What are bull and bear markets?
Anyone interested in investment will very quickly come across the concepts of bull and bear market. In this article, we will consider these notions and related strategies in the context of the cryptocurrency market peculiarities.
Terms and their origins
A bull market is a situation when the demand for an asset significantly exceeds supply and thereby provokes the price increase. Holders become more confident and start investing more and more into the asset.
In a bear market, the exact opposite situation occurs. Traders are pessimistic and prefer to take profits by selling the asset. It causes a noticeable preponderance of supply over demand and the price drop.
According to one version, the term names came from the fact that the bull raises the victim on the horns, and the bear hits it down with its paws. These images are associated with the direction of price changes on the market.
It is impossible to assert that the price of a certain asset will constantly rise or fall since one period after a long time may be replaced by another. Therefore, a long-term upward or downward tendency in price can also be called a bullish or bearish trend respectively. Changes in trends are especially relevant in the cryptocurrency market with its high volatility.
Bull market & how to trade on it
A bull market arises on a positive news background when a new or existing token seems reliable and promising to many traders and attracts more and more investments. The rise in price will be unstable due to frequent fluctuations in the cryptocurrency market, but it can be tracked by the fact that each next price peak will be higher than the previous one.
The strategy of the holders in the bull market is approximately the same: enter the market early (closer to the start of price growth), purchase the asset, and leave the market when the price reaches its peak. This is the classic “buy low, sell high” trading strategy. But there are some pitfalls:
- confirmation that the trend line is definitely moving up can take a significant amount of time, and buying the asset too hastily can play a cruel joke on the trader;
- it is impossible to determine exactly when the price of the coin will reach its peak, therefore, selling the cryptocurrency at the right time and receiving the maximum profit is not an easy task.
Nevertheless, it is still easier to benefit from the increase in price than from the decline.
Can you make money in the bear market?
Profiting from the price drop is more difficult and comes with high risks. Experienced bear market traders use a short-selling strategy. After selling the asset at its current value, they plan to purchase the same asset in the future, but in larger quantities due to its price reduction.
Some traders also buy cryptocurrency during a bearish trend, anticipating a change to a bullish trend or benefitting from periodic price fluctuations.
To mitigate the risks posed by high volatility, professional investors employ a dollar-cost averaging strategy. The essence of the strategy is purchasing the target asset regularly for a fixed amount at certain intervals without looking at the increase or decrease in the price.
How to understand the market sentiment?
Trend analysis is the basis for predicting whether a coin will go into a bull or bear market. But technical analysis alone will not be enough because a series of external factors can affect the cryptocurrency rate:
- changes in legislation (in particular, in tax laws);
- world news;
- events that positively or negatively affect the token reputation;
- the impact of “whales” (large holders) on supply and demand.
The purchase or sale of large asset volumes initiated by a whale or a group of whales can greatly shake the course and put it in the direction the instigator needs. The great influence of Elon Musk’s tweets on cryptocurrency trends is very demonstrative.
Trading in both bull and bear markets can bring good profits when choosing a successful strategy and observing. It is important to keep a cool head during periods of price fluctuations and remember that you should not invest money that you are not ready to lose.