Think teddy bears, Winnie the Pooh, Paddington, or Baloo. The bears in pop culture are often cute and friendly. Not so with the market. The “bear markets” are dreaded by investors, and the “bulls” are welcomed. If you are new to investing and find the imagery and the terms confusing, we hear you.
This simple explainer will help you understand what bull and bear markets are and how they affect investment decisions.
What is a bull market?
To begin with, call to mind the Charging Bull of Wall Street. The 3,200-kilogram bronze bull sculpture symbolizes the aggressive financial optimism and prosperity that one sees during a bull market.
The financial market is driven by consumer confidence and optimism. These are at their highest in a bull market. A bull market is a period when investment prices are peaking steadily, which indicates that the economy is thriving. It is also a time of economic boom; there are more employment opportunities, and there is a thriving economy.
A notable feature is that investors buy and hold on to assets in the bull market as the market is driven by increased buyer activity. An increase of at least 20% in 8 weeks indicates a bullish market trend.
Why markets go up in a bull market
Bull markets are born due to several factors. Let’s talk about some of them.
Monetary stimulus
Bull markets are born when there’s increased government spending in the form of rescue packages and stimuli. Governments loosen their purse strings when markets are in trouble—for instance, during a bear market. Thanks to their stimulus, struggling businesses get a breather, and investor confidence in the economy rises.
Strong corporate performance
Publicly traded companies can also fuel a bull market by reporting impressive earnings. When blue-chip companies are confident about their prospects, they produce a ripple effect that leads to better market performance. The companies themselves benefit from increased activity in the stock market, while other firms take a cue and increase spending to take advantage of market growth.
Features of a crypto bull market
The traditional market and the crypto market can both be bullish. A crypto market that is bullish usually presents some features that indicate changing market conditions.
1. A rise in crypto value
A crypto bull market is marked by a fast rise in market prices and is characterized by volatility. You may see a massive surge in the value of top cryptos within a few days or weeks. Since crypto markets are smaller than financial markets, bull runs last longer.
2. Adoption by traditional institutions
A crypto bull market also witnesses rising confidence from traditional firms and large corporations. Traditional finance firms begin to accept crypto as a viable asset as they are keen to take advantage of the rise during a bull run. Also, large corporations accept crypto as payments and even purchase them as commodities.
3. Positive mainstream support
Pop culture and media can also trigger crypto bull runs. In such cases, celebrities like Elon Musk back crypto, while the media runs feature stories on the resulting crypto market trends.
How do bear markets work?
A bear market is the opposite of a bull market. When things get bearish, there is low consumer confidence and overall pessimism. A bear market occurs when investment prices plummet, indicating that the economy is in decline. The bear market is also described as a falling market since the prices are dropping, signaling economic strain.
In this type of market, unemployment peaks as people lose their jobs because of reduced spending by investors and businesses. Another notable feature of the bear market is that investors sell short, hoping that they might be able to buy back investments at lower prices later. A decline of at least 20% in 8 weeks generally indicates a bearish market trend.
Why markets go down in a bear market
Bear markets are characterized by market downturns triggered by various factors.
Unforeseen and uncontrollable events
Events such as war, pandemics, or natural disasters are often unforeseen. But, when they happen, they invariably trigger a bear market as a result of the panic. In the past, such events have had serious economic impacts that lasted for extended periods.
High risk-taking in the stock market
Bear markets can also be human-made when market actors take uncalculated risks. Traders usually bet on the future or performance of some commodities and markets, but the consequences can be dire when their predictions go wrong. Too much investment in a particular market leads to a bubble that runs the risk of bursting, leading to a market crash.
Features of a crypto bear market
Crypto bear markets are usually accompanied by waning customer and investor confidence in crypto assets. The following features usually are apparent during a bear market.
1. Decreasing crypto value
In a bear market, crypto suffers from decreasing value as investors dump their assets to avoid further losses. While some bear runs are characterized by holding—as investors stop selling their crypto—most of them see investors rushing to dump, which leads to losses worth millions.
2. Negative sentiments from traditional finance
Crypto bear markets are also characterized by negative perceptions or sentiments from traditional and respected financial institutions. For example, when organizations such as JP Morgan issue statements against crypto, the effects are usually felt across the market.
3. Interventions
Since bear markets usually lead to losses in fortune, governments and other regulators can step in. Government actions and restrictions can increase bear market runs, increasing uncertainty for investors.
Examples of both markets from the crypto world
The crypto world has seen incredible bull runs and experienced damaging bear runs, both of which have made many re-evaluate their investment choices.
A classic bull market was seen in 2021 when Bitcoin saw a 60% rise in value between September and November. The rise from $40,000 to $67,000 in a few weeks inspired confidence in crypto. Yet, after the incredible bull run, a debilitating bear run followed.
The Bitcoin crash in December 2021 was a perfect example of a bear market in the crypto world. The crypto saw a 50% dip in value, plummeting from $67,000 to $35,000. The decline in Bitcoin’s value echoed throughout the cryptocurrency world as other coins, too, suffered a decline in prices.
Should you buy in a bull or bear market?
Investors employ different market strategies, with the majority choosing to buy during a bull rather than a bear market. Bear markets are risky for investors as prices are extremely volatile and risks of loss in value are high. Bull markets are safer for investors since stocks and commodities often recover and perform better over time. Novices are likely to be tempted to invest in the bear market, but it is not advisable.
Investing opportunities in a bull market
Investments are all about risks, and there are great opportunities for investors in a bull market. To invest in a bull market, timing is everything since getting in early allows you to buy low. Investors can take advantage of the rising prices by chasing in and dumping before the commodity peaks or the bubble bursts. Some crypto investors hold on to their purchases in a bear market since losses are usually temporary.
Investing opportunities in a bear market
When bearish trends emerge, best practice dictates that one should reduce positions in commodities or weaker cryptos. Bear markets tend to punish lesser-proven cryptos that take longer to recover, creating serious losses. Investing in a bear market is risky, but seasoned investors can take advantage of market trends.
FAQs
Is it better to buy in a bull or bear market?
The best approach is a diversified one that aligns with your financial goals. It’s also important to consult with a financial advisor and conduct thorough research before making investment decisions in either market condition.[
Why is it called a bear vs. bull market?
These terms have become metaphors to describe market conditions, with “bear” representing a decline and “bull” representing a rise in prices. They’ve been used in financial jargon for many years and are integral to understanding and discussing market trends and investor sentiment.
Is it good to buy in a bear market?
Buying in a bear market can be a viable strategy, especially for long-term investors, but it requires careful planning, diversification, and a focus on your individual financial situation and goals.
What is bull and bear in investment?
These terms are often used to describe market conditions and sentiment, helping investors and analysts understand market dynamics. It’s essential to note that the transition between bull and bear markets can be influenced by various factors, including economic data, geopolitical events, and investor psychology.
