Bear v Bull Market – What’s the Difference?

You may have heard the terms ‘bull market’ and ‘bear market’ when reading up on crypto markets (or even traditional financial markets). But what exactly do these terms mean, what metrics can you use to identify each phase for yourself, and how can you best use this knowledge when managing your own crypto portfolio?

In this article, let’s dive further into these two crucial phases to understand the crypto market better.

What Is a Bull Market?

The term bull market, also known as a bull run, originates from the stock market. If you’ve ever been to Wall Street, or seen pictures of the famous New York Stock Exchange, you may be familiar with the huge bronze statue of a bull that sits in pride of place outside – this statue is no coincidence. It represents a thriving market, the trajectory of which is depicted by the horns of the bull rearing upwards. This is why the bull is said to be symbolic of an upturn in economic activity.

Characteristics of a Crypto Bull Market

The term bull market is often used loosely and is not a fixed or precise way to describe the state of the market. However, a few key characteristics will help you to identify one for yourself. 

Economic Factors: Favorable Conditions 

Bull markets tend to occur during periods of strong economic growth in a broader sense. These favorable economic conditions might involve a growing GDP, low unemployment, and low-interest rates. These factors are a driving force for speculative markets; they directly influence how much disposable income people have to investigate other financial options (stocks, shares and cryptocurrencies for example).

In a bull market, we tend to see a significant increase in innovation and adoption of new technologies, as well as a positive regulatory environment that helps boost confidence in the space.

Sentiment Check: Positive Vibes Only

The bull market typically begins when market participants feel optimistic about the future. This positive outlook means participants are more willing to take on risks, believing that prices will continue to rise. They are therefore more likely to buy – and hold – assets. This alone is enough to cause prices to rise.

Increased institutional confidence in the market also increases, and is a good measure of broader sentiment. During the 2020 crypto bull run, for example, MicroStrategy, Tesla, and Block (previously Square) all added Bitcoin to their balance sheet, showing their own confidence in the crypto market, and also acting as a catalyst for others to feel that same confidence.

• Greed Trumps Fear

This euphoria, however, can make market participants overly optimistic – and this can have an impact on our ability to rationally assess opportunities.

For example, media coverage promoting the eye-watering gains (see: “Everyone Is Getting Hilariously Rich and You’re Not” article from NY Times at the top of the 2017 bull market), can induce feelings of intense FOMO (fear of missing out). 

This can be observed via the Fear and Greed Index, which measures the sentiment of the market (and therefore its likelihood to make rational decisions, founded on facts rather than emotion). By monitoring the index, you can get a sense of whether value within the market is based on fundamentals or FOMO. To explain, a score edging toward 100 on this scale indicates a creep of FOMO into the decision-making process – and might allow you to draw conclusions about the current price of an asset, relative to what it’s actually worth.

Pricing: The Only Way is Up

The most obvious characteristic of a bull market is a sustained period of higher-than-average prices, itself a product of heightened confidence and higher demand.

During the bull run of 2020 and 2021, major crypto assets Bitcoin and Ethereum hit all-time highs of $69,000 and $4,880, respectively.

With prices rising, market capitalization also goes up. To illustrate, Bitcoin hit a $1 trillion market capitalization for the first time in 2021. Simultaneously, the total crypto market cap surpassed $3 trillion.

While bull markets can last for years, they eventually come to an end when prices reach unsustainable levels. Then asset prices may decline gradually for months, followed by a steep plunge. This is when the bear market will take hold.

What Is a Bear Market?

Generally, bear markets, also known as bear runs, are characterized by at least a 20% drop in the market’s overall value for a sustained period, accompanied by a drastic drop in overall confidence in the market. As asset owners unload their risks by selling off assets, a spiral of decline is caused which may last for months or years.

One of the worst bear runs recorded by the stock market was during 1929-1932, which wiped off 89% of the value of the Dow Jones Industrial Average.

Characteristics of a Crypto Bear Market

Now, let’s take a look at the key characteristics to help you to identify a crypto bear market.

Economic Factors: Unfavorable Conditions 

A bear market often occurs during a broader economic recession; when growth slows down, or the economy enters a contraction phase. This often drives central banks to raise interest rates, which makes speculative options, like cryptocurrencies, less attractive or simply less feasible. For a start, keeping cash in a bank account may offer more stable returns than most assets; and beyond this, fewer people have the disposable income to dabble on the speculative side of things.

These difficult market conditions may also cause companies close and layoffs to intensify, with the industry consolidating around a few survivors.

During this period, both individuals and institutions try to limit their exposure to risk, leading to a decrease in demand for speculative assets, an increase in sell-offs and reduced prices for those assets as they flood back into the market.

Sentiment Check: It’s Time for Doom & Gloom

During a bear market, market participants have a negative outlook and the dominant feeling is anxiety, or fear. This pessimism makes people risk-averse and more likely to sell their assets in an effort to mitigate their losses. 

Media coverage amplifies negative sentiment. For example, you may have seen a sharp rise in the number of mainstream media articles proclaiming “Bitcoin is dead” during prior bear markets.

• Fear Dominates

In terms of measuring the sentiment of this period, a good option is checking out the Bitcoin Fear and Greed index. In a bear market, you can expect scores tending closer to zero (fear-dominated), reflecting negative social media analysis, news coverage and market activity. In May 2022, for example, the Bitcoin Fear and Greed Index fell to its lowest point in more than two years, reflecting widespread fear amid the market crash.

For some, bear markets are actually considered a good time to buy. As with FOMO, the prevalence of anxiety may also distort price perceptions. In turn, this creates opportunities to buy valuable assets at a lower-than-usual price.

Pricing Extravaganza: Goblin Mode

The most obvious characteristic of a bear market is a sustained period of declining prices. Lows get lower, indicating a strong selling pressure as anxiety overtakes greed as the driver of the market. 

Trading volume decreases as market participants become less active and more risk-averse. You may also hear phrases like “in it for the tech,” which means “I’m in it for the technology, not the money.”

During the 2022 crypto bear market, prices of most crypto assets fell from their all-time highs, wiping out more than $2.1 trillion from the market.

As the price drops, so does the market capitalization of crypto assets. At the time of writing, Bitcoin’s market cap has fallen from $1 trillion in 2021 to just $434 billion in 2023.

However, it is important to remember that the market is cyclical. Bear markets calm down eventually, with market participants gradually building up their confidence and giving way to another bull cycle.

What is Dollar Cost Averaging? 

All markets have ebbs and flows and, as a relatively new asset type, the crypto market can be a particularly volatile place. To mitigate your risks as you interact with crypto and build your portfolio, some market participants use a Dollar Cost Averaging strategy or DCA. 

Instead of buying or selling an asset in large chunks based on the performance of the market on that particular day, investors using a DCA strategy will buy (or sell) a fixed dollar cost of crypto periodically – regardless of what is happening in the cryptocurrency market. 

This technique minimizes the effects of market volatility, allowing participants to remain calm and rational, buying over time in set increments, instead of being led by market undulations. Consequently, it insulates buyers from the impact of drastic swings in the market.

Bull v Bear Market: Crypto Market Cycles

So, bear and bull markets are simply elements of the broader market cycle – crypto is no exception to this, and shares many of the same characteristics and behaviours of any other market.

Bear and bull markets can last for months or even years, significantly impacting the price of digital assets and, in turn, your portfolio. As such, understanding the nature of market cycles when analyzing bull v bear markets is essential for anyone interacting with crypto, and wanting a deeper understanding of the big picture.

Knowledge is power – so stay in control of your private keys, and keep on learning as you explore the booming world of crypto.

Knowledge is Power