Contents

  • Introduction

  • What is a bear market?

  • Examples of Bear Markets

  • Bear market or bull market – what is the difference?

  • How to trade in a bear market

  • To conclude


Introduction

Financial markets move according to trends. It is important to understand the differences between these trends to be able to make better investment decisions. How is it possible ? Well, different market trends can lead to very different market conditions. If you don't know what the underlying trend is, how will you adapt to different conditions?

A market trend is the general direction of a market's price. In a bear market, prices are generally falling. Bear markets can be a difficult time for trading or investing, especially for beginners.

Most cryptocurrency traders and technical analysts agree that Bitcoin has been in a bullish macroeconomic trend throughout its existence. Although there have been several bear markets. These typically result in a drop of over 80% in the price of Bitcoin, while altcoins can easily see drops of over 90%. What can you do during these times?

In this article, we are going to discuss what a bear market is, how you should prepare for it, and how you could profit from it.

If you want to learn more about bull markets first, check out What is a Bull Market?.


What is a bear market?

A bear market can be described as a period of falling prices in a financial market. Bear markets can be extremely risky and difficult to trade for inexperienced traders. They can easily lead to heavy losses and deter investors from returning to financial markets. How is it possible ?

There is a saying among traders “Stairs up, elevators down”. This means that upward movements can be slow and steady, while downward movements tend to be more abrupt and violent. How is it possible ? When the price begins to fall, many traders rush to exit the markets. They do this either to convert their positions into cash or to lock in gains from their long positions. This can quickly lead to a domino effect where sellers rush to exit their positions which leads to even more sellers exiting theirs, and so on. The decline can be even more amplified if the market is highly leveraged. Mass liquidations will have an even more pronounced cascading effect, leading to a violent sell-off.

That said, bull markets can also have phases of euphoria. During these periods, prices rise at an extreme rate, correlations are higher than usual, and the majority of assets rise at the same time.

Typically, investors are "bearish" in a bear market, meaning they expect prices to fall. This also means that market sentiment is generally weak. However, this may not mean that all market participants are in active short positions. This simply means that they expect prices to fall and are looking to position themselves accordingly if the opportunity presents itself.


Examples of Bear Markets

As we discussed, many investors believe that Bitcoin has been in a macro bullish trend since it began trading. Does this mean that there are no bear markets in this bull period? No. After reaching around $20,000 in December 2017, Bitcoin experienced a fairly brutal bear market.


Le prix du Bitcoin chute suite à la tendance haussière de 2017.

Bitcoin price falls following 2017 uptrend.


And before the 2018 bear market, Bitcoin saw an 86% decline in 2014.


Le prix du Bitcoin chute de 86 % par rapport au plus haut de l'année 2013.

Bitcoin price falls 86% from 2013 high.


In July 2020, the previous bear market range around $3,000 was tested again, but never broken. Had this low point been breached, one could argue that Bitcoin's multi-year bear market is still ongoing.


Le Bitcoin teste à nouveau la fourchette de prix de ses précédents marchés baissiers.

Bitcoin is retesting the price range of its previous bear markets.


Since this level was not breached, it can be argued that the crash that followed COVID-19 fears was just a retest of the range. However, there are no certainties in technical analysis, only probabilities.

Other notable examples of bear markets come from the stock market. The Great Depression, the 2008 financial crisis, or the 2020 stock market crash due to the coronavirus pandemic are all notable examples. These events all caused significant damage on Wall Street and affected stock prices on a global level. Market indexes such as the Nasdaq 100, the Dow Jones Industrial Average (DJIA), or the S&P 500 Index can experience significant price declines in periods like this.


Bear market or bull market – what is the difference?

The difference is quite simple. In a bull market, prices rise, while in a bear market, prices fall.

One notable difference can be that bear markets can have long periods of consolidation, that is, sideways or small price movement movements within a range. These are periods when market volatility is quite low, and there is little trading activity. While it can also apply to bull markets, this type of behavior tends to be more prevalent in bear markets. After all, falling prices over an extended period of time are not very attractive to most investors.

Another thing to consider: it is possible to enter a short position in an asset in the first place. If it is not possible to short an asset on margin or using derivatives, traders can only express a bearish opinion on the market by selling spot for stablecoins or cash. This can lead to a longer, less attractive downtrend for buying, causing prices to move slowly.


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How to trade in a bear market

One of the simplest strategies traders can use in a bear market is to stay in cash (or stablecoins). If you're not comfortable with a price decline, it may be best to simply wait until the market moves out of decline territory. If a new bull market is expected to occur at some point in the future, you can take advantage when it happens. At the same time, if you are HODLing for the long term with an investment horizon of several years or decades, a bear market is not necessarily a direct signal to sell.

When it comes to trading and investing, it is generally best to trade in the direction of the market trend. This is why another lucrative strategy in the stock markets could be to open short positions. So when asset prices fall, traders can profit from this drop. These can be day trades, swing trades, position trades: the main intention being simply to trade in the direction of the trend. That being said, many traders will look for "counter-trend" trades, that is, trades that go against the major trend. Let's see how it works.

In the case of a bear market, this would be like going long on a rebound. This movement is sometimes called a bear market rally or a dead cat bounce. These counter-trend price movements are known to be volatile, as many traders may be tempted by a short-term rebound. However, until the overall bear market is confirmed to be over, the assumption is that the downtrend will resume right after the rebound.

It is for this reason that successful traders will take their gains (around recent highs) and exit their positions before the downtrend returns. Otherwise, they risk being stuck in their long position while the bear market continues. Therefore, it is important to note that this is a very risky strategy. Even the most advanced traders can suffer significant losses trying to catch a falling knife.


To conclude

We discussed what a bear market is, how traders can protect themselves and profit from this situation. In summary, the simplest strategy is to hold your funds in cash in a bear market, and wait for a safer opportunity to trade. Additionally, many traders will look for opportunities to take short positions. As we know, it is wise to follow the direction of the market trend when it comes to trading.

Do you still have more questions about market trends, bear markets or trading? Check out our Q&A platform, Ask the Academy, where the Binance community will be happy to answer your questions.