You have probably heard the terms bullish and bearish trends if you’re interested in trading cryptocurrencies. These crypto-assets, also called virtual, electronic, or digital currencies use cryptography for security purposes. The cryptography technology makes double-spending or counterfeiting digital coins almost impossible.
Also, most cryptocurrencies use blockchain technology to create a decentralized network and a digital ledger that a disparate computers’ network enforces. The defining trait of cryptocurrencies is their decentralization. That means no central authority, like a bank or government, issues, controls, regulates or manipulates them. Perhaps, that’s why more people want to own, use, and trade these crypto assets.
But the absence of a central regulatory or controlling authority makes their markets highly volatile. And this volatility creates opportunities for trading these virtual currencies or digital assets. But apart from being tradable commodities, cryptocurrencies are usable currencies. For instance, you can find cash slots that allow gamblers to fund their accounts with cryptocurrencies like Bitcoin and Ethereum. Also, some online and local merchants take Bitcoin payments for services and products.
However, trading is the most popular activity around prominent cryptocurrencies. Traders use the terms “Bull” and “Bear” to describe the stock markets’ performances. These terms refer to an appreciating and a depreciating value in the stock markets. Contextually, a bull market is a rising one while a declining market is a bear one.
Since the crypto market fluctuates almost every day, traders use these terms to refer to an extended downward or upward movement period. Similarly, substantial swings in any of these directions indicate the market changes.
But these trends confuse new crypto traders. This article explains the bullish and bearish trends in the crypto market. Understanding these market trends is crucial because they can affect your mindset significantly when trading or investing in a cryptocurrency.
Bullish Market Definition
So, what is a bull market in crypto trading or investing? A bull market is a period of favorable economic situations for trading or investing in a commodity or asset. It’s a rising market, with positive trader or investor sentiments about the current uptrend.
Asset prices increase consistently during a typical bullish market, with high employment levels and a strong economy. A bullish market applies to traditional markets and cryptocurrency markets. However, more consistent and robust bull-run phases are typical in crypto markets.
The unusual scenario is a bull run with a 40% price increase over two days in crypto markets. That’s because of the relatively smaller size of crypto markets than conventional markets. Therefore, crypto markets are more volatile.
Many people believe that the “bull market” term came from a fighting style for bulls where each attacks the opponent by moving horns in an upward motion. A bullish market in the contemporary world connotes optimism about the continued value of an asset.
In the crypto markets, traders and investors observe the value of cryptocurrencies grow with optimistic investors trying to maximize their profits with rising portfolios. Also, favorable economic conditions create opportunities for traders and investors to maximize returns from their investments.
Simply put, an investor starts the bull market by buying securities. Also, they can do this using fiat currency because bullish markets raise the value of securities. A bull market can go on provided the demand is higher than the supply. But eventually, the market turns and shifts into a bearish trend.
Causes of a Bullish Market Trend
Investors start a bull market if they feel that the cryptocurrency’s price will rise and maintain the trend for a more extended period. Therefore, they purchase a crypto asset or stock at a lower price with the optimism that they will reap a good return on investment.
But other factors can also lead to a bullish market trend. For instance, low unemployment rates and high gross domestic product can cause a bull market. Investors’ confidence increases when market conditions are favorable.
Here are more factors that cause a bullish trend in the crypto market:
- Pop and mainstream culture support: If the pop and mainstream cultures support a cryptocurrency, its bullish trend can start. For instance, DJ Khaled and Paris Hilton influenced the 2017 Bull Run in the crypto market.
- Growing optimism: Optimism in the traditional finance sector can also cause a bull run. For instance, JP Morgan’s sentiments about Bitcoin rallying up to $146,000 influenced its Bull Run some time back.
- Institutional capital’s introduction: When corporate institutions embrace crypto assets, such as MicroStrategy, more people develop optimism towards it, leading to a bull run.
- Unique events: Some events like Covid-19 that threaten conventional finance prompt more people and institutions to rethink cryptocurrencies. Thus, more traders and investors may want to purchase crypto assets to cushion themselves from traditional finance challenges.
Since cryptocurrencies are relatively new but are often used in online casino games, it’s not easy to determine the exact causes of a bullish market trend. Nevertheless, the above factors have proven their impact on the crypto market.
Bearish Market Definition
A bearish market is one with a significant downtrend for a short period. This market trend starts when the commodity or asset prices drop rapidly. Most traders, investors, and experts consider a market trend bearish when a cryptocurrency’s value drops by at least 20%, and the downward movement continues.
For instance, Bitcoin, the most prominent digital currency, dropped to $3,200 from $20,000 in December 2017 within a few days. Typically, a 20% dip from the previous highs characterizes a declining bear market. Consequently, prices are generally low with a continuous decline.
A downward trend affects traders’ and investors’ outlooks while perpetuating the declining pattern further. Traders and investors believe that the “bear” term originated from the bear’s fighting style. A bear starts high and attacks downward with claws, pushing down its weight.
High unemployment rates and a slow economy characterize a bear market with geopolitical crises, poor economic policies, natural disasters, and burst market bubbles as the possible causes for these conditions. A bear market lacks confidence and general optimism among investors.
Traders and investors aim to buy assets during the bear markets in the crypto market, particularly during their rock bottom. But, determining whether a bear market has ended is not easy. Thus, investors have a hard time taking the gamble and buying low-value cryptocurrencies that might or may not recover.
Typically, prices drop when market players get news about unfavorable conditions about a stock or a cryptocurrency. A downward spiral can cause more investors or traders to hold off on their assets, believing that more negative news could come and prepare themselves for the worst situations possible.
In some cases, traders and investors sell their crypto holding after panicking. And this creates a further downward trend. Eventually, a bear market can calm down, and investors gain confidence, leading to another bull cycle.
Causes of a Bearish Market Trend
Typically, a downward pricing trend causes a bear market. A continued price decline means investors lose confidence that the asset’s value will recover, driving a further downward movement. Factors like pandemics, political crises, and slow economies can trigger a bearish market trend.
Here are possible causes of a bearish trend in the crypto market:
- Regulatory interventions: Regulatory institutions can cause a bearish trend if they intervene in the crypto market. For instance, the Chinese government caused a bearish trend by restricting Bitcoin mining and trading. The intervention stopped some mining operations, triggering widespread uncertainty among crypto traders and investors.
- Negative sentiments: The traditional finance sector can also cause a bearish trend by expressing negative views about the crypto market. For instance, Jamie Dimon, the JP Morgan CEO, described Bitcoin as a fraud before the crypto asset hit $20,000 per unit leading to its prompt crashing.
- Federal funds rate: Altering the federal funds rates impact the crypto market. That’s the rate at which financial institutions like banks borrow or lend the excess reserves.
- Backwardation: Backwardation implies a lower asset’s future market price than its current market value.
- Death cross: Technically, the death cross is an indicator for an asset crossing from 50-day with an average move to 20-day.
Again, it is difficult to determine when the crypto market will take a bearish trend due to its relative newness.
Bullish vs. Bearish Market Trends
Both the bullish and bearish market trends describe the cryptocurrency’s price direction. However, investors can note specific differences. While bullish and bearish market trends affect cryptocurrencies and stocks, they also differ because of virtual currencies’ volatility. Crypto markets move faster once a bear or bull market takes hold. Also, bear and bull markets are not easy to spot, which is the case for stocks.
Nevertheless, crypto traders and investors can take advantage of bearish and bullish market trends. For instance, a trader can get into a bullish market early to use the rising prices to profit from the increasing values and exiting at their peak. Unfortunately, nobody knows when a bullish trend will reach its peak.
On the other hand, investors can reduce their positions, especially in lesser-proven crypto assets, upon sensing a bearish trend. In that case, the investor can move their holding into precious metals or cash that may hold ground against future crashes. Also, the move can put an investor in a better position for a potential bearish market trend. Once a bullish market trend ends, many cryptocurrencies are available at lower prices, creating opportunities for doubling investments.
Parting Shot
Several factors drive bullish and bearish trends in the crypto market. Therefore, crypto traders and investors should observe past patterns and research extensively to understand bear and bull trends. They can make wise predictions and crypto trading or investing decisions.
