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What Is a Bull Market?

In financial markets, a “bull” or a “bear” market occurs when asset prices trend in a particular direction over an extended period of time. If a market trends upwards and assets grow in value, it’s referred to as a “bull market.” When a market trends downwards and asset values are declining, it’s known as a “bear.”

The terms bull market and bear market have been used throughout financial markets for centuries, and the emerging crypto space has also embraced them. With the rapid market cycles and dynamic price movement evinced in crypto thus far, both bulls and bears have plenty to keep them busy.

What’s the Difference Between a Bull and a Bear Market?

From both a short-term (hourly, daily) and long-term (monthly, annual) perspective, markets operate in a cyclical fashion through upwards and downwards movements as the price of an asset is determined. An easy way to distinguish a bull versus bear market is to think of them as “up” vs. “down,” or “peak” vs. “trough.”

Investment Considerations for Bull and Bear Markets

Although the general nature of a bull or a bear market is distinguished primarily by the direction of asset prices, there are other characteristics that are important to consider. A bull market or bear market framework represents parameters for understanding market sentiment, but that sentiment is contingent upon a number of co-existing factors. For example:

To determine whether the market is bull or bear, it’s important to look at not just the market's immediate reaction to particular conditions, but how it's performing in wider contexts. Small movements might represent a market correction — a short-lived trend that usually lasts less than a few months. However, bull and bear markets are not ephemeral trends; rather, they’re longer term, macro phenomena. For example, if an asset increases 200% in three months, and then drops 20% in the next month, then the criteria for a long-term bearish downtrend has likely not yet been met, even though downward momentum is prevalent.

In a bull market, there tends to be strong demand for assets, but weak supply. As a result, prices will rise. In a bear market, more people are looking to sell assets than to buy. The demand is significantly lower than the supply. As a result, prices drop. However, as the supply and demand ebb further in one direction, the more probable an eventual turnaround becomes. For example: As prices of an asset go up, so can selling pressure from investors taking profits, which increases the supply.

Investor sentiment and market performance are interdependent. In a bull market, investors flock to buy and sell assets with the hope of gaining a profit. During a bear market, the mood is negative and investors don’t tend to expect upward momentum until the bear trend has definitively ended.

Any asset’s market is intrinsically linked to the wider economy in which it is situated. For example: A bearish stock market is typically associated with a weak economy. A weak economy can lead to decreased consumer spending, which generally means lower profits for businesses, which in turn can decrease overall risk appetite for speculative investments. In a bull market, people have more money to spend and are willing to spend it, which has the effect of strengthening the economy.

The terms “bull” and “bear” are applicable mostly with regard to extended time frames. Small movements are generally just a correction. A correction is not the same as a bear market. Moreover, markets often stagnate and remain steady before they validate a particular trend direction. In such an interim, the string of small upward and downward movements cancels out any gains or losses, resulting in a flat market trend that can continue for periods that are even longer than the bull or bear markets themselves. Because prices are trending lower in a bear market, you might make some purchases that could prove beneficial in the long run. The issue with investing in a bear market, however, is that you don't know how long the dip will last or how far the prices will drop. Hence, you could risk making a premature buy, or might miss the opportunity to make a good investment altogether. Because any investment you make could be speculative, patience is paramount.

Read more here for additional information on bull and bear markets and how they can play into an investment strategy.

See you next week. Onward and Upward! Team Gemini

Team Gemini

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