The majority of asset classes are in a bear market right now. Let's discuss eight things you should know about bear markets to form better trading strategies.
With a few exceptions, the main financial markets are in a bear market right now. Bitcoin is down by 70% from its high, while altcoins are down by 90%. Even the S&P 500 corrected over 20%. In light of these falls, today we will dive into eight lessons and facts about bear markets that one should always keep in mind.
Bear Markets Are Important
Bear markets are a key part of the market cycle. Since 1932, stock market winters have happened roughly once every five years. So far, it looks like crypto winters happen in a similar pattern, with the past bear markets happening approximately after every 3.5 years.
While bear markets can be painful, they provide assets some time to return to the mean and get ready for the next bull run.
Stock and Crypto Bear Markets Are Very Different
On average, the stock market finds a bottom after correcting 36%, whereas Bitcoin goes as far as roughly 86%.
There are some assets that fall more than the index, such as Microsoft going down around 40% in the current bear market.
The length of bear markets is another key difference between stock and crypto winters. In the stock market, bear markets are much shorter than bull markets (on average, bear markets are about 10 months long, while bull markets are 32-month long). It shows a longer period of sustainable growth, followed by a sharp correction period.
In crypto, the length of bear markets is very similar to the average crypto bull market, with both halves of the cycle taking between 19 and 26 months. Crypto winters start out very sharply but spend a lot more time consolidating at the lows before starting a new run.
Bear Markets Are Hard to Predict
Bear markets are usually hard to predict in advance. Even though the signals are always there, only a few ever manage to predict (and play) a market crash well.
In our experience, it is better to milk the cow until it stops producing than to constantly worry about it. Your energy should be allocated to making profits during bull markets and forming a risk management system for bear markets.
Let’s discuss this point in detail!
Time Is Essential
In both the stock market and crypto, time is an essential element. While bear markets can put your portfolio in deep red numbers, you can see it turning green if you consider a larger time frame. Charts show that while one in three quarters can be a negative in the S&P 500, holding on for 10 years yields a positive return 94% of the time!
Holding Bitcoin with a long-time view, generally, makes you wealthier as well (as illustrated in the graph below). Buying Bitcoin in the past year may have put you at a loss, but if history repeats itself, your PnL could be green at some point in the not-so-distant future.
Market Sentiment Is Often the Worst at the Bottom
Predicting a bear market is hard. In a similar fashion, it is very difficult to know when the market finds its bottom. In fact, the market usually finds a bottom when everyone expects it to get much worse.
Many people will exit the markets by selling their assets at loss. “Crypto is dead” or “the stock market bubble has finally burst” will get too common. If we consider the previous point, investing at times of such market sentiments might not be a bad idea.
Crypto and Stock Bear Markets Don’t Always Coincide
Crypto and stock bear markets do not always happen at the same time. In fact, this is the first time that both markets entered this phase simultaneously. As you can tell from the chart below, the 2016-2017 crypto bull run started just when the stock market entered a bear market.
Nevertheless, in the past year or two, crypto and the stock market have become more correlated than ever. Time will tell how long the statement “crypto and stock bear markets don’t always coincide” will hold true.
Some Altcoins May Not Make a New All-Time High
After a crypto bear market, many altcoins die. This statement was especially seen in the previous bull market, where many coins failed to form new highs. This happens because newer, more innovative projects become the center of attention.
Crypto bull runs happen on narratives, and older coins simply do not have the same powerful narrative that newer coins do. It is the author's expectation that this statement will become less and less true over time, as the industry matures. The first example of this maturity is Ethereum, a token launched in 2015, which was one of the strong performers in the recent bull market as well.
If You Survive the Bear Market, You Generally Make Profits
Finally, we wrap up our list of things to know about bear markets on a positive note: if you survive the bear market, you generally make money. As we mentioned earlier, time is essential. If you are patient enough to navigate the bear market without blowing up your account, the next bull run will likely bear fruits for you.
Be patient, accumulate promising investments, and wait for the next expansion!
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form.
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