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What Are Crypto Bear Markets?

During a bear market, you won't see many smiling faces in the crypto community. Unless traders are shorting cryptocurrencies, nobody's crypto portfolio is rising during this time. Many people will see their crypto assets lose purchasing power as they hold through a bear market. 

While few enjoy living through a crypto bear market, it's an ever-present risk for investors. Below, we'll address FAQs like “What is a bear market in crypto?” and “How does it compare with bear markets in other asset classes?” We'll also share some strategies to preserve your capital and seize potential bear market opportunities.

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What’s a bear market? 

A simple bear market definition could go as follows: There's more supply in the market than demand from investors. In practice, it’s a period of the market being down from previous norms.

When investors say they're in a bear market, it means asset prices are declining. Whether people are trading stocks, precious metals, or cryptocurrencies, a "bearish" sentiment signals depreciating values. 

Most textbook definitions of a bear market claim there needs to be a 20% drawdown from the local high. On top of this, investors use various fundamental and technical factors to determine whether they're in a bear market. 

For instance, most bear markets occur during great macroeconomic stress situations. Issues like war, high unemployment, and inflation may sour investor sentiment. Central banks can increase selling pressure whenever they decide to raise interest rates. 

Technically, many chart analysts use moving averages to determine when prices cross into bear territory. Generally, if the prices in an asset class fall below common trendlines (e.g., the 200-day moving average), technical traders expect market prices to continue to follow a downward trajectory. 

But it's not just the downward price movement that defines a bear market. While every bear market has a broad selloff, there's a different mood during this time. Bear markets are characterized by negative attitudes like depression, fear, and pessimism. 

You'll notice many investors aren't as keen to put their money to work during a bear market. During a bear market, many people hold what they have or panic sell, fearing that more pain is around the corner. Sustained bear markets also tend to have less trading volume and liquidity than during bull runs. 

What is a bear market in crypto?

A crypto bear market has the same bearish features, pertaining to cryptocurrency. During a crypto bear market, the prices of Bitcoin (BTC) and altcoins decline significantly from their recent highs and continue trending downward. You may also notice less media coverage or more negative crypto-related headlines during a bear market. 

While a crypto bear market shares all the traits of a stock bear market, crypto tends to be more volatile and prices may fall further. Although the crypto market cap surpassed $1 trillion in the early 2020s, it's still at a nascent stage compared with U.S. equities or precious metals. 

It takes less money to move crypto up or down, which results in more severe losses during a bear market. Since crypto attracts many speculative investors, it's more likely to fall harder than the stock market

Many crypto-specific metrics can help investors determine whether they're in a bear market. Since transaction data is viewable on the blockchain, many firms research on-chain data. For instance, analysts can monitor the hash rate of the Bitcoin network, which lets them know how many BTC miners are keeping Bitcoin secure. Generally, the lower the hash rate, the higher probability of a Bitcoin bear market. 

Blockchain experts often look into how many tokens flow back to centralized exchanges, which can signal intense sell pressure. Analysts can review network congestion and average daily transactions to see how many people are using various blockchains. 

Bull market vs. bear market

Unlike bears, bulls tend to attack toreadors by thrusting their horns upward. Therefore, a bull market means asset prices are increasing. 

Not only are prices moving up during a bull market, but there's also a more optimistic vibe in the investor community. People feel comfortable taking on risks and investing in stocks or crypto. You'll also notice an uptick in trading volume and positive economic data, such as a high GDP, strong consumer sentiment, and low unemployment. 

How to recognize a crypto bear market

Every investor looks for different features to determine when they're in a crypto bear market. Realistically, there's no one strategy to mark the transition between a bull and bear market. It may take weeks or months before investors admit that a recent downward trend is a legitimate bear market. There are, however, a few features that often occur during a crypto bear market: 

  • Lower highs and lows: If crypto prices are in a bear market, traders should see prices continue moving downward. Even when a cryptocurrency has a mini upswing, these prices tend to hit their head on strong resistance lines before continuing down. When cryptocurrencies continue to make lower highs and lows on multiple timeframes, they're likely in a bear market.  
  • Limited or negative media coverage of crypto: News sites usually only run stories on crypto during peak bull market mania. When a crypto bear market hits, there are generally fewer feature stories about the Web3 industry. Even worse, significant negative headlines may surround crypto during a bear market. 
  • Declining on-chain activity: During a crypto bear market, you probably won't see people using blockchains as much as during a bull market. A decline in network activity suggests there's less interest in crypto, which often translates to low demand for digital assets. 
  • Increase in stablecoin issuance: When crypto traders want to take risk off the table, they often swap their crypto holdings into stablecoins. During crypto bear markets, you may see the stablecoin market cap increase as more crypto investors are sitting on the sidelines. 

How long does a crypto bear market last?

There's no knowing how long any market cycle will last. However, as was the case following the 2017 bull run, crypto bear markets can last for years before a significant rebound. You may have seen some investors refer to these long bear markets as crypto winter. 

Some people believe digital asset prices rise and fall, along with Bitcoin halvings. When Bitcoin's block rewards decrease every four years, crypto traders expect a sharp price increase due to the supply shock. According to this theory, crypto prices rise for a few months after the Bitcoin halving before crashing and falling into a multiyear bear market. 

While the four-year cycle theory is trendy, it's not an exact science. The crypto market has a relatively short price history compared with institutions like the New York Stock Exchange (NYSE). Although the four-year cycle played out in the past, it's too early to say whether it’ll work after every Bitcoin halving. 

Critics also argue that the four-year cycle theory is simply a self-fulfilling prophecy. In other words, the boom and bust cycle happens only because so many people believe it’ll happen. 

Managing a crypto bear market

Crypto bear markets aren't a fun time for long-term investors. However, remember that bear markets are normal across all asset classes. Also, even the worst bear markets of the past few centuries resolve at some point. 

Crypto bear markets offer investors an opportunity to purchase digital assets at a discount. Even if investors don't pick the absolute bottom, they can be sure they aren't buying a token at the top. 

Many long-term investors use bear markets to dollar-cost average (DCA) into tokens they believe have a bright future. DCA is an investment strategy that involves buying small increments of an asset at regular intervals. Long-term crypto investors use DCA to manage volatility and even out their average price. 

Since asset prices are so low during a bear market, it's usually not advisable to sell off during significant corrections. Unless you desperately need the money or you've lost confidence in your crypto's fundamentals, it's best to have patience and wait for more favorable tailwinds to enter the crypto market. 

Wrapping up

You'll know you're in a crypto bear market when everyone expects prices to trend lower. While crypto bear markets create a gloomy atmosphere, remember that serious crypto projects continue to develop during these times. Bear markets sweep away crypto scams or tokens lacking solid fundamentals. For long-term investors in solid Web3 projects, crypto bear markets may present great bargain opportunities. 

However, a new company aims to foster a positive crypto environment by giving a share of its crypto to everyone on the planet for free. Enter Worldcoin. We’re also airdropping free DAI to anyone who downloads our app. Subscribe to our blog to learn how to securely buy, store, and trade crypto, among others. 

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