Contents

• Introduction
• What is the spot market?
• Bear Market Example
• What is the difference between a bear market and a bull market?
• How to trade in a bear market?
• Summary

Introduction

Changes in financial markets with trends And fluctuate. In order to make more informed investment decisions, it's important to understand the differences between trends. Because the market conditions are different, market conditions will vary widely. If you don’t understand the underlying trends, how can you respond to the ever-changing market environment?

Market trend refers to the overall trend of the market. In a bear market, prices overall fall. Bear markets make trading or investing more difficult, especially for beginners.

Most cryptocurrency traders and technical analysts believe that Bitcoin has always been in a bull market on a macro scale since its birth. Even so, cryptocurrencies have experienced brutal bear markets many times, often resulting in Bitcoin prices falling by more than 80%, and altcoins often plummeting by more than 90%. Faced with the dilemma of a bear market, how should investors respond?

In this article, we will discuss what a bear market is, how investors respond, and how to profit in a bear market.

If you want to understand the bull market first, please read "What is a Bull Market?" 》.

What is the spot market?

A bear market is a period of falling prices in financial markets. It is extremely difficult for inexperienced traders to engage in trading in a bear market, and they face significant risks. They can easily suffer serious losses and never have the courage to return to financial markets. Why?

There is a popular saying in the investment circle: "To go up, take the stairs, and to go down, take the elevator." This means that uptrends are slow and steady, but downtrends tend to be violent and volatile. how so? Whenever prices plummet, many traders rush to exit the market, whether to move to cash or to lock in gains on long positions. This will quickly trigger a chain reaction, with a large number of sellers selling to close their positions, which will then spawn more liquidation operations, creating a vicious cycle. If the market applies high leverage, the decline will even be doubled. Large-scale forced liquidation will have a more serious chain reaction and trigger crazy selling.

Similar extreme situations also exist in bull markets. During a bull market, prices grow rapidly and different assets are more correlated than before, with most assets rising in tandem.

Generally speaking, investors are "bearish" in a bear market and expect prices to fall, and market sentiment is also quite depressed. However, some market participants won’t just go short. These players simply expect prices to fall and may choose to go long if a good opportunity arises.

Bear market example

As mentioned above, many investors believe that Bitcoin has always been in a bull market on a macro level since it entered the market. Does this mean there was no bear market during this period? the answer is negative. After rising to around $20,000 in December 2017, Bitcoin fell into a sluggish bear market.

After the 2017 bull market, Bitcoin plummeted.

Before encountering the bear market in 2018, Bitcoin also plummeted 86% in 2014.

Bitcoin’s decline compared to its 2013 peak Up to 86%.  

As of July 2020, the low of the previous bear market - the range of around US$3,000 has been tested again, but it has not fell below. A break below this critical range would be strong evidence that the multi-year Bitcoin bear market is not over yet.

Bitcoin tests bear market historical lows again.

Given that the lows have not been broken, we believe that the plunge caused by COVID-19 panic is just another test of this range. However, certainty cannot be obtained through technical analysis, only probability.

Other noteworthy examples of bear markets come from the stock market. Whether it is the Great Depression, the 2008 financial crisis, or the stock market crash caused by the global COVID-19 epidemic in 2020, they all deserve attention. These natural and man-made disasters caused heavy losses to Wall Street, and the entire stock market suffered a huge impact. During this period, market indexes such as the Nasdaq 100, the Dow Jones Industrial Average (DJIA), and the S&P 500 also fell sharply.

What is the difference between a bear market and a bull market?

There are significant differences between bear markets and bull markets. Prices rise in bull markets and fall in bear markets.

A significant difference between the two is that bear markets may have longer periods of sideways movement, that is, consolidation or adjustment in price behavior. At this time, market volatility is quite low and trading activity is almost non-existent. While consolidation can also occur in bull markets, it tends to be more common in bear markets, where continued price declines discourage most investors.

Another thing to consider is whether it is possible to establish a short position in an asset from the outset. If traders do not have the ability to short an asset using margin or derivatives, they can only express a bearish stance by selling for cash or exchanging stablecoins. This can trigger a longer-lasting downtrend, with minimal willingness from traders to buy and tepid price action consolidation.

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How to trade in a bear market?

Holding cash (or stablecoins) is one of the simplest bear market trading strategies. If falling prices are keeping you awake, it's better to just sit back and wait for the market to shake off its bearish streak. If you expect that a new bull market may arrive at some point in the future, you can invest in the market again at that time. At the same time, if you're holding for the long term, spanning years or decades, a bearish streak is a sure sign that you should sell.

Generally speaking, it is wise to trade and invest in accordance with market trends. Therefore, a strategy for profiting in a bear market also includes opening short positions. In this way, when asset prices fall, traders can take advantage of the trend and profit from it. Whether it is day trading, swing trading, or position trading, the main goal is to trade based on market trends. Having said that, many contrarian traders tend to trade "against the trend," adopting trading patterns that go against the prevailing trend. Let's understand how it works.

In a bear market, "countertrend" means establishing a long position after a rebound, sometimes called a "bear market rally" or a "dead cat rally." These counter-trend price movements can be extremely volatile, as many traders may take advantage of the opportunity to go long on short-term rallies. However, unless the entire bear market ends for good, the downtrend is likely to resume immediately after a brief rally.

As a result, successful traders will seize the opportunity before a bear market reappears and exit with profits near recent highs. Otherwise, once the bear market continues, their long positions will be locked up. Please note that this is a high-risk strategy. Even the most experienced traders can suffer huge losses when trying to catch a flying knife.

Summary

In the above, we discussed what a bear market is, how traders can protect themselves and survive from Profit in a bear market. In short, the simplest and most straightforward strategy is to hold cash in a bear market and wait patiently for the right trading opportunity. Additionally, many traders will look for opportunities to establish short positions. As we all know, it is wise to follow market trends.

Have additional questions about market trends, bear markets, or trading? Please visit our Q&A platform Ask Academy, where members of the Binance community will patiently answer your questions.