Bull vs Bear Market: What’s the Difference?

A beginner’s guide to understanding the differences between a bull and a bear market, indicators for these market phases, and what to do in each.

You’ll likely have heard the terms ‘bull’ and ‘bear’ in conversations about the crypto and stock markets. But what exactly do they mean, why are they called this, and how should you act in each of these market phases? Read on for answers.

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Bull and Bear Market Definitions 

• Bull market: A market in which asset prices are rising or are expected to rise backed by strong economic fundamentals and an expansionary business cycle. 
• Bear market: A market in which asset prices have declined by 20% or more with the expectation of weaker economic fundamentals and a contractionary business cycle. 

What is a Bull Market? 

In traditional finance (TradFi), the term ‘bull market’ is believed to have originated from a bull’s fighting style of thrusting its horns in an upward motion. Investors have since used this term to describe the overall market sentiment that exhibits a similar pattern — an uptrending price trajectory. 

By definition, a bull market is the condition of a financial market in which the asset prices are rising or are expected to rise. Favourable macroeconomic conditions or high employment levels, all of which give investors confidence in the markets support this. 

What Causes a Bull Market? 

The driving factor behind a bull market is the growth of an economy, such as the increase in a country’s gross domestic product (GDP), a growing employment rate, or low interest rates. 

However, apart from these quantifiable metrics, the market sentiment — the overall perception of the financial market — also plays a huge impact on the psychology of investors in certain market conditions. 

The bull market cycle is rather simple in the bigger picture: When these metrics seem favourable, it leads investors to buy. As more investors demand these finite assets, the prices increase. 

Bull Market Indicators:

• Strong GDP
• High employment rates
• Strong demand for assets
• Positive market sentiment
• General interest in cryptocurrency in the mainstream media

Examples

The cryptocurrencies with the two largest market caps are Bitcoin and Ethereum. They are often seen as indicators of the crypto market as a whole.

In January 2017, the Bitcoin bull market kicked off with a breakout from its previous all-time highs of approximately US$900. As soon as this level was breached, it sent the coin into a euphoric bull run phase that doubled its price to US$1,800 around May 2017, and then to a high of US$19,000 by the end of the year.

Similarly, Ethereum started the year at its lowest, around US$8 and accelerated upwards at the end of March. Towards the end of the year, the asset experienced another surge in prices, ending the year close to its highs, at approximately US$750. In this one-year period, Ethereum gained over 9,200%. 

What is a Bear Market? 

Similar to a bull market, the term ‘bear market’ is believed to have originated from a bear’s fighting style of swiping its paws downwards in an attack. 

A bear market is defined as a market condition in which asset prices have declined 20% or more from their recent highs. In comparison, a market correction is a decline of 10% or less. Despite this threshold, the average bear market since 1929 has actually recorded declines from 30% to 40%. So, if you ask, “is crypto in a bear market in 2022?” the answer is yes, according to traditional benchmarks and technical analysis. 

Aside from the numbers, a bear market is also characterised by investors’ pessimistic outlook on the economy and the lack of confidence in the markets. In general, investors are extra cautious with their money during a bear market, as no one is certain when or if a bear market will end. 

What Causes a Bear Market? 

A bear market can start as early as the period just before or after the economy enters a recession. The factors, however, may vary. 

For example, while the COVID-19 pandemic was looming over the world, the indicators that signalled a bear market included widespread closures and increasing unemployment rates. 

In contrast, the typical bear market can be triggered by weakening economic fundamentals, such as hiring freezes, a deceleration in corporate growth, high inflation rates, high unemployment rates, and increasing interest rates. 

For most investors, these negative indicators are initial signs to be attentive to a shrinking economy. Consequently, many will start liquidating more volatile assets and place their funds into more stable assets, such as precious metals or government bonds. As opposed to wanting to maximise profits, they will switch to capital preservation mode. 

When selling starts, market growth further stalls, inciting worry amongst other investors or market players. So the more investors start selling, the quicker the demand for assets dries up, and the supply overwhelms the market, causing a further decline in prices. 

Bear Market Indicators

• High inflation rates
• High unemployment rates
• Slowing economic growth
• Supply greater than demand
• Deceleration in corporate profit estimates

Examples

One of Bitcoin’s bear markets came swiftly after its peak in late 2017. While there were discussions amongst governments, economists, mathematicians, and tech experts regarding the various applications of its underlying blockchain technology, prices were deemed too high to maintain a significant demand. As a result, supply overwhelmed demand, and prices gradually trended lower. Within this period, Bitcoin migrated from the highs of US$17,527 in January 2018 to the lows of US$3,236 in December 2018. 

During the same period, Ethereum also experienced a bear market. Once the demand for this asset cooled off and early buyers locked in their profits, sellers outnumbered buyers, leading to a sell-off. Its prices reached a peak of approximately US$1,382 in mid-January 2018, before gradually sloping downwards and closing near the bottom of this period at about US$116. 

Bull Market vs Bear Market – What to Consider in Each

As a crypto user, you’ll inevitably run into a number of bull and bear markets. Despite their differences, crypto holders can optimise their strategies to maximise the opportunity presented in each market. Hence, it is vital to understand the dynamics of bull and bear markets. 

Approaches to Consider in a Bull Market

In a bullish market, where the outlook is positive, crypto users generally benefit the most when they can recognise the trend early on and buy currencies they are interested in early. This greatly increases potential returns once other investors enter the market and push prices higher. On average, bull markets tend to last longer than bear markets, and market corrections within a bull market are generally minimal and short-lived. 

However, if macroeconomic factors take an unexpected turn, resulting in a bear market, crypto users tend to reduce their positions or lock in profits by selling assets. 

This is especially important for backers of smaller market cap cryptos and new projects, as there is no guarantee that these digital assets can survive a bear market. In this case, many holders prefer to move their funds into less volatile assets for the duration of an upcoming bear market. 

Approaches to Consider in a Bear Market

When holders sell their assets, asset prices fall, giving buyers the opportunity for potentially higher returns in the future. Some crypto users try to purchase certain crypto assets which they believe are at a low price with the intention of selling them at the peak of the next bull market. 

The caveat is, no one in the market can predict how long a bear market will last, especially if it’s driven by global economic factors or other external circumstances. As a result, crypto users taking this course of action could buy a certain asset prematurely, while prices are still on a downtrend. 

The general indicators from the table above are a good general distinction between a bull and a bear market, however, there are also other factors that can contribute to the state of the market, including unpredictable circumstances, such as a black swan event (e.g. the Covid-19 pandemic), that can catch crypto holders off guard. 

Is the Market Always in a Bull or Bear Phase?

The short answer is no. It is important to note that often the market simply exists in a neutral state. 

This happens when the buyers of an asset are in equilibrium with the sellers; there is no shortage or surplus. In this market, although there will still be fluctuations in the prices, they generally stay within a small range. Therefore, many users prefer to wait until there are more indications of whether a bull or a bear market will follow before choosing to enter or exit the market. 

Final Thoughts

Although bull and bear markets are driven by the expectations of market participants on where the economy is headed, it is tremendously difficult to pinpoint the top or the bottom of a market. Despite this uncertainty, there is one thing most traders believe — markets are cyclical. This goes for traditional financial markets as well as the crypto and digital asset markets.

Many crypto holders look for strategies for sustainable success and prefer long-term strategic asset allocation, such as dollar-cost averaging (DCA). Alternatively, not participating in a bear market is also a common choice for holders, as it allows them to prepare for the next bull market. 

It might take a little longer to plan it out with your financial advisor using valuation tools, but it will help you weather the different phases of a market cycle, avoid the near-impossible task of timing the market, and make rational — not emotional — investing decisions. 

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any crypto assets.  Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.