Key Takeaways
A bear market is a prolonged period of declining asset prices, often driven by economic downturns or geopolitical uncertainties.
Investors can navigate bear markets using strategies like dollar-cost averaging, short selling, or shifting to less volatile assets like cash, bonds, or stablecoins to minimize risk.
Despite their challenges, bear markets are a normal part of market cycles. Historical market data shows that established markets like the S&P 500 and Bitcoin managed to recover from all bear markets over time.
Introduction
Financial markets move in trends that represent the overall direction that the market is going. In a bear market, prices are declining consistently, which often makes it a challenging time to trade, especially for beginners.
It’s fairly easy for crypto traders and technical analysts to agree that Bitcoin has been in a macro bull trend throughout its existence. Even so, there have been multiple relentless bear markets along the way. Some of these periods brought more than an 80% decline in the price of bitcoin (BTC) while causing many altcoins to drop more than 90%.
What Is a Bear Market?
A bear market can be described as a sustained period of declining prices in a financial market. They usually last months or even years and are marked by reduced investor confidence and economic contraction.
Unlike short-term market dips, bear markets reflect deeper economic challenges. They often coincide with recessions, high unemployment, or declining corporate earnings, which reduce demand for stocks and other assets. The duration and severity vary, but bear markets are a normal part of market cycles.
There’s this saying among traders: “Stairs up, elevators down.” Moves to the upside may be slow and steady, while moves to the downside tend to be sharper and violent. Why is that? When the price starts crashing, widespread FUD causes many traders to exit the markets. Some do that to cut losses, while others lock in profits from their long positions.
This can quickly result in a domino effect where sellers rushing to the exit leads to even more sellers doing the same. The drop can be amplified even more if the market is highly leveraged. Mass liquidations will have an even more pronounced cascading effect, often resulting in a strong sell-off (capitulation).
What Causes a Bear Market?
There are many possible factors that can trigger or intensify a bear market. Common causes include:
Economic downturns: Recessions or slowing GDP growth often lead to reduced corporate profits, encouraging investors to sell stocks and crypto assets.
Geopolitical events: Crises, such as wars or trade disputes, can create uncertainty, driving investors to safer assets like cash or bonds.
Market bubbles: Overinflated asset prices, like the Dot-Com Bubble in 2000, can collapse when valuations become unsustainable.
Monetary policy changes: Rising interest rates, as seen in the 2022 bear market, can increase borrowing costs and impact market sentiment.
Unexpected shocks: Events like the 2020 COVID-19 pandemic can cause rapid market declines due to widespread fear and uncertainty.
These factors may also happen simultaneously. For example, the 2008 Financial Crisis stemmed from a housing bubble, careless lending practices, and global economic problems, leading to a major bear market.
Bear Market vs. Bull Market
The difference is fairly straightforward. In a bull market, prices are going up, while in a bear market, prices fall.
One notable difference may be that bear markets can have long periods of consolidation, i.e., sideways or ranging price action. These are times when market volatility is quite low, and there’s little trading activity happening. While the same may be true in bull markets, this kind of behavior tends to be more prevalent in bear markets. After all, prices going down for an extended period aren’t very attractive for most traders and investors.
Bear Market Examples
As we’ve discussed, Bitcoin has been in a macro bull trend since it started trading and is among the best-performing assets in the history of financial markets. Still, BTC has had multiple bear markets throughout the years. Let’s check a few examples using TradingView charts.
2018-2019
After Bitcoin’s move to around $20,000 in December 2017, it experienced a bear market in 2018 and early 2019, dropping more than 84% from peak to bottom.
2019-2020
In 2020, Bitcoin dropped more than 70%, with a sharp drop in Q1 2020 due to the coronavirus pandemic. That was the last time Bitcoin traded below $5,000.
2022
From the 2020 low of under $4,000, Bitcoin went all the way up to an all-time high near $69,000 in 2021. But after more than a 1,670% increase in price, the price went down more than 77% to under $15,600 in November 2022.
What to Do in a Bear Market?
It depends on your investment and risk profile. There are multiple ways to go through a bear market, but doing it successfully takes discipline and careful planning. Let’s go through a few common bear market strategies.
1. Reduce exposure
One of the simplest strategies traders can use in a bear market is to reduce risk by selling assets for cash (or stablecoins). If you’re not comfortable with prices declining, you are likely investing more than you can afford to lose (position size matters).
2. Do nothing (HODL)
In some cases, it may be better to simply wait until the market gets out of bear market territory. Historical data shows that established markets like the S&P 500 and Bitcoin recover over time. If you’re long-term HODLing with an investment time horizon of many years or decades, a bear market isn’t necessarily a signal to sell.
3. Dollar-cost averaging (DCA)
Many see bear markets as good long-term opportunities for dollar-cost averaging (DCA), especially with more established assets like Bitcoin. DCA consists of investing regularly, regardless of market prices. This allows investors to buy more when prices are low, reducing the total average cost per unit of asset. For example, if you buy 1 BTC at $100,000 and it drops to $80,000, you could buy another BTC to bring the average cost down to $90,000.
4. Short selling or hedging
Experienced traders often try to profit from declining prices by short selling. This way, when asset prices are going down, they can profit from the decline. Regardless of whether you do day trades or swing trades, the idea is to follow the broader market trend.
Short selling can also be used for hedging—reducing risk by opening a short position while holding the asset on spot. For example, if you hold 2 BTC on your crypto wallet, you could open a 2 BTC short position on Binance to compensate for the losses you would incur if the market keeps going down.
5. Counter-trend trading
This is a high-risk strategy, but some traders will look for trades that are against the major trend. In a bear market, this would be entering a long position on a bounce, which is called a “bear market rally” or a "dead cat bounce."
These counter-trend moves can be notoriously volatile, as many traders may jump on the opportunity to long a short-term bounce. However, until the overall bear market is confirmed to be over, the expectation is that the downtrend will resume right after the bounce.
Traders will try to take profits around local highs and exit before the downtrend resumes. Otherwise, they could be stuck in their long position while the bear market continues. Again, this is a very risky strategy. Even the most advanced traders can face big losses when trying to "catch a falling knife."
Why Is It Called a Bear Market?
The term "bear market" comes from the imagery of a bear swiping its paws downward, symbolizing the downward trajectory of market prices. In contrast, a bull market relates to the movement of a bull pushing its horns upward.
These terms have been used since at least the 19th century, with one theory suggesting "bear" derives from "bearskin jobbers" who sold pelts before they had them, similar to short selling in modern markets.
Closing Thoughts
Bear markets are usually driven by economic, geopolitical, or speculative factors that erode investor confidence. While challenging, they are a natural part of market cycles. With discipline and planning, traders may protect themselves and even profit from the downtrend.
During a bear market, many investors choose to simply continue HODLing (staying invested) or reducing risk by moving to lower-risk assets like bonds or cash. Dollar-cost averaging is also a popular strategy that may work well in the long-term. Short selling and counter-trend trading are much riskier, but can be viable alternatives for experienced traders.
Further Reading
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