Although it may not seem like it, most asset classes are currently in a bear market. Keep reading to learn eight key things about bear markets so as to improve your trading strategy.
The stock market usually experiences a bear market about once every three to five years. A bear market is when the prices of stocks drop by 20% or more from their peak, and it typically lasts for several months. Even though we’re in a bear market right now, there are still eight important things to remember.
Bear markets are a crucial component of the market cycle. If we look at history, stock market winters occur every 5 years on average. Similarly, it appears that crypto winters also follow this pattern–with bear markets appearing after around 3.5 years have passed.
Bear markets aren’t fun, but they do give assets the time needed to recover and prepare for the next bull market.
While the stock market generally corrects by 36%, Bitcoin goes as low as 86%.
In the current bear market, someassets have fallen by more than the index. For example, Microsoft is down around 40%.
Another key distinction between stock and crypto winters is the length of bear markets. In general, bear markets in the stock market are shorter than bull markets (usually lasting around 10 months whereas bull markets last an average of 32 months). This indicates a time of prolonged growth followed by a sudden drop.
Bear markets in crypto last about as long as bull markets, at 19 to 26 months each. However, crypto winters begin sharply but take more time to settle at the lows before starting a new run.
It’s hard to predict a bear market before it happens, even though there are always signs. Most people don’t manage to see the crash coming until it’s too late.
We believe that it is more beneficial to keep milking the cow until it stops producing than to worrying about it constantly. You should use your energy to make profits when the market is doing well and create a risk management system for when the market crashes.
Down to the nitty-gritty!
Time is one of the most critical factors in investing, whether you’re putting your money into stocks or cryptocurrency. It might seem like things are going bad if a bear marketdrags your portfolio down, but if you zoom out and look at a larger time frame, you’ll probably see it start to turn around. In fact, historical data shows that even though the S&P 500 has had negative returns in one out of every three quarters over the last 20 years, holding onto investments for 10 years has resulted in positive returns 94% of the time!
If you’re holding Bitcoin with a long-term outlook, you’re more likely to see an increase in value (as shown in the graph below). Buying Bitcoin within the last year may have resulted in a loss, but if history repeats itself, you could be back in the green at some point soon.
As anyone will tell you, it’s tough to forecast a bear market. It’s similarly hard to understand when the market reaches its lowest point. Usually, the bottom happens when people think conditions will continue deteriorating.
When the market plummets, a lot of people sell their assets at a loss. “Crypto is dead” or “the stock market has finally burst” will become too common. But if we look at it from another perspective, investing during these times might not be such a bad idea after all.
This is the first time that both crypto and stock markets have entered a bear market simultaneously. However, as you can see from the chart below, the 2016-2017 crypto bull run started when the stock market was already in a bearish phase.
Although in the past crypto and the stock market have seldom moved together, recently they have become more correlated than ever. Only time will tell how long this trend will continue.
After a long period of decline in the cryptocurrency market, many altcoins are abandoned. This was especially apparent during the previous bull market, where coins that failed to hit new highs became less popular as newer projects gained more attention. This happens because investors tend to flock towards digital currencies with more innovative features and potential for growth.
When acurrency or “crypto” bull run occurs, it usually happens because of the strength of the story or narrative behind that currency. Older coins don’t have as strong of narratives as newer coins do at this point in time, but that is changed expected to change over time. The industry will become more sophisticated and nuanced, which will be evident by Ethereum’s recent performance in light of its launch date in 2015. It was one fo the top performers duringthe most recent market growth spurt..
To end on a high note, if you manage to stick around during a bear market, generally you are rewarded with profit. As we stated earlier, time is of the essence. If you can be patient enough to get through the tough times without giving up, the next bull run will probably bring success your way.
Be persistent, invest in what shows potential, and be patient for the next market boom!