What is a Bear Market?5 min read

what is a bear market financial paradox

Financial markets are developing in line with trends. It is important to understand the difference between these trends in order to make more informed investment decisions. How to arrive? Well, different market trends can lead to very different market conditions. If you don’t know the main trend, how will you adapt to changing conditions?

The market trend is the general direction in which the market is moving. In a bear market, prices tend to decline. Bear markets can be difficult times to trade or invest, especially for beginners.

Most crypto traders and technical analysts agree that Bitcoin has been in a macro bullish trend throughout its existence. Regardless, there have been several ruthless crypto bear markets. This usually causes the bitcoin price to drop more than 80%, while altcoins can easily drop more than 90%. What can you do at this time?
In this article, we will explain what a bear market is, how to prepare for it, and how to profit from it.

What is a bear market?

A bear market can be described as a period of falling prices in the financial market. Bear markets can be extremely risky and difficult for inexperienced traders to trade. They can easily lead to large losses and scare away investors from returning to financial markets.

Among the merchants there is a saying: “Staircase up, lift down.” This means that upward movements can be slow and steady, while downward movements tend to be more abrupt and abrupt. Why? When the price starts to fall, many traders rush to leave the markets.

They do this either to save money or to take profits on their long positions. This can quickly lead to a domino effect where sellers rushing to exit force more sellers to exit, and so on.

The decline could be further exacerbated if the market is heavily indebted. Mass sales will have an even more pronounced cascading effect, leading to massive sales.

However, bull markets can also experience euphoric phases. During this time, prices are rising at an extremely fast pace, correlations are higher than usual, and most assets are rising at the same time.

Typically, in a bear market, investors are bearish, which means they expect prices to fall. It also means that overall market sentiment is rather weak. However, this cannot mean that all market participants are inactive short positions. It simply means that they expect prices to decline and may look forward to taking a position if the opportunity arises.

Bear market examples

As we have said, many investors believe that Bitcoin has been in a macro bullish trend since it started trading. Does this mean there are no bear markets in this bull run? Not. After Bitcoin jumped to about $ 20,000 in December 2017, a rather brutal bear market ensued.

Since this level has not been exceeded, it can be argued that the accident caused by fears of COVID-19 was just a new test of the lineup. However, there is no certainty in technical analysis, only probabilities.

Other notable examples of the bear market can be found in the stock market. Notable examples are the Great Depression, the 2008 financial crisis, or the 2020 stock market crash due to the coronavirus pandemic. All of these events have wreaked havoc on Wall Street and affected stock prices across the board. Market indices such as the Nasdaq 100, Dow Jones Industrial Average (DJIA), or the S&P 500 index can experience significant price declines during such periods.

Bear market versus bull market – what’s the difference?

The difference is pretty simple. In a bull market, prices rise, and in a bear market, prices go down.

One notable difference, perhaps, is that bear markets can have long periods of consolidation, i.e. sideways movement or variable price action. These are times when market volatility is quite low and trading activity is low. While the same may be true in bull markets, this type of behavior tends to be more common in bear markets. After all, long-term price drops are not very attractive to most investors.

Another thing to consider is the ability to short an asset in the first place. While it is not possible to sell an asset on margin or use derivatives, traders can only express a bearish view of the market by selling cash or stablecoins. This could lead to a longer and longer-lasting downtrend with little buying interest, resulting in a slow and calm sideways price movement.

How to trade the bear market

One of the simplest strategies traders can use in a bear market is to stay in cash (or stablecoins). If you don’t like falling prices, it might be better to just wait for the market to break out of the bear market territory. If a new bull market is expected to emerge at some point in the future, you can take advantage of it when it does. At the same time, if you are a long-term HODL with an investment horizon of several years or decades, a bear market is not necessarily a direct sell signal.

When it comes to trading and investing, it is usually best to trade in the direction of the market trend. This is why another profitable strategy in bear markets can be to go short. Thus, when asset prices fall, traders can profit from the fall. These can be day trades, swing trades, position trades – the main goal is simply to trade in the direction of the trend. However, many opposing traders will look for countertrend trades, that is, trades that go against the direction of the main trend. Let’s see how it works.

In the case of a bear market, this will lead to a long position on the bounce. This move is sometimes referred to as a “bear market rally” or “dead cat bounce”. These countertrend price movements can be notoriously volatile as many traders can take advantage of the opportunity for a short-term bounce. However, until the overall bear market is confirmed, the downtrend is expected to resume immediately after the rebound.

This is why successful traders will take profits (near recent highs) and exit before the downtrend resumes. Otherwise, they can get stuck in their long position due to the continuation of the bear market. Thus, it is important to note that this is a very risky strategy. Even the most advanced traders can take big losses trying to catch a falling knife.


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