Although bear markets might be stressful for investors, in hindsight, they are often perceived as good investment opportunities to buy in at lower prices. Learn about crypto bear markets, how long they usually last, and what you can do to make the most from them.
What is a Bear Market?
Bear markets refer to a period where supply is greater than demand, confidence is low and prices are falling. It is a widely used term not only in the cryptocurrency market but in traditional markets such as stocks, real estate, commodities, and bond markets. Pessimistic investors who believe prices will continue to drop are referred to as bears.
When compared to traditional markets, cryptocurrency markets are smaller and more volatile. As a result, it is common to see prolonged and more volatile bear markets, where 85% price drops are not out of the ordinary. In addition to significant price drops, other characteristics of crypto bear markets include:
Extreme Fear and Pessimism
Pessimism and fear reign in crypto bear markets. These sentiments last longer and are more prominent during these times. A useful metric that measures market sentiment is the Crypto Fear and Greed Index with scores that range from single numbers up to 100. Lower scores represent greater fear. Scores below 49 are on the more fearful side, and scores that range between 50 to 100 tend to be more on the optimistic side.
Low Trading Volume
Lower trading volume is often a result of extreme fear and pessimism in the crypto bear markets. During prolonged periods of low trading volume, price action appears more like a flat line with few minor changes, signifying a crypto winter period.
Unfavorable Macroeconomic Conditions
Since the availability of money affects the trading volume and because economic stability affects investor confidence, unfavorable macroeconomic conditions can often lead to a bear market in crypto markets. Traditionally, crypto bear markets accompany the combination of rising inflation and rising interest rates. Long periods of these unfavorable macroeconomic conditions can turn crypto bear markets into crypto winters.
Why is Bitcoin in a Bear Market?
Bear-market blues have set in among even the most bullish crypto proponents. Experts are pointing to the war in Ukraine, concerns over tighter monetary policy, and rising inflation rates as the primary driver for slumping prices for risk-on assets such as cryptocurrency. Interestingly, the crypto market has been increasing following the stock market lately, which makes it even more intertwined with macroeconomic factors.
In addition to an already bleak macroeconomic backdrop, fear in the cryptocurrency space has recently been magnified by the collapse of the Terra ecosystem and crypto lender Celsius pausing account withdrawals and transfers, both of which evaporated investor confidence and caused the market to tank.
The Bear Markets of the Past
If you are a crypto investor, you might feel like the current bear market is never going to end; however, history highlights that this is unlikely to be the case. Bitcoin has been declared dead hundreds of times throughout its tenure. To gain a little perspective, it’s worth analyzing the various bear markets since Bitcoin’s inception through 2022, highlighting the catalysts that drove prices and overall sentiment into a nosedive.
2012 Bitcoin Bear Market
The first major bear market of Bitcoin was in 2012, a year that was marked by an onslaught of hacks and negative events that contributed to the uncertainty around Bitcoin. This bear market lasted 185 days, with a peak price of $7.08 and a bear market low of $4.22.
2014 Crypto Bear Market
Subsequently, 2013 was an extremely significant year for Bitcoin and crypto in general. In October 2013, Silk Road, an online black market, was shut down by the FBI. However, Silk Road’s significance in the history of Bitcoin was that it represented the crypto asset’s first form of widespread user adoption. This bear market lasted 415 days, with a peak price of $1,149.19 and a bear market low of $197.24.
2018 Crypto Bear Market
The 2018 cryptocurrency bear market followed what many refer to as the bursting of the cryptocurrency bubble. After an unprecedented boom in 2017, the price of Bitcoin fell by over 65% from January 6 to February 6. The cryptocurrency market entered a long winter, picking back up in early 2019.
When will the Bitcoin Bear Market End?
Timing the bottom of a Bitcoin bear market is difficult because of many factors that have the potential to impact overall sentiment in the cryptocurrency space. However, you can use a few strategies to predict a potential range where a bottom may occur.
Monthly Bitcoin Heikin-Ashi Candles
A solid strategy to sniff out a trend reversal is by using Heikin-Ashi candlesticks on Bitcoin’s monthly chart. As the saying goes, “zoom out, when in doubt”; the monthly chart provides the best perspective for identifying a meaningful Bitcoin bottom and reversal. Monthly candlesticks can help eliminate the noise and allow you to visualize the multi-year trend of Bitcoin in a larger time frame.
Secondly, Heikin-Ashi candles are useful as they smooth out price action and allow trends to be more easily identified. As opposed to typical candles, Heikin-Ashi candles are calculated based on the weighted average price of previous candles. These candlesticks are a delayed indicator, meaning that if a trend change has occurred, you would have already missed the bottom. This delay isn’t necessarily a bad thing because while you may enter the market at a slight premium, you can have greater certainty that the bear market has entered an accumulation phase as opposed to a continued downtrend.
In previous bear markets, the downtrend on the monthly Heikin-Ashi timeframe has ranged from 13 to 15 months. Currently, Bitcoin has experienced seven months of a downtrend already as seen below:
The chart above also uses a logarithmic scale, which captures the general trend of Bitcoin more effectively than a normal scale. based on the data from previous bear markets, it is plausible that the Bitcoin bear market bottom could arrive between September 2022 and March 2023. However, it is important to note that past results are not indicative of future performance.
Bitcoin Halving Analysis
Most investors believe the value of Bitcoin will increase and may achieve greater growth between now and its fourth halving in 2024. Bitcoin halvings occur roughly every four years. To be more precise, for every 210,000 blocks created, the number of Bitcoins created in each block algorithmically decreases by 50%. This belief is based on Bitcoin’s track record in previous years and the results from the first and second halving events. The theory behind this is as follows:
1. Reward halved
2. As a result, inflation halved
3. Lower available supply; higher demand
4. Increased demand to push prices higher
5. Miner’s incentive remains, regardless of smaller rewards, as the value of Bitcoin increases in the process
In the past, Bitcoin’s price has risen 6 to 12 months in anticipation of the next halving. As a result, based on the assumption that the next halving will occur sometime in early 2024, the bear market has another reason to possibly end sometime between early or mid-2023.
What to do in The Bear Market
Invest Your Time in Research
While crypto bear markets may be boring times for many investors, it is also the optimal time to research. Invest your time in learning about cryptocurrency projects, gaining financial skills, and exploring investment strategies. By doing this, you will not only become a more knowledgeable investor but also be more prepared to capitalize on the opportunities that arise in the next bull market.
Keep Emotions in Check
The crypto bear market is not for the faint of heart. Crypto bear markets create emotional roller coasters that make it easy to start making potentially harmful emotion-driven decisions. Fear and greed contribute to poor decision-making, which is why investors must be conscious of these emotions when trading and investing.
Diversify Your Crypto Portfolio
It is best practice to diversify your portfolio during bear markets to ensure that not all your investments are in crypto. You will be less likely to experience a major disaster with a diversified portfolio. Crypto investors can also diversify their crypto portfolios by looking to invest in promising new projects or focusing on projects with a strong track record.
Learn how to Short Crypto
Shorting cryptocurrency, although even riskier than buying it, is one way to hedge against the long positions you have in the market. However, timing is imperative with shorting; do your research and implement sound risk management strategies before opening a short position.
Dollar-Cost Average
Dollar-cost averaging (DCA) occurs when investors buy assets in increments over some time. The strategy helps reduce the effect of price changes from volatility by averaging out the price. DCA investors should focus on projects that have active communities, realistic roadmaps, and active development. However, prudent investors will wait until a consolidation period starts before DCAing.
Conclusion:
Despite crypto bear markets, cryptocurrencies as a whole are still advancing with impressive speed. The blockchain industry is growing rapidly, and many new projects are emerging every month. The keys to making it through crypto bear markets are positivity, patience, and a sound survival strategy that incorporates the tips in this article. Manage risk, stay engaged in the market, and try to stay calm during tough times.