Bull vs. Bear Markets in the Era of Crypto

Bull and Bear Markets Defined

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.

Whether you’re interested in cryptocurrency, stocks, bonds, gold, real estate, or any other asset, you’ll experience rising and declining markets. Sometimes, bull and bear markets refer to the market for a single asset, or group of particular assets, but mostly bull and bear refer to whole financial markets and sectors, or even entire economies. Bull and bear markets can last from a few months to many years each, and can vary in many ways. In general, however, for a market to reach bonafide bull or bear status, it must experience a shift of at least 20% from a recent peak or trough.

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.”

What Is a Bull Market?

Bull = think up (a peak): You might think of a bull market as a time of buoyancy, prosperity, and optimism. Investors and companies have a positive outlook about the economy and financial markets in general. Consensus expects that prices of individual assets — stocks, crypto, gold, for example — are all generally on the rise. People have more capital to spend, and they spend it optimistically; they feel that the present upswing could keep getting better and better. If someone is bullish or described as a bull, they are optimistic that prices of assets will continue to rise over the long term, or over a specific period of time.

What Is a Bear Market?

Bear = think down (a trough): A bear market generally indicates a market in a period of decline. It’s associated with a downward trend in assets’ prices. Prices may drop continuously, while investors generally believe that a negative trajectory will continue. During a bear market, investors are generally pessimistic about the future and are more averse to risk than they might be in a bull market. When people claim to be bearish, it indicates that they’re generally convinced asset prices will decrease over a specific period of time.

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.

“You Can’t Time the Market”

You might have heard the phrase, “You can’t time the market.” It remains a maxim in both legacy financial services and cryptocurrency. While bull and bear markets generally have a great impact on the success of your investments, it’s often not until after a trend has reversed definitively that a cycle shift can be confirmed. Trying to time your investments and sell at the absolute peak of a cycle, or buy at the lowest bottom, is incredibly difficult. One way to manage uncertainty is to follow a plan where you invest a fixed amount at regular intervals irrespective of which way the market is going. This strategy is called dollar-cost averaging, and it can be a useful tool in the changing tides of market cycles.

The bull and bear market framework is said to date back to the 1700s, to the time of speculation by bearskin trappers of the American frontier. Over time, the characteristics of the animals themselves have been woven into the definition: Raging bulls and hibernating bears represent a metaphor for the cyclical nature of markets — one of the most important and basic concepts to understand about free market economies. Both bear and bull markets can greatly influence your investing experience, and it's to your advantage to understand market trends when investing. That said, developing a keen eye for quality projects, companies, and fundamentally sound assets is usually a more viable long-term investment strategy than speculating on ever-changing trends and chasing market cycles.