What Is a Bear Market And When Is It Coming
“Winter is coming?” What is the real essence of a bear market? Is it that scary, and when will it come?
What is a bear market?
In the crypto community, many are looking forward to a bull market and dreading the beginning of a bear cycle, seeing it as the end of times for the entire market. What is the nature of a bear market, is it that scary, and when will it come?
While everything is growing and prospering in a bull market, a bear market is the opposite story. In a bear cycle, cryptocurrency prices fall and market participants tend to expect further declines. In general, this period is dominated by pessimistic investor sentiment, which leads to lower demand and falling asset values.
Signs of a bear market
There are a number of signs by which a bear cycle can be identified. For example, these include:
- A steady decline in prices. Prices of major cryptocurrencies such as Bitcoin and Ethereum are rapidly falling by 20% or more from previous highs over the course of several months.
- Decreased trading volume. In a bear market, trading volumes often decrease as investors become cautious and don't want to risk buying assets that may continue to fall.
- Interest in new projects/ICOs/IDOs/airdrops drops. During a bear cycle, the number of new cryptocurrency project launches and fundraising through ICOs, IDOs, etc. significantly decreases due to lack of interest from investors who are not willing to take risks during these volatile times.
- Increased cases of bankruptcy, cryptocurrency company closures or employee layoffs. During this period, cryptocurrency companies are experiencing funding and operational difficulties, leading to bankruptcies or staff layoffs.
- Pessimistic sentiment in the media and social media. Negative agenda prevails in the media: from forecasts to the collapse of this or that project/company.
- Growth of short positions. Investors are increasingly taking short positions in anticipation of further price declines and increasing hedging of risks through derivatives such as options and futures.
- Declining institutional investment. In a bear market, large institutional investors become less active, resulting in less liquidity and market support.
Historical pattern
Throughout the history of the crypto industry, bear cycles have come several times. The first bear market lasted six months and happened in 2011. The major cryptocurrency reached $29.38, a 50,000% increase that happened in less than a year. But after the hack of the largest crypto exchange at the time, Mt. Gox, the price of Bitcoin began to fall. By November 2011, Bitcoin lost more than 90% of its value and fell to $2.
At the end of 2013, a new bear cycle happened, when after the rapid growth of Bitcoin and the hype around cryptocurrencies, prices plummeted. Bitcoin rose from $13 in early 2013 to its peak of nearly $1,150 in December 2013. The price then began to plummet, reaching $200 to $250 in January 2015, a more than 80% drop from the peak.
In the middle of this cycle, many investors lost interest in cryptocurrencies, which led to a significant decrease in trading volumes. All of this was accompanied by pessimistic sentiment. Many believed that it was a bubble that had burst. Especially when cryptocurrency exchange Mt. Gox went bankrupt in 2014 after another hack and the loss of 850,000 BTC. This was a key blow to confidence in cryptocurrencies and contributed to the continuation of the bear market.
In 2017, the cryptocurrency industry once again faced bearish sentiment. The cryptocurrency boom and ICO mania led to a rapid market decline. At the end of 2017, the major cryptocurrency reached an all-time high of almost $20,000, but already in early 2018, prices began to plummet. By the end of 2018, Bitcoin was trading in the $3,000-4,000 range: a drop of more than 80%. As a consequence, demand for cryptocurrencies plummeted and many investors, especially newcomers, left the market.
In 2017, thousands of projects held ICOs, which attracted huge investments. However, in 2018, many of these projects failed to live up to expectations, and regulators such as the U.S. SEC began actively cracking down on fraud and unregistered securities offerings.
The latest cycle of bearish sentiment began in 2022 with the collapse of the Terra ecosystem, which set off a chain of negative events. Bitcoin hit a record high of $69,000 in November 2021, but by June 2022, its price had fallen to $18,000 - a more than 70% drop. Ethereum has also fallen more than 80% from its highs.
The US Federal Reserve began raising interest rates and reducing liquidity in financial markets, which had a negative impact on risky assets, including cryptocurrencies. In May 2022, the Terra ecosystem collapsed when its UST stablecoin lost its peg to the US dollar. This set off a chain reaction of sell-offs that collapsed many cryptocurrency assets and led to the bankruptcy of some major companies such as Celsius and Three Arrows Capital. Adding fuel to the fire was the illegal activity of one of the major exchanges at the time, FTX.
Many large investors and hedge funds reduced their investments in cryptocurrencies due to increased volatility and economic uncertainty. It should not be forgotten that in 2021, the rapid growth of DeFi and NFT was an important driver of market growth. However, in 2022, interest in these segments declined significantly, which also contributed to the market decline.
All of these examples have a common pattern. All bear cycles begin after a period of rapid growth and an overheated market. During such periods, cryptocurrency prices often skyrocket, leading to a sharp decline. During a bull cycle, numerous speculative projects enter the market, which contributes to inflated expectations and unjustified investments.
Once all-time highs are reached, there is a sharp drop in prices. This can be caused by a variety of factors, including profit realization, negative news or macroeconomic events. All of this is fueled by negative investor sentiment and panic. Trading volume declines, major triggers occur in the form of bankruptcy or collapse of major players, and regulators continue to increase pressure and discourage innovation.
Why is a bear market not so scary?
A bear market for cryptocurrency can seem terrifying to many investors, especially those who haven't experienced one before. And it's a justifiable feeling. Many are afraid of losing funds due to a significant price drop, fraud, or company collapse. And the general panic and lack of prospects and innovation can only reinforce this feeling and push investors away from the industry for good.
But it's also worth understanding that a bear market is a healthy and natural part of the cycle that helps the industry “cleanse” the market of overvalued assets and weak projects. During a bear market, many speculative projects or those that were created without long-term potential disappear, making the market more mature and sustainable for the future.
More experienced industry participants don't panic and see long-term potential in a bear cycle. Their strategy holds on three pillars: portfolio diversification, calmness, and DYOR. Yes, asset prices are falling, but this allows them to acquire quality cryptocurrencies at a favorable price. For example, in previous bear markets, those who bought Bitcoin at the lows have made substantial profits in subsequent bull cycles.
At the end of the day, the focus is shifting to technology development rather than mindless speculation. Developers are focusing on improving existing blockchains, creating new applications and infrastructure solutions. Not all of these solutions will eventually work, but the new bear cycle will fix that and bring something updated and improved again.
If a bull market attracts more people to the cryptocurrency industry, a bear market leaves those who believe in the long-term prospects of cryptocurrencies and blockchain technology. This helps to improve the quality of projects and create a foundation for sustainable growth.
This period is actually full of common sense as it provides investors with valuable lessons on how to manage risk, stay calm during periods of volatility and take a more strategic approach to investing.
What is happening to the market right now?
In one of our articles, we have already discussed whether the market is in a bull cycle at the moment. In brief, there is no unambiguous answer, as this period has collected markers of both bullish and bearish cycles.
“Winter is coming” or when the bear market will occur
In fact, now the market is in a suspended state, which means that it is almost impossible to predict what direction vector it will choose in the near future. But it is still worth trying to pay attention to bear market signals.
The first signal is the tightening of monetary policy. Central banks may raise interest rates, which may cause a decrease in liquidity in financial markets, including the cryptocurrency market. The crypto industry is reacting to the decisions of the US Federal Reserve and the statements of its chairman. Right now, the Fed keeps the rate in the 5.25%-5.50% range, following its aggressive policy for 18 months now. However, recently its members have signaled that they are ready to soften because inflation has started to slow down. Conclusion: a cryptocurrency bear market isn't coming anytime soon. Or is it?
The second signal is increased regulatory pressure. After the events surrounding FTX, the US Securities and Exchange Commission and its chairman Gary Gensler have engaged in a fierce battle against the crypto industry, grooming it with outdated market tools. Binance, Coinbase, Robinhood, Ripple, Justin Sun are among the many that have come under the regulator's crackdown, whether it's fair or not.
On the one hand, it seems as if regulators are deliberately drowning the crypto industry, which discourages investors and, as a consequence, brings it into a bearish cycle. But now there is an event looming on the timeline that is creating uncertainty. The outcome of the November presidential election in the U.S. will directly determine the future policy towards cryptocurrencies, both on the part of regulators and the administration. And only then we can draw conclusions about market cycles.
The third signal is changes in technology trends. Lack of innovation can reduce investor interest and contribute to the start of a bearish trend. The trend of the current bull market was the boom of memecoins and tap-to-earn games. Interest in them is gradually losing, but it is still there, given the recent records for the same TON network, for example. And the memecoin sector is becoming the most profitable among the rest in yet another quarter.
The fourth and defining signal is a major collapse or bankruptcy of the incumbent industry mastodon. Like after the collapse of Mt. Gox, Terra and FTX, such a thing could unexpectedly happen at any time to anyone and in the current bull market. This would definitively open the way for bearish sentiment. And that underscores the whole point of answering the question, “When is the bear cycle going to happen”? It could happen tomorrow, or maybe after the election or not? Or maybe even a year from now? Long story short, there is no clear answer to that one. The other question that matters is, “What are the preconditions for a bear market?” Which we have already answered just above. And only time will tell when the bear market will come.
Whatever the case, investors need to remain constantly vigilant and not forget the importance of DYOR in order to be ready for any changes in the market.
Gary Gensler Justin Sun Binance
