Bull vs. bear crypto market: What's the difference and how to handle both

Bull vs. bear crypto market: What's the difference and how to handle both

“Bull” and “bear” are typically used to describe how stock markets are performing — whether they are appreciating or depreciating in value. In this context, a rising market is called a bull market, while a declining one is called a bear market.

Given that the crypto market is generally volatile and fluctuates on a daily basis, these terms are used to refer to longer periods of either mostly upward or downward movement. Likewise, changes in markets are indicated by substantial swings (at least 20%) in either direction.

In this article, we’ll focus on how these trends apply to cryptocurrency. Specifically, we’ll discuss: What is a bull or bear market? What characterizes bull vs. bear markets? How to know whether we are in a bull or bear crypto market? The key differences between bull and bear market, and how to invest in a bear vs. bull market.

What is a bull market?

A bull market refers to generally favorable economic conditions. It means that a market is on the rise and is also usually accompanied by positive investor sentiments concerning the current uptrend.

There is a sustained increase in asset prices in a bull market, accompanied by a strong economy and high employment levels. 

This applies to cryptocurrency markets as well as traditional markets. In cryptocurrency, however, it is more common to see stronger and more consistent bull-run crypto phases. 

What is a bull run in crypto typically like? A 40% increase in price over one to two days is quite the usual scenario. This is because crypto markets are relatively smaller than traditional markets and are, therefore, also more volatile.

The term “bull market” is believed to have originated from a bull’s fighting style, wherein it attacks its opponents with its horns in an upward motion. Today, a “bullish” market or investor usually connotes optimism concerning an asset’s continued rise in value. 

In the crypto market, the charging bull heralds a bullish phase for cryptocurrencies. Here, you’ll observe cryptocurrencies growing in value with generally favorable economic conditions and optimistic investors looking to make the most of their rising crypto portfolios.

Briefly put, the investor starts bull markets through the purchase of securities. This can also be done with fiat currency, as bullish markets typically raise the price of securities. The bull market goes on for as long as supply is exceeded by demand. After a while, the bull gets tired, so to speak, and the market shifts and turns into a bear market. 

What causes a bull market?

As previously mentioned, investors are the ones who begin a bull market. When they feel that prices will start to rise and continue doing so for an extended period, they start buying stocks (at a low price) and are optimistic about their return on investment (ROI). The increased optimism among investors likewise causes stock prices to continue rising.

There are also other factors that cause a bull market to emerge. Among these are a strong gross domestic product (GDP) and low unemployment rates. Generally, favorable market conditions cause an increase in investors’ confidence. Cryptocurrency bull markets are, likewise, influenced by similar factors to traditional markets. 

However, crypto markets are still relatively new on the scene, compared with traditional securities which have been around for hundreds of years. With fewer total investors, crypto may also be driven by factors unique to its niche.

For example, crypto bull runs may be driven by things such as:

  • Mainstream and pop culture support: Think of the 2017 bull runs influenced by the likes of Paris Hilton and DJ Khaled, and shows like The Big Bang Theory.

  • Introduction of institutional capital: A good example is MicroStrategy’s $650M Bitcoin (BTC) investment (over 70,000 BTC).

  • Growing optimism from traditional finance: JPMorgan strategists said Bitcoin could rally to as high as $146,000.

  • Unique events that threaten traditional finance: COVID-19, for example, drove a lot of people to turn to crypto amid the stress caused by the pandemic on traditional financial markets.

Characteristics of a crypto bull market

The typical attitudes and actions that characterize a bull market are:

  • Increased prices over a sustained period of time;

  • Strong demand despite weak supply;

  • Increased investor confidence in the market;

  • Overpricing of certain projects;

  • Insertion of talks about cryptocurrency in mainstream media as well as social media;

  • General interest in cryptocurrency among celebrities, influencers and other sectors who might not have been interested in crypto before;

  • Hard rise of prices in the event of good news;

  • A slight drop in prices in the event of bad news.

What is a ‘bull run’ in crypto?

A bull run refers to an extended period during which a lot of investors are purchasing cryptocurrencies. It’s characterized by the above-mentioned characteristics such as rising prices, demand outweighing supply and high market confidence. 

Investor confidence typically drives a positive feedback loop, further extending the bull run (more investments, continued rise in prices). For cryptocurrency, most especially, the price of a given cryptocurrency is largely influenced and driven by public confidence in an asset.

What is a bear market?

On the other hand, a bear market is one in which the value of cryptocurrencies has fallen by at least 20% and is continuing to fall. An example includes the famous cryptocurrency crash in December 2017, when investors saw Bitcoin fall from $20,000 to $3,200 over the course of a few days. 

A declining bear market is characterized by a dip of 20% or more coming from previous highs. As such, prices are low and dropping continuously. The downward trend likewise affects investors’ outlook and perpetuates a further downward pattern. The term ‘bear’ is believed to have come from a bear’s fighting style — starting high, then attacking with claws downward and all its weight pushing down.

During a bear market, the economy is slow with high unemployment rates. These conditions can arise from poor economic policies, geopolitical crises, burst market bubbles and even natural disasters. 

Bear markets also lack the general optimism and confidence that most investors have during bull runs.

Typically, crypto traders aim to purchase assets during a bear market, especially during rock bottom. However, it can be hard to know exactly when a bear market has ended, making it hard for investors to take the gamble and purchase low-value crypto that may or may not recover.

Prices typically drop the moment the market receives news concerning unfavorable conditions regarding a particular cryptocurrency or stock. The downward spiral causes more people to hold off on investments due to the belief that more bad news will come soon and that there’s a need to brace themselves for the worst. 

Some even sell their holdings out of panic, further creating a downward trend. Bear markets tend to calm down eventually, and investors slowly gain confidence, starting a new bull cycle yet again.

What causes a crypto bear market?

A downward trend in pricing can typically cause a bear market to begin. As prices continue to drop, investors simultaneously lose confidence that prices will recover, resulting in further downtrends. 

In general, things such as wars, political crises, pandemics and slow economies may trigger the start of a bear market. Government intervention may also cause a bear market to begin. In crypto, however, it’s much harder to predict when a bear market will start based on previous trends. Whereas the stock market already has decades of data for investors and analysts to refer to, the crypto market is relatively young.

While the causes of a bear market vary, there are a few common indicators that a bear market is going to start. Some of the indicators of an emerging crypto bear market are:

  • Lower trading volume: This usually means that people have started to hold their coins due to uncertainty in the market.

  • Negative sentiments from traditional finance: An example of this was when JPMorgan CEO Jamie Dimon called Bitcoin a fraud in 2017, just months before it reached $20,000 per unit and then crashed promptly.

  • Death cross: A technical indicator pertaining to an asset’s crossing from a 50-day moving average to a 200-day moving average.

  • Backwardation: When an asset’s price in the futures market is lower than the current market price.

  • Changes in the federal funds rate: The rate at which banks lend/borrow their excess reserves overnight.

  • Intervention from regulatory bodies: An example of this is the Chinese government’s restrictions concerning crypto software and mining. Such interventions force a lot of mining operations to go offline, causing widespread uncertainty

Characteristics of crypto bear markets

The typical attitudes and actions that characterize a bear market are:

  • Decreasing prices over a sustained period of time;

  • Supply is greater than demand;

  • Lack of investor confidence in the market;

  • No talk (or negative talk) of cryptocurrency in mainstream media as well as social media;

  • General distrust in cryptocurrency among economists, analysts and traditional finance;

  • Lower highs in the event of good news;

  • Lower lows in the event of bad news.

Bull vs. bear market: Key differences

So, the question a lot of people ask is, how do you determine if it’s a crypto bull or bear market? Although both are marked largely by the direction of cryptocurrency prices, there are key differences that investors can take note of. The effect that bull and bear market trends have on cryptocurrency is generally the same as that of stocks.

With cryptocurrency, however, trends differ due to crypto’s susceptibility to fluctuations. As such, crypto markets tend to move faster as soon as bull or bear market trends take hold. Bull and bear markets are also easier to spot in stocks. It may not be the case with cryptocurrency since crypto investors give feedback that affects crypto differently as compared to stocks.

For example, let’s say that crypto markets are recovering from a bear market. As such, an investor would then typically enter bull investor mode at the bottom of a bear market. Consequently, this will drive up crypto prices much faster. Crypto bull markets tend to move quickly compared to stocks. They also tend to be shorter-lived, lasting only between a few days to a month.

Then, as the bull market continues to grow stronger, investors will then slowly decline because they are likely selling the currency and cashing out. For this reason, bull and bear markets affect crypto in a different way to stocks due to their added volatility and the speed of exchanges. 

Some of the notable differences between bull and bear markets are:

Bull Market vs Bear Market

Supply and demand

In a bull market, demand for cryptocurrencies is strong amid weak supply. A lot of investors want to buy crypto, but few are willing to part with them. This drives up prices further as investors compete to purchase what is available.

In a bear market, however, more people are selling than buying (as opposed to the investment principle). Demand is lower than supply, causing prices to drop further. 

Market scenario

Rising GDP ushers in a bull market, while falling GDP signals the emergence of a bear market. This is because GDP typically increases alongside revenue increases for companies and rising salaries for employees. Together, they enable an increase in consumer spending. 

On the flipside, GDP falls when companies’ revenues are weak and wages are lower or stagnant. As such, bear markets typically accompany economic recessions, with GDP decreasing for two consecutive quarters. 

Impact on economy

A bear market is linked to a weak economy. When businesses fail to meet revenue goals and consumers are not spending enough, profits decline and affect the economy negatively. The same attitude is reflected in crypto and stocks, where people hesitate to trade or invest due to the circumstances.

On the other hand, a bull market is linked to a strong economy, during which consumer spending is higher and profits are more significant. Trading stocks and crypto also increase during bull runs.

Outlook of investors

Investor psychology and crypto market performance are closely linked. When in a bull market, the increase in cryptocurrency prices further boosts confidence among investors. As a result, more investors are encouraged to place their investments in the market with the hopes of gaining good profits.

In a bear market, investor sentiment toward crypto is generally negative. As such, some sell their holdings out of panic, further driving prices lower and more investors to act similarly. 

Stock price

Looking at current cryptocurrency prices is one of the quickest ways to determine whether one is in a bullish or bearish market. Moreover, rising asset prices indicate market confidence and an incoming bull run. Contrarily, declining asset prices indicate low confidence and an incoming bear market.

Liquidity

A bullish market has higher liquidity, wherein stocks can trade at lower transaction costs due to investors’ high confidence in quick and steady returns. On the other hand, a bearish market has lower liquidity due to a lack of confidence in general market conditions. 

International investments

Bull markets are characterized by sustained price increases. As such, more investors have faith in the sustained uptrend and are more willing to take risks. By contrast, declining prices in a bear market also come with less investor confidence.

Job market

Unemployment rates are also closely related to shifts in market trends. In a bull market, unemployment rates are declining amid a more robust economy and better purchasing power among consumers. During bear markets, however, companies tend to lower employee headcounts, driving unemployment rates up. This also tends to prolong a bear market since people are earning less, companies are also earning less revenue.

Is it better to buy in a bull or bear market?

Crypto traders usually buy during bearish markets for the benefit of lower cryptocurrency prices. As such, when bullish markets emerge, they have higher chances of making a solid profit. 

However, there’s also a benefit to buying during a bull market. Buying during bullish markets can contribute to the uptrend, and therefore can also drive your profits as the market strengthens. 

Both strategies come with risks, as do any other tactics in trading. So, the key is to really be able to understand historical trends and stay updated with cryptocurrency news. You’ll likely run into a couple of bulls and bears for as long as you’re investing in crypto, so it’s best to consider investing in both. 

How to invest in a bull market?

When investing in a bullish market, it’s always best to recognize the trend early on so you can likewise buy early. Later on, you can sell at higher prices just as the market is hitting its peak. Bull markets tend to last long, so any losses are usually minimal and temporary. 

But, what if things take an unexpected turn (such as a crisis or regulatory intervention) and you sense a bear market emerging? In this case, the best strategy is to reduce your positions, especially those in lesser-proven crypto. You may want to move your holdings temporarily into precious metals, cash, or similar assets. This is because they have better chances of holding up against a crash. 

Cryptocurrencies also tend to be available at lower prices at the end of bullish markets, so keep an eye out and take advantage of the possibility of increasing your investments.

How to invest in a bear market?

Investing in a bear market naturally involves more risk, as prices are lower and investors have low to zero confidence in cryptocurrencies. However, this risk also comes with the possibility of higher returns in the future. As such, you can purchase cryptocurrencies when they are at lower price points and sell them at the peak of the next bull market.

Another strategy that investors use is selling their existing holdings as soon as they detect downtrends, and then buy back these holdings later on at a much lower price as the market continues to decline. 

There’s no way of telling how long a bear market will last, especially if it’s driven by recession or similar circumstances. So, the issue is not knowing when exactly the dip will last, and how much further prices can drop. As a result, you might make a premature buy or miss out on a good investment. 

Final thoughts

Bull and bear crypto markets are driven by many factors. As we discussed, the cryptocurrency market has fewer investors and is more volatile than the stock market, so there are a few differences when considering trading during bullish and bearish markets. 

Crypto investors typically buy when prices are low during bear markets and hold on to them so they can make good profits once the next bull market arrives. There are still tons of other strategies that pro traders use, such as looking out for the ‘rectangle pattern’ during bullish trends.

One helpful trick is to keep observing past market patterns of bull and bear trends. This can help you predict upcoming ones, or at least provide you with strategies for navigating changes in the market. Another great habit is keeping updated on the latest cryptocurrency news, as well as learning from experts by reading about their tips and tricks. 

Whether you’re investing during a bull market or bear market, it’s important to remember that there are always risks associated with each strategy. As such, we encourage you to do your own research to ensure that you’re making the best possible decision given the circumstances. 

In case you want to read up more on the basics of crypto, you can always consult our How to Crypto guides that contain great resources, such as this excellent beginner article on how to get involved with crypto.

We also have a rich resource of materials that dive deeper into the specifics of Bitcoin, Ethereum and Dogecoin, among others. Reading helpful resources will help familiarize you with industry terms, as well as the best strategies in dealing with different types of cryptocurrency.