A decade ago, few people would have believed you if you said you hold some of your investment portfolios in cryptocurrency; a type of digital or virtual currency that is stored through various cryptographic means! However, today, you might be seen as uncivilized if you either don’t currently invest or have never traded even a single Ethereum or Bitcoin.
Thanks to its high value, nearly everybody out there now wants to invest in cryptocurrency. If you invested $1,000 in bitcoin a decade ago, it would be worth around $300 million today! It is easy to see why bitcoin and other crypto coins have attracted the attention of investors across the globe.
Cryptocurrency is practically everywhere today and is no longer for proven entrepreneurs and routine traders. If you didn’t know, nearly every business out there is currently integrating cryptocurrency into its platform.
However, despite its ever-increasing popularity, it is worth noting that the cryptocurrency industry is a highly volatile one. In case you were not aware, the value of crypto coins usually goes through extreme ups and downs, and if you are not experienced enough, it is very easy to incur significant losses.
So, if you are going to become successful in crypto trading, you’ll need to do a bit of research and understand the dynamics of the trade.
Just like any other financial market, the cryptocurrency market will always experience a period where there is a rapid drop in crypto coin prices, a market scenario referred to as a bear market. If you have been in this industry for some time, the chances are high that you might have heard about a bear market.
But what does it mean? And how does it impact crypto traders? And how can you take advantage of this situation as a crypto trader? To find answers to these questions, continue your reading.
So, what does a bear market in crypto mean?
Generally speaking, a bear market simply refers to a strong market downtrend that represents a substantial decline in prices over a relatively short period.
To put it simply, a bear market is a term used to describe a negative trend in crypto coin prices. It is widely used not only in the cryptocurrency world, but in traditional markets, including bonds, stocks, commodity markets as well as real estate. As earlier explained, crypto markets are relatively smaller and as a result, are more volatile.
During a bear market, crypto investors are usually pessimistic about the future. When you hear an investor saying he’s bullish, he is simply indicating that he is quite confident that a particular asset’s price will likely go down with time.
Bear markets generally emerge from a combination of factors, ranging from current market conditions, investor confidence or psychology, unfavorable legislation, among other factors.
So, what are the stages of a bear market?
It is imperative to note that bear markets don’t just occur out of nowhere. There are four distinct phases of a bear market, including:
The first phase is usually characterized by high trader sentiment and increasing prices. At the end of this phase, investors start to escape from the market in a bid to make quick profits.
In the second phase, crypto coin prices start to sharply decline, and both trading activities and corporate profits start to drop. What’s more, economic indicators that may have been positive at some point will now start to fall below average. A situation referred to as capitulation is experienced, where investors begin to somehow panic as market sentiment begin to fall.
In the third phase, speculators will start entering the market, ultimately leading to a slight increase in crypto coin prices as well as trading volume.
In the last phase, asset prices continue to decline, but rather gradually. And as low asset prices and good news begin to attract the attention of crypto traders again, increased trading activities will eventually lead to the onset of bull markets.
Can crypto traders take advantage of a bear market?
Even though the bear market period might not seem like the best time to invest in cryptocurrency, savvy investors can actually benefit significantly even during this period. Below are a few proven tips strategies you can use to survive even during bearish crypto trading periods.
Short selling: Also referred to as shorting, this can be an effective way of making profits during a bearish spell in the crypto market. It is a versatile technique that not only suits crypto markets alone, but other markets as well. Shorting simply means selling an asset in the hopes of repurchasing it later at a relatively lower price. And if the market moves up and the asset price declines, their position goes, and traders can now purchase the assets, which is now somewhat cheaper, and make profits.
It is worth noting that shorting can also be practiced through borrowed crypto assets. For instance, if you are bearish on a particular crypto coin, you can put up the required collateral, borrow a specific amount of that coin, and sell it immediately. Now you have created a short position and if the market fulfills your expectations and goes lower, you repurchase the exact same amount you borrowed and pay back your lender together with interests and you earn the resulting profits.
The HODL technique: Just as the name implies, this is an intentional misspelling of the word hold’. It means holding on to your crypto coins through crypto’s ups and downs. It is based on the assumption that investors will continue to hold on to their crypto coins regardless of how low the prices become.
This strategy is suitable for those who are willing to wait. As such, it is a long-term strategy. Because the crypto market is highly volatile, low crypto prices are just at maturity and stabilization. At some point, the market will stabilize and the prices will increase and you will eventually sell your coins at higher prices.
Don’t invest in one coin! As you already know, it is nearly impossible to predict the future of cryptocurrency. So, to be on the safest side, it is important that you diversify your investment by investing in at least two crypto coins. This may enhance your chances of making the right call.
The Bottom Line
Generally, the crypto industry is a highly volatile one. Over the years, bear and bull trends have routinely replaced each other, with no possibility of preventing or predicting them.
This means that investors need to equip themselves with some strategies to ensure they survive these uncertain crypto market conditions. Hopefully this answers your question of what does a bear market in crypto mean.