Markets with sustained and/or significant growth are called bull markets. Markets with persistent and/or significant declining prices are called bear markets. Each of these markets brings its own unique opportunities and risks.
Whether we are talking about cryptocurrencies, stocks, real estate, or other assets, markets are often described as either bull or bear markets. Simply put, a bull market is a rising market, while in a bear market, prices are falling. Because markets often fluctuate, for example from day to day (or even moment to moment), the two terms usually describe the following market trends:
Longer periods of time in which upward or downward movements predominate.
Significant upward or downward price swings (20% is generally considered a benchmark here)
So what is a bull market?
A bull market, also called a bull market, is defined as a period when the majority of investors are buying, demand is greater than supply, market confidence is high, and prices are rising. If you notice in a market that prices are showing a rapid upward trend, this could be an indication that the majority of investors are becoming increasingly optimistic or “bullish” about further price movements, which could mark the beginning of a bull market.
Investors who believe that prices will rise over time are considered “bulls.” As investor optimism increases, a positive feedback loop is created, which usually attracts further investment, leading to a perpetual rise in prices.
Because the price of cryptocurrencies is influenced quite significantly by public confidence in these assets, some investors use a strategy that attempts to determine the level of investor optimism in a market (this measure is called “market sentiment” or “sentiment”).
What marks the end of a bull market?
Even during a bull market, fluctuations, setbacks, and corrections occur. Short-term downward movements can easily be misinterpreted as the end of a bull market. That’s why it’s important to assess potential trend reversal signals from a broader perspective, by analyzing price movements over longer periods of time. (Investors with shorter investment horizons often rely on a “buy the dip” approach, i.e., price reversals are used to make investments).
History has shown us that even bull markets eventually come to an end, and at a certain point investor confidence wanes. Such a shift in sentiment can have many causes, ranging from negative news, for example unfavorable legislation, to unforeseen circumstances, such as the Corona pandemic. A sharp downward movement in prices can herald a bear market, with more and more investors believing that prices will continue to fall. This creates a downward spiral as investors dump their assets to avoid further losses.
What is a bear market?
Bear markets are defined as a period when supply is greater than demand, confidence is low, and prices fall. Pessimistic investors who believe that prices will continue to fall are therefore referred to as “bears.” Bear markets are a difficult environment for trading, especially for inexperienced traders.
It is notoriously difficult to gauge when a bear market may be over and the bottom has been reached because economic recovery is usually slow and unpredictable, and many external factors can affect it, including economic growth, investor psychology, and news or events of global significance.
But bear markets also present opportunities. After all, if your investment strategy is long-term, buying assets during a bear market may well prove lucrative when the business cycle reaches its turning point. Investors with shorter-term strategies should also watch for temporary price swings or corrections. And for more experienced investors, there are strategies such as short selling – where investors speculate that the price of an asset will fall. Another strategy that many crypto investors rely on is the average cost effect. This involves investing a fixed amount per week or per month (for example, $50), regardless of whether the asset’s price rises or falls. This way you spread your risk and can invest consistently in both bull and bear markets.
Where do the terms “bull” and “bear” actually come from?
As with many financial terms, the origin is not entirely clear. But it is widely believed that the attacking behavior of these animals was the inspiration for their names: bulls thrust upward with their horns, while bears strike downward with their paws. There are, of course, many theories and evidence regarding the origin of these terms. If you’re curious, this English-language background article on Merriam-Webster’s website is a good place to start.