If you are interested in investments, you have undoubtedly heard the terms bull and bear. The terms relate to the upward or downward trajectory of the market and capture how investors feel about the market.
Though we associate them with the stock market, they also apply to cryptocurrencies. The highly volatile crypto market has seen its share of bullish and bearish times. We will dig a little deeper into the terms and how they relate to crypto and the blockchain.
A bear market is when a market experiences a decline. It is characterized by a sustained fall in securities, usually over 20%. It’s typically brought on by widespread pessimism and negative investor sentiment. A bear market can be as short as a few months, or last for several years.
In a bear market, investors are more risk-averse, opting for boring, sure bets and staying away from more speculative options.
The flip side of the coin is a bull market. It is a market or investment that is moving on an upward trajectory.
Over the years, the terms have become associated with the stock market, but these terms apply to cryptocurrencies, real estate, and many other assets. Neither of these terms is used in a micro sense. They represent a lasting, sustained change. It has to be a trend.
A bear market for crypto differs from those typically associated with the stock market. Crypto markets are smaller and more volatile. It is typical to see large swings in price in just one or two days. A 20% downturn would not work as well for classifying a crypto bull market. Moving closer to a number in the 50% to 80% range is a better indicator for bear territory. Regardless of the percentage, it has to be a sustained period of price declines to be classified as a bear crypto market.
In a bear market, investors are pessimistic and have lost confidence in a specific cryptocurrency or the market as a whole. The negative sentiment causes investors to sell their holdings. Supply begins to outweigh demand, and prices fall.
Several factors bring on the downturn, including:
Naturally, the firesale of crypto assets causes a bit of a feedback loop. Investors believe that the market will continue to fall over time and want out, further decreasing demand, driving down prices.
What should you do during a bear market?
Bear markets are stressful. You are seeing the value of your investments dwindle. However, they are natural parts of the investment cycle. Though this fact may not bring you much comfort, it is critical to remember because it will help you avoid panic selling. Though it can seem like a way to cut your losses, when you sell all of your investments, you lose out on recovery when those investments begin to rise in price. Selling at a loss ensures that you lose.
Cryptocurrencies are volatile by nature. Refer to your investment goals and your long-term plan. When you invest, you need to look at multi-year trends, not just in the near term. Just review the historical trends of Ethereum and Bitcoin; both have seen massive price increases after steep declines.
There is no way of predicting when a bull market will end, especially if a significant economic recession or crisis drives it. It may be helpful to talk to a financial planner to figure out the best way to proceed.
How to manage your portfolio during a bear market
As the classic saying goes, buy low, sell high. A bear market is your opportunity to buy low. It’s called buying in the dip. This is not a risk-free move. There is the possibility that prices could fall even further.
If you have allocated a certain amount of money to invest in crypto, this may be the right time to buy. Investors get into trouble by viewing low prices as an opportunity to bargain shop and spend more they can risk losing.
One strategy for buying in the dip is dollar-cost averaging (DCA). This method involves breaking up the amount you will invest into smaller buys spread out over time. So let’s say that you see Bitcoin falling in price and want to invest $500 in it, believing that it will rise again. Instead of putting all $500 in at once, you spread it out into 5 x $100 investments over time. This way, you minimize the risk of buying at the wrong time. If the price falls after your first purchase, you can still buy at a lower cost.
It is pivotal that you do your research. Look into the coins that you are looking to purchase. And be sure to diversify your portfolio so that all your eggs are not in one basket.
Can I short cryptocurrencies?
If you believe that a cryptocurrency will fall in price, you can short the currency. Short selling is betting against a rising price. You profit when the price of the investment falls. It is an advanced strategy used by experienced traders. It is a risky proposition because you could sustain massive losses if the asset gains value.
There are several ways to short crypto like Bitcoin. The most common method is shorting Bitcoin’s derivatives, like futures and options. This carries an additional level of risk in the unregulated sphere of futures trading of cryptocurrencies.
Disclaimer: This is also not available through crypto platforms in Canada.
Feeling bearish or bullish? Do your research.
No matter the state of the market, it’s important to remember that investing in cryptocurrency comes with risks, like any investment. Never invest more than you are comfortable losing. Do your research or talk to a qualified financial planner to ensure that you’re making a sound investment decision and creating a low-term investment strategy.
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