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What Is a Bear Market?

February 18, 2022

Christina

What Is a Bear Market?

A bear market is used to describe a market whose asset prices are in a sustained decline or have experienced a substantial downturn in price. Here's how to spot one.

During a bear market, investor confidence and market sentiment are low, and more sellers than buyers are driving down the price.

Characteristics of a bear market 

Just as a 20% sharp increase in price may mark the dawn of a bull market, a 20% decrease could signal the start of a bear market. A bear market may also be observed if market conditions have continued to dwindle over a period of time, generally, if the market consistently fails to reach its 52-week high.

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Markets are heavily impacted by human psychology and are often driven by two emotions: fear and greed. A fear and greed index, in fact, is used to measure market sentiment. During bull markets, participants tend to succumb to extreme greed, whereas, in bear markets, they suffer from extreme fear. 

Market psychology is so powerful that it can profoundly harm investors' portfolios, the stability of a market, and even the wider economy. Just as positive investor sentiment leads to buying and causes a powerful feedback loop that serves to fuel a bull market, fear and uncertainty feed the downward spiral of a bear market. 

Optimistic participants in a bull market are known as "bulls," whereas, in a bear market, pessimistic participants are known as "bears," and the sentiment is "bearish." Some permanent Bitcoin bears include Jamie Dimon, Peter Schiff, and Warren Buffett. Despite an upturn in price or significant positive developments with the network, they will constantly highlight the perils of owning Bitcoin and negate its many attractive properties.

[Read now: What Is a Bull Run?]

Visually, a bear market is known because a bear typically attacks from the top-down, swiping its claws in a declining movement, contrary to bulls that toss their horns upward to attack. 

Notable bear markets in Bitcoin's history have been in 2014 and 2018 and have both begun in the third year after a Bitcoin halving following preceding bull markets. In 2022, the question of whether Bitcoin is now in or entering a bear market is being asked a lot due to its massive 45% descent from its all-time high in November 2021. 

How to spot a bear market

As mentioned, a sudden decline in an asset's price of 20% or more can be a sign that a bear market has begun. This may be triggered by an unexpected event, known as a "black swan" event, such as the onset of the COVID-19 pandemic when Bitcoin lost half of its value in just two days.

However, oftentimes, spotting the onset of a bear market isn't as simple or as catastrophic. It can be difficult to ascertain whether a market has flipped bearish as volatile assets like cryptocurrency experience high fluctuations daily and it's not uncommon for the market to experience downward turns in the middle of a bull run or upward turns during a wider bearish trend.

Analysts use a few different metrics to confirm the onset of a bear market. One of the most widely used is a combination of the asset's 50-day MA (moving average) and its 200-day MA. When these averages cross, they form either a "golden cross" or a "death cross." As you can imagine, the presence of the former can often represent bullish momentum, whereas the latter may confirm the bearish trend.

On-chain data can also provide insights into the direction of the market. It provides all the information surrounding Bitcoin transactions, buying and selling behavior, and whether there is a selloff occurring from large participants or miners that could signal a bear market.

The end of Bitcoin bull and bear markets?

Until now, Bitcoin markets have followed a four-year cycle, with a bull market following a Bitcoin halving and a bear market coming after a euphoric bull run. However, many in the industry are arguing that these cycles are now broken due to the institutionalization of the market and the change in infrastructure, participants, and maturation. This would mean that the current bearish trend may be short-lived or just a correction in a wider bull market.

Bitcoin on-chain analyst and trader Willy Woo, recently tweeted: "Price in relation to on-chain demand from both speculative and hodl category of investors are now both at peak oversold levels. The last time this happened was in October 2020, and the time before that was at the bottom of the COVID crash." In other words, according to on-chain data, Bitcoin price could be preparing for a price bounce. 

While no one can predict the future direction of a speculative asset nor the unforeseen external events that can influence their path, there are some possible events on the horizon that could either repel or confirm the Bitcoin bear market. 

These include excessive regulation of cryptocurrencies or Bitcoin mining and the collapse of indebted Chinese property developer Evergrande, which could overspill into the wider global economy and be particularly damaging for Bitcoin. This is because of the high possibility that many of the "cash equivalents" backing the industry's largest stablecoin Tether are certificates of deposit from Evergrande. The collapse of Tether could cause a massive exit of funds from the cryptocurrency markets, driving down Bitcoin's Price further.

Other developments to watch out for will be the approval (or not) of a Bitcoin ETF, the evolution of the pandemic, and the Federal Reserve's interest rate hikes to tackle rising inflation, which many predict will cause funds to flow from Bitcoin back into traditional markets like bonds. The coming weeks and months will be crucial for Bitcoin and the digital asset industry at large.

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