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The cryptocurrency market has been known for whipsaw volatility, and when crypto prices dip, conversations often gravitate towards “bear market” talk.
But what is a bear market in crypto, and how can you use it to your advantage?
In this guide, we’ll discuss the differences between bear market vs. bull market, how to spot each, and how to use a bear market effectively in crypto investing.
Key Takeaways on Bear Markets
- Bear markets bring higher volatility, with prices moving up or down quickly due to lower liquidity.
- The overall price trend in a bear market is down, despite frequent short-lived rallies.
- Bear markets present buying opportunities. However, it’s still important to choose investments carefully.
- Technical indicators can help investors choose entry and exit points while also managing risk.
- Dollar-cost averaging allows investors to leverage bear market lows without closely monitoring the market.
What is a Bear Market?
A bear market is a financial market condition characterized by a prolonged period of declining prices, typically accompanied by a sense of pessimism and low investor confidence. Although bear markets occur in many financial markets, including stocks, bonds, and cryptocurrencies, the definition can vary. In the context of crypto, the bear market meaning is often associated with a significant and prolonged decline in the value of digital assets.
In stock trading, for example, many agree that a bear market occurs when prices fall by 20% or more from their recent highs, with the decline lasting two months or longer. In crypto, some don’t agree on the two-month rule — not in a market where prices can change by double-digit percentages in a day.
Both bull and bear markets take inspiration from the characteristics of powerful animals. Bears swipe downward with their paws when attacking, causing massive destruction. In contrast, bulls charge forward with their horns, symbolizing upward price movements in markets.
Characteristics of Crypto Bear Markets
Several distinct characteristics set bear markets apart from other bull markets and transition periods. Understanding these properties is crucial for investors to navigate the complex world of cryptocurrency investing.
High Volatility and Sharp Price Declines
Even in the best of times, crypto markets exhibit much higher volatility than mainstream financial markets. During bear markets, this volatility becomes more pronounced. Prices may plummet by 20-30% or more in a matter of hours or days.
Bear markets provide more trading opportunities for traders on both the long and short sides of the trade. Although the overall trend is down during bear markets, short-term reversals can add to trading profits.
Reduced Trading Volume and Liquidity
As investor sentiment turns bearish, trading activity tends to decrease significantly. During the 2022-2023 bear market in crypto, Bitcoin trading volume waned, as shown on the volume chart below. By early 2024, trading volume showed a strong uptrend.
This reduction in trading volume leads to lower liquidity, making it more challenging for investors to buy or sell assets quickly and at fair prices. The decrease in trading volume clearly indicates that investors are losing interest in the market, further exacerbating the downward trend due to a lack of consistent buyers.
Increased Price Correlations
During a crypto bear market, the correlations between different cryptocurrencies tend to increase dramatically. Bitcoin and Ethereum differ greatly in both narrative and use case, yet Ethereum followed Bitcoin’s lead, falling sharply when the music stopped in late 2021.
During a crypto bear market, almost all crypto assets tend to fall together, reducing the ability to find a safe haven within the crypto market. Strong fundamentals, promising new partnerships, and other positive investment criteria often don’t matter. The market continues its downward trajectory until it finds a bottom.
Investors with a diversified portfolio may find that their assets are still highly correlated. On the other hand, bear markets offer the opportunity to buy strong projects at a discount as the market falls for nearly all crypto assets simultaneously.
Prolonged Periods of Falling Prices and Negative Sentiment
Bear markets often last a year or longer, shaking all but the most diamond-handed investors. Due to this negative sentiment, a crypto bear market becomes a self-fulfilling prophecy in many ways. As prices fall, investors become more pessimistic, with many cutting their losses on the way down.
What Causes a Crypto Bear Market?
Often, a combination of factors, rather than just one, contributes to crypto bear markets. Both internal and external factors can cool an overheated market, causing the trend to reverse and sparking a sell-off.
Internal Causes of Crypto Bear Markets
Crypto bear markets can be triggered by a variety of internal factors, including:
- Speculative volatility: Although real-world use cases are emerging, crypto remains a speculative asset. Sentiment and hype can lead to rapid price increases and declines. With much of the market fueled by speculation, implosions in the space can easily shake investor resolve.
- Leverage: Crypto markets often use much higher leverage levels (borrowing to trade) than traditional financial markets. A relatively small drop in crypto terms can trigger waves of liquidations.
- Regulatory uncertainty: Changes in regulations, government scrutiny, and uncertainty about cryptocurrencies’ legal status (and future) can create fear and lead to sell-offs.
- Technological vulnerabilities: Security breaches, hacks, and technical glitches can erode investor confidence and contribute to market downturns.
- Market manipulation: The relatively unregulated nature of the crypto market makes it susceptible to manipulation, such as “pump and dump” schemes, which can create artificial price spikes and declines.
- Crypto-specific events: High-profile failures like TerraUSD and FTX can shake investor confidence and trigger widespread sell-offs.
External Causes of Crypto Bear Markets
In addition to internal factors, crypto bear markets can also be influenced by external factors, including stock market trends. Bitcoin often trades in tandem with the Nasdaq market, although it can diverge in response to other economic factors.
- Macroeconomic pressures: Rising interest rates, inflation, and economic recessions can impact the crypto market, causing investors to become risk-averse and withdraw from volatile assets. For example, the U.S. Federal Reserve’s aggressive interest rate hikes in 2022 reduced the attractiveness of cryptocurrencies and contributed to a decline in investor sentiment.
- Inflationary pressures: High inflation can erode purchasing power and create economic uncertainty, leading investors to seek safer investments with more stable returns.
- Financial market trends: Trends in global markets, such as stock prices and bonds, can also influence the crypto market. Crypto markets, which are open 24/7, may sell off before stocks in response to economic news. These selloffs can mark the beginning of lasting downturns.
Given the strong correlation between Bitcoin halving cycles and bull markets, bear markets tend to reflect a market that’s begun to lose momentum. Any of the potential triggers above can cause an already wobbly market to fall.
Indicators of a Bear Market
Is a bear market good or bad? The answer might depend on timing and which positions you hold when the bear awakens from hibernation. By learning to recognize the signs of a bear market, you can adjust strategies as needed rather than just riding out the prolonged downturn, losing time and often money.
While it’s impossible to predict with certainty when a bear market will occur, there are several indicators that can suggest a downturn is imminent. Let’s examine each of these in more detail.
Market Trends and Charts
Technical analysis of market trends and charts can provide valuable insights into the market’s likely direction.
One key indicator is the Death Cross, which occurs when the 50-day moving average (MA) crosses below the 200-day MA. This bearish signal has been correlated with bear markets in various asset classes, including cryptocurrencies.
In the chart, you can see the death cross that marked the beginning of the 2022 bear market. The two following crossovers occurred as the 50 and 200-day moving averages were moving in close correlation due to more gradual price changes. The market soon recovered in both cases.
Trading volume can also provide valuable insight. Volume for key assets like Bitcoin gradually fell, approaching the peak in late 2021, suggesting the BTC market was losing steam. The death-cross moving average crossover didn’t occur until 60 days after the peak, but trading volume gave an early warning.
Sentiment Analysis
When bearish, the market sees more bad news ahead. Although technical indicators can provide insight, markets also run on emotion.
Sentiment analysis gauges investors’ overall attitude toward the market. Let’s explore some common indicators of bearish sentiment.
Fear and greed index
A metric that measures investor sentiment based on factors such as price volatility, trading volume, and sentiment surveys. The most commonly used crypto fear and greed index was launched in 2018 and incorporates social media sentiment as one of several factors. Many traders use fear and greed as a contrarian signal. Extreme greed often correlates with market peaks, whereas extreme fear may indicate a short or long-term bottom.
Put-call ratio
A ratio that compares the number of put options (bets against the market) to call options (bets for the market). A high put-call ratio can indicate bearish sentiment.
Social media sentiment
Analyzing social media posts and comments can provide insights into investor attitudes towards the market. Although there are tools to measure trading sentiment on social media, many traders already know the pulse of the market from following their own feeds.
Fundamental Analysis
Crypto fundamental analysis involves examining the underlying factors that drive the market. These can include economic indicators or regulatory changes that affect the market.
Economic indicators
GDP growth rate, inflation rate, and unemployment rate can impact investor confidence, risk tolerance, and spending habits.
Regulatory changes
Changes in regulations or laws governing cryptocurrencies can impact their adoption and use. One of the better examples centers on China’s Bitcoin ban in 2021, which contributed to the 2022 bear market.
Global events
Major global events such as wars, natural disasters, or pandemics can create uncertainty and impact investor confidence. However, these are just one data point and can move the market in unexpected directions. For example, increased liquidity from the COVID stimulus made it into trading markets, pushing markets higher.
On-Chain Metrics
On-chain metrics refer to analyzing data from blockchain networks to gain insights into investor behavior. Some on-chain indicators of a potential bear market include:
- Transaction volume: A decreasing transaction volume can indicate reduced interest in the market.
- Wallet balances: Changes in wallet balances can indicate shifts in investor behavior. Several online tools allow traders to monitor whale wallets for transfers to or from exchanges.
However, it’s essential to remember that no single indicator is foolproof, and combining multiple indicators with fundamental analysis is often necessary for accurate predictions.
Biggest Crypto Bear Markets
2022’s bear market is often the most discussed due to its recency, but the cryptocurrency market has experienced several bear markets, with some being more severe than others.
While prolonged downturns can be challenging for investors, they are a natural part of the market cycle. Bull markets follow bear markets, usually with a slow recovery from the lows. Let’s take a look at the three biggest crypto bear markets:
The 2011 Bear Market
2011’s bear market was one of the earliest and most significant in cryptocurrency history. The Mt. Gox hack triggered the crash when a substantial amount of Bitcoin was stolen. By the end of the price decline, Bitcoin lost over 90% of its value.
The 2013-2015 Bear Market
Several factors, including the ongoing Bitcoin theft from Mt. Gox and the shutdown of Silk Road, influenced the 2013-2015 bear market. Bitcoin experienced a significant price drop, losing more than 80% from its 2013 highs.
The 2018 Bear Market
2018’s bear market, often called “the great crypto crash,” followed the 2017 ICO (initial coin offering) bubble. The bursting of the ICO bubble, along with regulatory concerns and scams, led to a sharp decline in cryptocurrency prices. This period marked the first major mainstream crypto crash, impacting many investors.
It’s also important to remember that a bull market has followed every bear market. After each downturn, the cryptocurrency market has bounced back stronger than ever before.
The Difference Between a Bull and a Bear Market
Bull and bear markets mark two distinct market conditions driven by internal and external factors, which impact investor behavior in opposite ways. Let’s examine the key differences between these two types of trading markets.
| Characteristic | Bull Market | Bear Market |
| Supply and Demand | High demand, low supply | Low demand, high supply |
| Impact on the Economy | Positive, growth-oriented | Negative, less activity |
| Liquidity | High liquidity, easy to buy/sell | Low liquidity, difficult to buy/sell |
| Investor Sentiment | Optimistic, confident | Pessimistic, fearful |
| Price Trends | Rising prices, increasing market cap | Falling prices, decreasing market cap |
Supply and Demand
In a bull market, demand is high, and supply is low, driving up prices as traders compete for coins. In contrast, a bear market sees lower demand and high supply, leading to downward pressure on prices.
Impact on the Economy
A typical bull market has a positive impact on the economy, promoting growth and investment. On the other hand, a turbulent bear market can have a negative impact, leading to economic contraction and reduced investment. As crypto is a relatively small part of the investment world, these economic impacts focus on crypto ecosystems.
Liquidity
Bull markets attract more market participants. This higher liquidity makes it easy to buy and sell assets. In contrast, bear markets often experience low liquidity, making it more difficult to enter or exit positions.
Investor Sentiment
Optimism and confidence reign in a bull market, while investors become pessimistic and fearful in a bear market. These investor sentiments can reinforce themselves, exacerbating price trends in crypto markets.
Price Trends
The most obvious difference between bull and bear markets is that prices rise in a bull market and fall in a bear market. However, expect turbulence in both directions. Markets don’t go straight up or down. This volatility, particularly in crypto bear markets, creates trading opportunities.
Next, let’s explore ways to trade a bear market to reduce risk and discover buying opportunities.
How to Invest in a Bear Market
Lower prices present buying opportunities, but bear markets also offer more trading opportunities.
Investment Possibilities
Bear markets put well-established cryptocurrencies like Bitcoin or Ethereum on a fire sale, potentially setting the stage for long-term gains. Bitcoin’s dominance means that BTC often moves the entire market. As a result, promising new projects with strong fundamentals likely also trade at a discount. However, always do your own research (DYOR) before investing.
When to Sell and When to Hold
The most challenging aspect of bear market investing often centers on learning when to buy, sell, or hold. Consider selling if you need liquidity immediately, have reached your profit target, or see that the project’s fundamentals have changed for the worse.
On the other hand, holding may be the better option if you believe in the project’s long-term potential and are willing to ride out the volatility.
You can also manage risk by selling a percentage of your position at specific profit goals.
Timing Your Entry and Exit
Market indicators provide several clues regarding entry and exit points. However, it’s best to use multiple indicators together. Let’s examine some of the easier-to-understand indicators.
- Death Cross: A 50-day moving average crossing below a 200-day moving average often signals a downtrend and a sell signal. Watching the 50-day, 200-day, and trading volume can help you identify trends, although moving average crossovers are lagging indicators.
- Golden Cross: A 50-day moving average crossing above a 200-day moving average often signals an uptrend, indicating that the bear market may be ending. This can represent a buy signal, but watch other indicators as well.
- Low trading volume: Low trading volume can indicate a lack of interest in the market, potentially leading to further selloffs. Again, low trading volume by itself leaves room for error.
- Fear and Greed Index: Extreme fear or greed can indicate the market might reverse course.
- On-chain metrics: Analyzing changes in wallet balances, transaction volume, and other on-chain metrics provides insights into usage stats that can indicate bullish or bearish trends.
Technical analysis tools like charts and indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) can help identify trend reversals that could signal buying opportunities during bear markets.
Dollar-cost averaging can also be an effective strategy during bear markets. Investing a fixed amount of money at regular intervals, regardless of the market’s performance, helps smooth out the effects of volatility.
If you cannot monitor charts and indicators, this strategy can help. In practice, you’re buying more at the lower prices and less as prices rise. You can use the same disciplined approach to exit a position, removing the need to time the market perfectly.
Conclusion
Although often disheartening, remember that bear markets are a natural part of the market cycle. Prolonged downturns present opportunities to buy assets at discounted prices. Technical analysis tools, such as charts and indicators, can help you identify buying opportunities and manage risk effectively. Dollar-cost averaging also lets you leverage bear market lows without the need to monitor the market as closely.
FAQs
What is a bear market in crypto?
How long does a crypto bear market last?
What causes a bear market in crypto?
Should I sell my crypto during a bear market?
References
- Monthly Federal funds effective rate in the United States from July 1954 to March 2025 (statista.com)
- Crypto Fear & Greed Index (alternative.me)
- Bruised by stock market, Chinese rush into banned bitcoin (reuters.com)
- Economic Impact Payments (treasury.gov)
- Russian Nationals Charged With Hacking One Cryptocurrency Exchange and Illicitly Operating Another (justice.gov)
- Ross William Ulbricht’s Laptop (fbi.gov)
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