Bull markets often lead to losses for ordinary investors. This seems to contradict our intuition, as bull markets mean rising stock prices, and investors should be able to profit. However, overconfidence and neglect of risk control in bull markets often become the reasons for retail losses.
In a bull market, the market generally rises, and retail investors are easily influenced by FOMO (fear of missing out) to blindly chase prices. They often neglect fundamental analysis and risk control, even going as far as to use leverage to amplify profits. However, the short-term prosperity of the bull market masks potential risks, and once the market corrects, overly optimistic retail investors may find themselves caught off guard, suffering significant losses.
People often let their guard down in seemingly favorable conditions, overlooking the importance of inherent uncertainty and risk control. Therefore, losses are not caused by the bull market itself, but rather by overconfidence and neglecting risk controls.
When opportunities arise, participation is of course possible, but the key is to recognize your role. Are you an investor or a speculator? Value investors theoretically prefer bear markets because they can buy tokens at low prices. Speculators need to understand that the most dangerous thing is mistaking speculation for investment.
Prices rising excessively and signs of a bubble
Parabolic rise:
Parabolic rise refers to the exceptionally rapid increase in cryptocurrency prices within a short period, resembling the shape of a parabola. This phenomenon is usually driven by speculative sentiment rather than based on the fundamental support of the currency. Here are several key points about parabolic rises:
Speculative sentiment: When the market has a generally optimistic expectation for a particular cryptocurrency, investors may flock to the market, driving up prices. This sentiment-driven rise often lacks actual economic or technical support.
Market overheating: Parabolic rises often indicate that the market may have entered an overheating state. In this state, prices may have far exceeded their reasonable levels, and market bubbles begin to form.
Risk of correction or crash: Due to prices deviating from fundamental support, a market influenced by negative news or sentiment may trigger a large-scale correction or crash. Such a crash could lead to significant losses for investors.
High valuation indicators:
High valuation indicators are important tools for assessing whether there is a bubble in the cryptocurrency market. These indicators typically include price-to-sales ratio, network value to transaction value (NVT) ratio, etc. Here are several key points regarding high valuation indicators:
Price-to-sales ratio: The price-to-sales ratio refers to the ratio of the market value of a cryptocurrency to its transaction volume or circulation. If the price-to-sales ratio is too high, it may indicate that the market is overvaluing the cryptocurrency and poses a bubble risk.
NVT Ratio: The NVT ratio refers to the ratio of the network value of a cryptocurrency to its daily transaction volume. If this ratio is significantly higher than its historical average, it may indicate that the market is overvaluing cryptocurrencies like Bitcoin, signifying a price bubble.
Risk of bubble burst: When valuation indicators reach historical highs, market funds may struggle to maintain excessively high prices. In such cases, the market bubble may burst, triggering a crash.
How to respond?
In the face of parabolic rises and the market risks indicated by high valuation indicators, investors can adopt the following strategies to mitigate risks:
Stay cautious: In situations where prices are rising rapidly and market valuations are high, investors should maintain a cautious attitude and avoid blind following.
Diversified investment: By diversifying investments across different types of cryptocurrencies, the impact of a crash in a single asset on the portfolio can be reduced.
Set stop-loss points: Set reasonable stop-loss points before investing, and sell promptly when prices drop to those points to limit losses.
Pay attention to fundamentals: In addition to market sentiment and valuation indicators, one should also focus on the fundamental factors of cryptocurrencies, such as technological developments and application scenarios. These factors may have a long-term impact on prices.
Abnormal trading volume changes
Surge in trading volume and excessive speculation:
In the cryptocurrency market, a surge in trading volume usually accompanies rapid price increases. This phenomenon may be caused by several factors:
New investors entering the market: As the cryptocurrency market becomes more popular and media coverage increases, more new investors are starting to flood into the market. They may be tempted by the rapid rise in market prices, hoping to seize investment opportunities.
Existing investors increasing their positions: During price increases, existing investors may see profit opportunities and choose to increase their positions to amplify gains. This further drives the growth in trading volume.
However, when trading volume shows an unusually large increase while prices are making new highs, and the growth rate is too fast, this may be a warning signal. It may suggest that the market is experiencing excessive speculative behavior, with investors being overly optimistic and neglecting potential risks. This excessive speculation may lead to market bubbles, and once market sentiment reverses, it could trigger large-scale sell-offs and price crashes.
Divergence between trading volume and price:
Another situation to be wary of is the divergence between trading volume and price. When prices continue to rise but trading volume begins to shrink, this often indicates that the buying power in the market is gradually weakening.
Although prices are still rising inertia, the lack of sufficient trading volume support means that the market's upward momentum is weakening. In this case, once a small amount of selling pressure arises, it may trigger a rapid price drop. Due to the lack of sufficient buying pressure to absorb the selling pressure, prices can easily be impacted by selling and fall. This divergence phenomenon is often seen as one of the signals indicating that the market is about to reverse.
Technical indicators issue warning signals
Technical indicators play a crucial role in the cryptocurrency market, providing investors with important bases for judging market trends. When technical indicators issue warning signals, investors should pay close attention, as these signals often indicate that significant changes may occur in the market.
Overbought indicators:
Overbought indicators are an important tool in technical analysis used to determine whether the market is in an excessively rising state. Common overbought indicators include the Relative Strength Index (RSI) and the Stochastic Indicator (KDJ).
RSI overbought signal:
When the RSI value remains above 70, it indicates that the market may have entered an overbought state. This means that the market has risen excessively in the short term, and prices may have deviated from their reasonable value range.
When the RSI forms a bearish divergence in the overbought region, meaning that prices are making new highs but the RSI fails to do so, it is a strong sell signal. It indicates that the market's upward momentum may be about to exhaust, and investors should be cautious of the risk of a market reversal.
KDJ overbought signal:
When the K and D lines in the KDJ indicator operate above the 80 area for an extended period, it also indicates that the market may be in an overbought state.
When the K and D lines form a death cross at high levels (i.e., the K line crosses below the D line and moves downward), this is also a sell signal, indicating that the market may be about to decline.
Changes in trend lines and moving averages:
Trend lines and moving averages are important tools for judging market trends. The warning signals they emit during market uptrends often indicate that a market reversal may occur.
Trend line breakout:
In an upward trend, if prices break below the long-term upward trend line, this is usually a warning signal indicating that the market's upward trend may be nearing its end.
Investors should closely monitor this change and make decisions in conjunction with other technical indicators and market information.
Moving average cross:
The crossing of moving averages is an important sign for identifying weakening market momentum and trend reversals. Common combinations of moving averages include the 5-day average and the 20-day average.
When a short-term moving average (such as the 5-day average) crosses below a long-term moving average (such as the 20-day average), this is usually viewed as a sell signal. It indicates that the upward momentum of the market may be weakening, and investors should be cautious of the risk of market decline.
Conversely, when the short-term moving average crosses above the long-term moving average, this is usually seen as a buy signal. However, since we are primarily focusing on sell signals here, we will not elaborate on the buy signal situation.
Changes in capital flow
Rising leverage:
In the cryptocurrency market, it is common for investors to use leverage for trading. Leverage trading allows investors to control assets of greater value with less of their own capital, thereby amplifying profits. However, high leverage also means increased risk.
Characteristics of leveraged trading:
Amplifying profits: Investors can achieve greater profits than their actual investment through leveraged trading.
Increasing risk: When the market trend is unfavorable, leveraged investors may face the risk of forced liquidation, which can rapidly amplify their losses.
Impact of rising leverage:
Increased market volatility: As leverage rises, market volatility may increase. When a large number of investors use high leverage for trading, any small fluctuation in the market can trigger a chain reaction, leading to rapid price increases or decreases.
Increased risk of market crash: In the late stages of a market rise, if the leverage positions on exchanges continue to climb and reach historically high levels, the risk of a market crash will also increase. This is because once the market experiences adverse trends, high-leverage investors may face the risk of forced liquidation, leading to rapid declines in the market.
Outflow of stablecoin funds from exchanges:
Stablecoins play an important role in the cryptocurrency market; they are often used as trading pair currencies and capital safety tools. If stablecoin funds begin to flow out significantly from exchanges, it may indicate that investors are withdrawing funds from the cryptocurrency market or transferring them to other safer asset classes.
Reasons for outflow of stablecoin funds:
Concerns about market prospects: Investors may be worried about the future prospects of the cryptocurrency market, leading them to choose to withdraw funds to avoid potential risks.
Demand for capital safety: In the face of increased market uncertainty, investors may choose to shift their funds to safer asset classes, such as traditional financial products or safe-haven assets like gold.
Impact of stablecoin fund outflows:
Decline in market confidence: A significant outflow of stablecoin funds may undermine market confidence, leading investors to be more pessimistic about the future prospects of the cryptocurrency market.
Market adjustment or crash: If stablecoin funds continue to flow out, this may trigger a market adjustment or crash. The outflow of stablecoins indicates that the money in the market is decreasing, which may lead to a decline in market prices.
Market sentiment extremely optimistic or panicked
Excessive optimism atmosphere:
In the cryptocurrency market, an overly optimistic atmosphere usually indicates potential risks. The formation of this atmosphere often stems from several factors:
Media hype: Extensive media coverage of the wealth effect from cryptocurrencies often exaggerates the situation, attracting a large number of novice investors into the market. These novice investors may lack sufficient market knowledge and risk awareness, making them susceptible to short-term market fluctuations.
Social platform frenzy: Discussions on social platforms about cryptocurrency prices continuing to soar are rampant, and this frenzied market sentiment further exacerbates investors' optimistic expectations. However, this sentiment often overlooks the risks and uncertainties of the market.
Investor psychology: In an overly optimistic atmosphere, investors are often confident about the market's future and may even ignore potential risks. They may blindly chase prices, leading to excessive buying and inflated prices.
Fear and greed index:
The fear and greed index is an important indicator for measuring investor sentiment. When this index is in the extreme greed zone, it indicates that investors are excessively greedy and the market's risk appetite is extremely high.
Investor behavior: In extreme greed, investors often disregard the reasonable valuation of assets and blindly chase prices. This behavior may lead to the formation of market bubbles and accumulate significant risks.
Risk warning: When the fear and greed index remains above 80 (extreme greed zone) for an extended period, it is usually viewed as a signal that the market has accumulated significant risks. At this time, investors should be particularly cautious to avoid losses from blind following.
Market reversal: In an atmosphere of extreme greed, the market may crash at any moment due to a trigger (such as negative news, policy changes, etc.). Therefore, investors should closely monitor market dynamics and adjust investment strategies in a timely manner.
Macroeconomic and policy changes
Impact of rising interest rate expectations
Changes in the direction of capital flow: When the market expects interest rates to rise, investors often seek safer investment channels to mitigate risks. Fixed-income assets, such as bonds, are favored for their stability of returns. Therefore, funds may flow from the riskier cryptocurrency market to these fixed-income assets.
Cryptocurrency price drop: As funds flow out, the demand in the cryptocurrency market decreases, naturally putting downward pressure on prices. This change often occurs when economic data shows rising inflationary pressures, leading to heightened expectations of interest rate hikes by central banks (such as the Federal Reserve).
Market expectations react in advance: The cryptocurrency market is often highly sensitive to macroeconomic data and policy changes; therefore, before formal policy adjustments, the market may have already reacted in advance, causing price fluctuations.
Impact of stricter regulatory policies on the cryptocurrency market
Market panic sentiment: The regulatory attitudes and policy adjustments of governments towards the cryptocurrency industry directly affect market sentiment. If regulatory agencies introduce stricter measures, such as enhanced regulation of exchanges, restricting trading activities, or imposing taxes, investors may feel panic and choose to sell cryptocurrencies.
Reduced capital inflow: Strict regulatory policies may limit financial institutions' participation in cryptocurrency-related businesses, thereby reducing capital inflow into the market. This change not only decreases market liquidity but also increases market uncertainty.
Risk of price crash: In the context of tightening regulatory policies, price volatility in the cryptocurrency market may intensify. If investors lose confidence in the future direction of the market, the risk of a price crash will significantly increase.
The characteristics of cryptocurrency market crashes are multifaceted, and investors need to analyze these market signals comprehensively, closely monitor market dynamics, manage risks appropriately, and avoid blindly following investments during market overheating to reduce the likelihood of significant losses. Furthermore, due to the complexity and uncertainty of the cryptocurrency market, these characteristics cannot accurately predict the timing and magnitude of a crash; investors should remain rational and cautious.
