Bull and bear markets: Definitions and how to distinguish them

“Bull market” and “bear market” are two terms you will read and hear often when investing in and trading cryptocurrency — as well as other assets. They are frequently used by traders to describe the current state of the market, and whether or not it is enjoying a prolonged period of increases or a prolonged period of declines.

If you hope to make money from cryptocurrency trading, it’s critical that you are aware of these terms and understand what they mean. They can not only help you determine when it might be a good time to invest but also when it’s a good time to hold what you have or perhaps sell it before its value falls considerably.

In this AAG Academy guide, we’ll teach you what exactly bull and bear markets are, what they mean for the industry, and why you should care about them.

What is a bull market?

The term “bull market” is widely used by traders to describe a market in which prices are rising or are expected to rise imminently. It has long been used in reference to the stock market, but these days it is also used to describe markets in which almost anything is traded, including bonds, currencies, commodities, and cryptocurrencies.

It’s important to note that the value of all these things, especially cryptocurrency, fluctuates on a frequent basis, so the term bull market only applies when a large portion of the market has seen or is expected to see increased prices for a sustained period of time — and that increase typically exceeds 20%. Bull markets can last for many months or even years.

Bull markets usually occur when the economy is strong or strengthening, and they are often accompanied by rises in GDP (gross domestic product), increased profits where public companies are concerned, and the rising confidence of investors. Cryptocurrencies also tend to perform better when the economy is healthy.

Since bull markets are incredibly difficult to predict before they happen, we sometimes don’t realize a bull market has occurred or is occurring until we are well into it or it has ended.

Example of a bull market

One of the most notable examples of a bull market is the longest in the history of trading. It began in March 2009, soon after the Great Recession had ended, and lasted until March 2020, during which time the S&P 500 stock market rose by more than 320%. Its end was attributed to a trade war between China and the U.S., Brexit, and, of course, COVID-19.

The S&P 500 also enjoyed a lengthy bull market between 2003 and 2007, during which time it rose by more than 100%. Before that, there was the “great expansion” between 1990 and 2000, which saw technology companies boom as the internet took off and led to a total index rise of more than 400% during the nine-year run.

Within the cryptocurrency industry, one of the most notable bull occurred in 2017, when the price of Bitcoin, after finally passing the $1,000 milestone in January, continued to see massive gains until it surpassed $19,000 (an all-time high at the time) in December. It made many Bitcoin investors millionaires in a very short space of time.

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Investing in a bull market

Most traders see bull markets as a time to buy and hold their assets while their value is rising. It’s best to get in quick, but again, with bull markets being difficult to predict and recognize in the early days, that’s not always possible. It’s also hard to determine which assets will rise (not all are guaranteed to do so), and when the bull market will end.

In an ideal world, traders would buy early — at the beginning of a bull market — and then sell their assets just before it ends, when their price is at the highest level. But you don’t necessarily need to be super early, and you don’t necessarily have to correctly predict the end of the bull market to make a profit. You just have to avoid buying too late.

What is a bear market?

The term “bear market” is used to describe the opposite of a bull market. It is when the market has experienced or is experiencing a sustained period of decline, during which the value of a large portion of assets falls considerably — usually by at least 20% — and traders are predominantly pessimistic in their outlook.

Like a bull market, a bear market is usually triggered by a weak or weakening economy in which GDP falls and companies report declining profits. This can be triggered by all kinds of things, including natural disasters, conflicts or tensions between different countries, and pandemics like COVID-19. In cryptocurrency, a bear market causes values to fall.

Bear markets can sometimes be easier to predict than bull markets since we can expect that certain outside factors will have an impact on markets. However, the extent of a bear market (how significantly prices will fall) and the duration are just as impossible to determine.

Example of a bear market

All of the bull market examples listed above were followed by bear markets in which the price of stocks, currencies and other commodities fell for a prolonged period of time. But perhaps a better example is one that is currently open us — the ongoing bear market of 2022, which has already seen the S&P 500 fall by 20% so far as a result of inflation and the cost of living crisis.

This has also led to significant drops for a large portion of the cryptocurrency industry. Looking at Bitcoin again, simply because it is the world’s biggest cryptocurrency in value, it is currently down from just under $40,000 in January to just over $20,000 today.

Bear market vs. corrections

It is important to remember that a bear market is different from a market correction. A correction is when the market falls by more than 10% but by less than 20% from its most recent peak. It is referred to as a “correction” because rather than falling further past that 20% mark into bear market territory, prices gradually increase and return to (or close to) their last peak.

A correction can happen during a bull market or can sometimes signal the beginning of a bull market, but that’s pretty rare. Since the mid-1970s, only five corrections have led to bear markets where stocks are concerned, according to data from Morningstar.

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Investing in a bear market

Investing in a bear market might seem like a bad idea on the face of it since no one knows how long a bear market will last or by how much prices could fall. However, if you’re not in a rush to make a profit and you’re happy to sit on an investment for some time, investing in a bear market can be just as profitable as investing before a bull market.

Let’s say, for instance, that a bear market causes the price of your favorite cryptocurrency to fall, and you invest while it is down 30%. There’s a good possibility it will fall even further, but when the bear market ends, there’s a very good chance that the price will eventually rise to its previous peak — or even further — and your investment will be worth significantly more.

Again, investing in a bear market requires even more patience, so it’s certainly not for those who are looking to make a quick return. And since nothing is guaranteed when it comes to investing, it’s important to remember that you only ever invest what you can afford to lose.

References

• What is bull market and how investor can benefit from one
• RIP to the longest bull market in history
• Bull Market
• The longest bull market in history in five charts
• Bitcoin price history
• Market correction what does it mean