Bear Market Definition and Real-World Examples


When it comes to investing in the stock market or cryptocurrency sector, a common mantra among investors is that you should try to “buy low” and “sell high.” In reality, this is nearly impossible to achieve since no trader can predict the exact time the market will fall or rise. 

Perhaps the only guarantee is that the market will move cyclically in uptrends (bull market) and downtrends (bear market). While bear markets may seem terrifying, they often last for a shorter period than the market. 

So what should investors do during a bear market? Before this, let’s first look at what a bear market is.

What is a bear market?

A bear market can be described as a prolonged decline in crypto prices. Specifically, this is when prices fall by more than 20% from their most recent high. 

While 20% is often the threshold, bear markets often plummet much deeper than that. However, this does not mean that prices are always on a downtrend. There are times when the prices rise for a short period, but the general trend is downward. 

Understanding bear markets

A bear market often occurs just before or after the economy starts shrinking or enters into a recession. 

When investors see a shrinking economy, they expect crypto profits to decline and crypto-related activity to decrease. This puts investors in panic mode, and they rush to exit the market. They do this to either double down on their long-term investments or stay liquid with cash. This quickly results in a cascading effect where more traders rush to exit trades leading to a massive sell-off.  

The sell-off increases supply and lowers demand, causing an oversaturated market and falling crypto prices. 

A declining market is often characterized by:

  • Increased volatility where prices keep falling and rising with lower highs.
  • Fear among investors to take any risk or lose any money.
  • Unemployment starts to rise as companies reduce their expenses to maintain their profit margins
  • Consumer confidence drops, and more people go into conserve and saving mode. 
  • Businesses start struggling to break even or delve into new products and innovations.

Real-world examples of Crypto bear markets

Most long-term crypto investors and technical analysts agree that Bitcoin has been in a macro bull run since its inception. 

However, there have been several relentless crypto bear markets that have brought more than an 80% decline in BTC price. Most Altcoins, on the other hand, have experienced over 90% declines, with some being wiped out. 

The 2021-2022 crypto bear market is the most recent bear market. BTC experienced a 45% drop from an all-time high (ATH) of $68,721 on November 18, 2021, to as low as around $ $34,000 on January 22, 2022.

BTC bear market after the 2021 September bull market

Before this, BTC also experienced a brutal bear market after hitting around $20,000 on December 17, 2017.

BTC bear market after the 2017 bull market

Other notable bear markets in the stock market include The Great Depression of 1929, Black Monday 1987, the Dot-com bubble of 2000 to 2002, and the Financial Crisis of 2007 to 2009. During these periods, market indexes such as Nasdaq 100, S&P 500, and the Dow Jones Industrial Average (DJIA) experienced major declines in their prices.

How to invest during a bear market?

Bear markets can undoubtedly be scary times for investors, and nobody enjoys watching the value of their portfolios go down. However, this does not mean that you cannot profit from this downtrend. It’s important to remember that a bear market is just part of the natural cycles of any market.

If you’re not comfortable with prices falling, one of the most straightforward strategies you can adopt is to stay in cash or stablecoins. If you expect a new bull market to rally later, you can ride out the volatility and price decline.

If you’re a long-term investor, a bear market isn’t necessarily a signal to sell. It may present an opportunity to add more coins to your wallet.

On the other hand, active traders should make dollar-cost averaging (DCA) their friend and buy the dip. While buying the dip can be done in one trade, DCA involves breaking your capital into several smaller trenches and making trades over time as the prices dip further. The idea is that if prices return to their highs, the dip buyers will take significant profits. 

Another direction that most investors might take is opening short positions. This way, traders can profit off the downtrend by borrowing crypto assets from brokers at their current price and selling them. They later return the crypto asset when the prices fall at a discount price. These can be through day trade, swing trades, or position trades.

Final thoughts

It’s crucial to note that trading during a bear market is highly risky. This is why most expert traders exit their positions and take profits before it starts. Even so, some advanced traders still prefer to trade this downtrend. For instance, the BTC bear market in 2017 and late 2021 acted as a good entry point for some traders. 

So, having discussed what a bear market is, it’s crucial to always be on the lookout for the characteristics mentioned above to stay ahead of the market and pre-plan your crypto trading strategy.

For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.

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