Due diligence is crucial when looking for an investment opportunity. However, conducting one’s homework is perhaps even more essential when it comes to cryptocurrency. Though fairly more lucrative than traditional asset classes, cryptocurrency comes with a fair share of uncertainty, and carrying proper research will help you understand the various aspects of the trade.
While there are plenty of areas you will need to learn and understand before venturing into the world of cryptocurrency is learning and understanding the basic terminology. And one particular terminology that is often used in crypto trading is a bull market. So, today in this post, we are going to discuss in excruciating detail, what a bull market is as well as how those looking to invest in crypto can take advantage of this unique market scenario. So, peruse the article and get to know.
So, what does a bull market in crypto mean?
In simple terms, a market that experiences substantial or sustained growth is known as a bull market. A bull market is the condition of a cryptocurrency market in which prices are either rising or are expected to increase. Though this term is often used to refer to the stock market, it can also be applied to anything that is tradable, and this includes cryptocurrencies.
In a bull market, the price of a cryptocurrency coin has been on an upward trajectory for an extended period. But why is the word bull’ being used to describe a thriving market or a positive price movement?
The term bull market can be traced from how a bull attacks when fighting. Typically, bulls are known to thrust upwards with their horns when attacking something. Similarly, investors use their capital to somehow drag up the price of a cryptocurrency or other financial assets. During a bull market, market players are extremely optimistic.
In financial terms, this state of optimism can also be described as being bullish. And by being bullish, you are simply confident that the market prices will increase in the long run. And an extended period of positive price movement is what is known as a bull market.
So, how are bull markets measured?
It is imperative to note that there are no universal or specific metrics used to measure or identify a bull market. As earlier explained, a bull market is only characterized by increased investor confidence, optimism as well as strong expectations that strong results, and in this case, an increment in cryptocurrency prices is going to be witnessed for an extended period. And because bull markets are quite difficult to recognize, analysts can typically only identify this phenomenon after it has occurred.
What are the characteristics of a bull market?
Generally, bull markets are mostly experienced when the economy is either strengthening or is already strong, especially in traditional financial markets. They tend to happen when there is a robust gross domestic product (GDP), a decrease in employment levels, and a rise in corporate profits. However, in the context of cryptocurrency, characteristics synonymous with a bull market include increased investor confidence, increased demand for cryptocurrencies, increased trading activity, and increased crypto coin prices.
So, what marks the end of a bull market?
History suggests that bull markets don’t last forever. This implies that at some point, it will decline. Cryptocurrency is a highly volatile industry, and this means that even during a bull market cycle, there will be price fluctuations along the way. Investors can easily misinterpret short-term downward price movements as the end of a bull market.
As a result, it is crucial that traders critically analyze any potential notable bull market reversal signs before drawing a conclusion. And one important factor to keep an eye on is price action over a longer time frame. With time, the confidence of traders will start to decline, and this may be caused by things such as natural calamities such as the COVID-19 outbreak, unfavorable legislation, among other factors.
A rapid downward price movement can be the start of the end of a bull market, where a significant number of investors now believe that cryptocurrency prices will continue to go down, ultimately resulting in the permanent end of a bull market as investors sell their crypto assets to curb further losses.
How do you take advantage of a bull market?
As we have already explained, bull markets occur when crypto asset prices rise faster compared to the average rate. They are usually characterized by periods of increased optimism among traders and economic growth. Below are a few ways through which crypto traders can maximize their profit during a bull market.
In the financial arena, a long position simply refers to the purchase of a stock or any other type of security in the belief that its price will rise in the future. So, during a bull market, you can actually buy lots of crypto coins and trade them later when the prices increase. The idea is to purchase the cryptocurrency at low prices and sell it later for more than what you paid. The price difference represents your profit. In a bull market, ideally, any losses should be minimal and temporary. Investors can actively and confidently invest in a crypto coin that boasts a higher probability of earning a profit.
While this is a popular strategy in the traditional financial markets, it is yet to gain traction in digital currency. However, it is available in established cryptocurrency exchanges. A call option simply refers to the right to purchase a stock at a certain price (strike price) until a set expiration date. Calls increase in value as the price of the stock in question increases. And if the stock prices go past the option’s strike prices, the buyer can exercise his right to purchase the stock at the lower strike price. You can then trade it on the open market at a higher price and earn your profit.
A retracement simply refers to a short period where the general trend in an asset’s price is reversed. It is worth noting that even during a bull market, it is highly unlikely that stock prices will keep increasing. There are likely to be brief periods in which slight dips occur as well, even as the general trend keeps going upward. For experienced crypto traders, you can identify these retracement periods and buy additional crypto coins. The idea behind this strategy is that, provided the bull market remains alive, the price of that particular crypto asset will quickly increase, retroactively giving a discounted purchase price.
The Bottom Line
Since its inception a few years ago, the interest in cryptocurrency has significantly increased, with more and more people looking to try their luck in an industry generally believed to be highly lucrative. However, before you join this unique industry, you need to ensure you are knowledgeable enough to handle the risk that comes with investing in crypto.
To boost your understanding of cryptocurrency trading, we have expertly described what a bull market is, how to spot it as well as the various techniques you can use to benefit from this unique market condition.