As a new cryptocurrency investor, you are likely to hear the terms bull market and bear market. In this article, I'd like to provide a general overview of what bull markets and bear markets are, the differences between them, some typical trading strategies that are employed in both of these types of markets, and some similar terms that you may hear in the cryptocurrency world.
The first thing to notice about bull and bear markets is that there is no exact, precise definition of either. For example, Investopedia describes a bear market as a situation in which assets fall 20% from their high while also being accompanied by negative sentiment. However, they also acknowledge that this is somewhat of an arbitrary number. Further, where one investor sees pessimism and more gloom on the horizon, another investor may believe that the market has reached its bottom and that good times are ahead.
At least with the bear market, we have the arbitrary definition price decline of 20%, but the definition of a bull market is even more nebulous as it is simply a situation in which prices are rising or expected to rise. This rise can last for weeks, months, or years. Moreover, even as prices are generally rising, there can still be days when the asset will close lower than it opens.
Lack of Predictive Value
Given the ambiguity of the terms bull & bear market, it's important to ask what relevance they have to actual investing or cryptocurrency trading strategies. I believe that each investor has to interpret the significance and probability of a bull or a bear market for themselves.
For example, let's suppose that we have had two months of continuously rising cryptocurrency prices. All of a sudden, prices drop for two or three consecutive days. One investor might interpret this as temporary volatility in an otherwise strong bull market, whereas another investor might interpret this as the beginning of a bear market.
Not only can it be difficult to determine whether something is or isn't in a bull or bear market, but there's absolutely no way of knowing how long such a thing will last. We know that the stock market, and cryptocurrencies, to a greater extent, can be highly unpredictable and a bull market can transform into a dip all of a sudden. The opposite is also true. Therefore, even if we were to have a clear definition of the term bull or bear market, there would be no certainty regarding how long this trend would last.
Therefore, I think the most important takeaway is to understand the meanings of the terms bull and bear market without using them as a predictive tool. I believe that the terms bull and bear market are useful for describing the past performance, but, given the volatility of the markets, and crypto, in particular, it is important to remember the saying that “past performance is no guarantee of future results.
As always, I hope you found the article useful, and thanks for reading!