14. Why do we talk about bull and bear markets?
With knowledge of what point in the cycle the market has reached, it will be easier for you to predict its movements. The concept of rise and fall while investing on the market is certainly familiar to you, from the basics of economics we were taught at school. As a reminder – during a boom, prices rise; during a slump, they fall with momentum. In the cryptocurrency market, these two concepts have their names. We then speak of a bull market (boom) and a bear market (bust). Today, we will characterize the differences that occur between the two.
Bull market – characteristics
When the cryptocurrency market experiences prolonged and strong increases, we then speak of a bull market. The investors themselves are called bulls. Why? It all comes down to the manner of the bullish attack – it hits with its horns from the bottom up. Just like the share prices of individual assets, which also rise from the down to the top. The bull market, is sensed not only by the rise in prices, but also by the mood that prevails. A bull market is accompanied by euphoria, enthusiasm and optimism.
How do you recognize that you are entering this type of market? Several factors must occur, of which the most important are:
∙ A 20% increase in asset prices.
∙ The presence of short-term corrections, following the desire of some investors to realize profits. It is important not to confuse these corrections with an impending downturn.
∙ Crypto-asset prices are higher than at past peaks.
∙ Investor sentiment is changing.
Remember, that it is not conjecture, but the strategies and tools you use are the ultimate determinant of the coming market cycle.
What does it look like to invest in a bull market?
Before any investment, it is a good idea to prepare properly. Even during a bull market, you need to have your strategy and follow it. One would buy shares of digital assets whose prices have recently fallen sharply. Another is to follow the prevailing upward trend. This strategy gives you many options and can be tailored to the asset in question. Remember, however, that when following a trend, you must do technical analysis and follow its signals.
A bull market ends at some point. So, how do you recognize its end and not be at a loss? The end of a bull market in cryptocurrencies also gives us some important signals:
∙ The trend line is broken.
∙ Prices failing to peak.
∙ Prices that are going head over heels, pierce the bottom of the last correction. ∙ Investors are selling off.
∙ Moods have become more pessimistic; the market is no longer euphoric. ∙ The upward trend is turning into a downward trend.
Bear market – characteristics
A bear market is a preview of a coming bear market. Supply in the market is increasing, resulting in falling prices. When are we talking about it? When the signals of the end of the bull market, which we discussed earlier, appear. The bear market also owes its name to the manner in which this animal attacks. On its downside, it is certainly more difficult to recognize than a bull market.
So, what are its characteristics?
∙ It lasts considerably shorter than a bull market.
∙ Inexperienced investors may misread its signals.
∙ It requires detailed and careful observation of the market.
∙ The sentiment and morale of cryptocurrency investors declines. ∙ A bear market is a bloody red that spreads across the charts.
What does investing in a bear market look like?
Definitely different. It is crucial that smaller dips not be mistaken for corrections. Certain wrong actions taken during a bear market can be irreversible for you. Here we will also mention to you a strategy that is even more important during a bear market. When the market enters a downtrend, following your chosen methodology can protect your capital and potential profits.
During a bear market, traders often use what is known as short selling when the price of an asset goes up. That is, they sell off their assets with the hope of buying them back at a significantly lower price in the future. Continued short selling is helped by following the downtrend and analyzing technical indicators.
A bear market also comes to an end at some point. What are the harbingers of this? Mainly cyclical upward breakouts of asset prices. However, in this case, you need to keep a close eye on the market and investor sentiment. Such instances are not always a sign of an impending bull market.
From today’s lesson, you already know the basic characteristics by which the two markets differ. However, we know from experience that spotting where the market is heading can sometimes be difficult even for experienced investors. It takes years of practice, stumbling, and above all, learning and strategy.
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