Since Bitcoin’s launch in 2009, several crypto crashes have occurred, including some that have completely wiped out specific altcoins. Since those crashes happened in lesser-known forms of crypto or without extensive media coverage, not all investors are aware of them.
Despite the crashes, however, there haven’t been any sustained bear markets in Bitcoin, which is the de facto benchmark for cryptocurrencies.
What Is a Crypto Bear Market?
A crypto bear market is one in which the value of major cryptocurrencies, such as Bitcoin, have fallen at least 20% from their recent highs, and are continuing to fall. By contrast, a crypto bull market is one in which the major cryptocurrencies are on the rise.
One of the most famous crypto crash occurred in December 2017, when Bitcoin fell from almost $20,000 per coin to just over $3,200 in a matter of days. After that, it rallied, reaching a price of nearly $65,000 per coin in April of 2021, before dropping again to below $32,000 in May.
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Traders aiming to time the markets aim to purchase cryptocurrencies or other assets at the bottom of a bear market, but it’s often difficult to know when a bear market has actually ended.
Why Is It Called a Bear Market?
The terms bull and bear markets come from stock trading, and according to some accounts their origins come from the style of attack each animal uses – a bull will charge with its horns pointed upward. A bear, on the other hand, towers over its opponents and swipes down.
Similarities Between Crypto and Stock Bull & Bear Markets
Investors don’t have experience with the performance of cryptocurrency during a stock bear market. The last true, sustained stock bear market occurred in 2007-2009. At the time, Bitcoin had just launched, gaining attention, if not yet acceptance. While calling a bull or a bear market in stocks or in cryptocurrency requires technical analysis of values, there are several other that both markets have in common:
The value of both stocks and cryptocurrencies fluctuate over time, but cryptocurrencies tend to gyrate more severely due to liquidity constraints within the market and a less established derivatives market.
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In both the stock market and cryptocurrency negative trader sentiment can portend a bear market. However, contrarian traders in both cases may see market dips as an opportunity to buy cryptocurrency at a discount.
Bear markets, in both stocks and cryptocurrency, can reflect external factors that change the way that investors value a particular asset. Those factors can include overall economic strength, interest rates, or geopolitical factors.
What Are the Signs of a Crypto Bear Market?
One of the most famous maxims in all of investing is “buy low, sell high.” In four words, it’s how investors make money. And it’s why, for crypto investors, knowing when a bear market is coming, or when one is just about to end, can make all the difference.
This is where the relative youth of the crypto market makes things difficult. With the stock market, economists, analysts and traders have decades and even centuries of data to sift through to find the trends and triggers that occurred just before a bear market turned to a bull and vice versa. Bitcoin, on the other hand, was launched in 2009.
Some warning signs of a crypto bear market include:
• Lower trading volume: This could indicate that people have begun holding their coins amid market uncertainty.
• “Backwardation”: This occurs when the price of an asset in the futures market is lower than its current market price.
• Death cross: This is a technical indicator in which an asset’s 50-day moving average crosses its 200-day moving average.
What Are Indicators of a Crypto Bull Market?
Even though crypto’s history has essentially been a very lengthy bull market followed by a short, terrifying market free-fall, and another market bull run, some trends have popped up for investors to watch.
• Liquidity. Crypto took a hit at the beginning of the lockdowns in spring of 2020, when investors needed cash. But so did everything else. Then it rose, as the crisis receded and the Fed pumped trillions into the economy, aiding in Bitcoin’s liquidity and other cryptos alike.
• Adoption: If more companies and financial institutions adopt crypto, then it should move more in step with the economy, and be subject to less violent fluctuations. It’s a sign that the Wild West is being tamed. But adoption is a double-edged sword. If it’s your cab driver and barber who are talking about crypto, then it could mean that the market is oversaturated.
Should I Invest in Crypto?
There is also a baseline level of uncertainty with crypto that doesn’t exist in many other asset classes. While nobody thinks that regulators will shut down or curtail the stock market or that hackers will breach a stock exchange, these are common concerns with Bitcoin and other forms of cryptocurrency.
In addition to concerns about cryptocurrency regulation and blockchain security, there is also a growing debate about the energy costs of Bitcoin and other cryptocurrencies, which adds to the question mark over the long-term viability of crypto as a whole, at least in its current form. Those existential doubts rear up whenever Bitcoin, or other major cryptos, take a steep decline, or fall for too long.
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That existential doubt can also be a major plus for investors, however. The shadows over crypto means that their declines are often incredibly steep. That creates regularly occurring opportunities to buy the crypto of your choice at a very steep discount, if you believe in the long-term growth of crypto as a whole, and if you can wait for the dip. Proponents of cryptocurrencies, including Bitcoin, believe that its growing adoption and use make it a smart long-term investment.
Recommended: Investing in Cryptocurrency: What You Need to Know
Like all assets, cryptocurrencies go through cycles in which their value rises and falls. For short-term investors, especially, knowing the signs of a bear market can help you create a portfolio strategy that makes sense for your risk appetite and financial goals.
One easy way to start building a portfolio that includes crypto is by opening an account on the SoFi Invest® brokerage platform. You can use the active investing option on the app to purchase stocks, exchange-traded funds, and cryptocurrency.
Photo credit: iStock/Eva-Katalin
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.