What Are Bear and Bull Markets?
Mar 18, 20225 min read
As in any field, trading has its specific terminology. So novice traders repeatedly encounter expressions such as “bull” and “bear” market. We invite you to sort out these concepts and find out what other animals are in this zoo.
A Bit of History: How Did It Start?
Animal terms appeared on the stock exchange back in the 18th century. There are several versions of their origin. According to one of them, the bull is a typical Englishman John Bull, a character of the satirist John Arbuthnot, and the bear is taken from the European proverb “to sell the bear’s skin before one has caught the bear”. Others believe that the concept of bulls and bears is symbolic: the bull attacks by lifting the opponent on the horns, and the bear nails the enemy with its paw down. Finally, according to the third version, it’s about fighting real bulls and grizzly bears.
It is no longer possible to find out the truth today, but the fact that these animals have become the main symbols of financial markets is indisputable. Almost all major Western exchanges have recorded these two animals in their symbols and talismans. For example, in New York, the bronze bull is located on Wall Street. Brokers, financial analysts, dealers, managers, and other inhabitants of Wall Street consider it a good omen to touch this statue when they go to work.
What Is a Bull Market?
A bull market can be described as a period when the price of assets increases. Most investors are full of optimism (bullish). They are eager to fight and massively buy cryptocurrency, expecting further price growth. At some point, such an incredible demand outweighs the supply, thereby reinforcing the price increase. The most common definition of a bull market is a situation in which the price soars by 20%.
What Are the Bull Market Drivers?
The key factor influencing the formation of a new bullish trend remains the growing adoption of Bitcoin and other cryptos as means of payment and investment and the use of blockchain technologies and applications in new business areas.
Other factors contributing to the beginning and development of the bullish trend are the official adoption of cryptocurrencies by large states (the considerable growth of 2017 primarily began with Japan), the entry into the digital assets market of large companies, the launch of financial derivatives, and other products. The price growth attracts new investors and traders, who push the rate up even more; the media write about huge profits, forming the effect of FOMO — the fear of missing an opportunity.
For example, in 2021, we could observe a rapid increase in the Bitcoin price when the price of BTC updated one “all-time high” after another. The driver of such explosive growth was the recognition of Bitcoin among institutional investors. For example, on February 8, the price of Bitcoin skyrocketed after it became known that Tesla invested $1.5 billion in Bitcoin. Another significant event was the adoption of Bitcoin as a currency in El Salvador. All this news stimulated investors to buy Bitcoin, thereby raising its price.
What Is a Bear Market?
Naturally, even during a bull market, falls, fluctuations, and corrections are possible. During such price movements, investor confidence decreases. The trigger for price drops can be anything from bad news, such as the refusal of Tesla to accept BTC for payment or a ban on mining in China, and unforeseen events like the COVID-19 pandemic. Additional factors may be the tightening of crypto regulation, problems with individual projects, hacking of leading exchanges. When the market falls, opponents of Bitcoin become more active in the media. As a result of such events, the price of cryptocurrencies drops, investors in a panic begin to massively sell assets to prevent subsequent losses. Supply exceeds demand, the price decreases, and the market enters a bearish trend. The bearish trend is characterized by strong pessimism regarding the scenario of lower market prices, low trading activity, and short strategies. If the last wave of the most stable investors falls to the influence of such statements and rushes to sell recently purchased coins, the collapse will become almost as impressive as the growth was. The fall in the exchange rate of cryptocurrencies in 2018 is one of the most striking examples.
Any Trend Is Your Friend
At first glance, it seems that a bullish trend is very good, and a bearish one is, on the contrary, bad. But, in fact, both of them are important for getting a good and permanent profit in trading.
By and large, the whole essence of a successful exchange game boils down to buying at the end of bearish and the beginning of bullish trends and selling at the end of bull time, when bears are just coming to the market. However, you should also keep in mind that investing in the midst of a bullish movement when the price has already increased significantly is a rather risky idea since at any moment, the price may go down, and you will suffer losses.
In the jargon of the participants of trading, there is a place for some more representatives of the animal world:
- Whales: extremely big investors who move the market.
- Hares: scalpers who earn on a cascade of small transactions, as if making jumps.
- Sheep (lemmings): those who follow the lead of others and do not have their own opinion.
- Wolves: experienced traders who almost do not make mistakes. As a character in “The Wolf of Wall Street” movie.
- Pigs: greedy and do not dump assets on time.
- Turtles: slow to react, adhere to the long-term strategy.
How to Determine a U-turn?
Unfortunately, there are no absolute markers and deadlines. The opinions of experts and analysts also do not always help. History knows many examples when the market flew up ahead of the wildest forecasts, or vice versa fell contrary to all expectations of growth.
As a guideline, you can analyze the difference with the last minimum or maximum. If the exchange rate has doubled or more, then the probability of a reversal is relatively high, and it is risky to buy new coins at such a time, even if there is a chorus of enthusiastic voices around. At this time, it is better to sell a little, fixing the profit.
But when the price drops from the maximum by two or three times, and investors begin to shed tears over the ended cryptocurrency fairy tale — it’s time to buy (if the market is not at the pivot point, then it is close enough to it).