade “against the trend”, adopting trading patterns that go against the prevailing trend. Let’s understand how it works.

In a bear market, “countertrend” means taking a long position after a rebound, sometimes called a “bear market rally” or a “dead cat bounce.” These counter-trend price movements can be extremely volatile, as many traders may take advantage of the opportunity to go long on short-term rallies. However, unless the entire bear market is over for good, the downtrend is likely to resume immediately after a brief rally.

Therefore, successful traders will take advantage of the opportunity before a bear market re-emerges and exit with profits near recent highs. Otherwise, once the bear market continues, their long positions will be locked up. Please note that this is a high-risk strategy. Even the most experienced traders can suffer huge losses when trying to catch a flying knife.

Summarize

Above, we discussed what a bear market is and how traders can protect themselves and profit from a bear market. In short, the simplest and most straightforward strategy is to hold cash in a bear market and wait patiently for the right trading opportunity. Additionally, many traders will look for opportunities to establish short positions. As we all know, it is wise to follow market trends.