What is a bear market? What are the features of the bear market? What strategies should be followed?
Financial markets are divided into two general trends, bear and bull. The trend in which assets are in a long-term and continuous decline is called a bear market. On the contrary, markets where a continuous upward trend is seen are also called bull markets.
The bear market can describe the overall decline in a market, such as the cryptocurrency market, as well as the long-term depreciation of a particular asset.
In financial markets, the decline may be much harder than the uptrend due to the panic of investors. The bear market is therefore extremely risky, especially for inexperienced investors, and can lead to huge losses.
Investors follow different strategies in the bear and bull markets. For this reason, it is of great importance which trend dominates the market in general and this trend should be determined before making an investment.
How to tell that the bear market has started?
The bear and bull markets describe more medium and long-term trends rather than short-term trend changes. In the medium and long term, situations in which a decrease of at least 20 percent is observed are defined as a bear market. While bear markets, which are cyclical, can last for a few weeks or months, long-term bear markets can persist even for years.
Bear markets should not be confused with corrections that are common in bull markets. A 10 percent decline in traditional financial markets is seen as a correction and can be considered normal. In the crypto money markets, this rate can go up to 30 percent and it is seen very healthy in bull markets. Bitcoin, for example, experienced an almost 30 percent retracement and declined to $ 28,900, after breaking a record to $ 42,000 on February 8, with the bull market gaining momentum in December 2020 . However, this decline did not put crypto into the bear market, and BTC regained momentum after three weeks of consolidation, reaching as high as $ 57,500 as of February 21, 2021.
In bear markets, the declines are not instantaneous and there are continuous and much harder declines in the medium term. For example, BTC entered the bull market in 2018, after breaking a record by approaching $ 20,000 in December 2017, losing more than 80 percent of its value in one year and declining to $ 3,000.
Therefore, while determining bear markets, longer-term trends should be taken into account and factors such as macro situation and investor sentiment should also be taken into account.
What are the features of the bear market?
The most distinctive feature of the bear market is that the prices tend to decrease continuously, unlike the bull market, where the price increase is seen continuously. The bear market, as mentioned above, can apply to an entire market as well as only for a particular asset.
Although the bear market is not the case in all situations, it often accompanies bad economic conditions and recession. It is possible that an economy in which employment, disposable income and production decline will bring along a bear market.
Investors' psychology and sentiment play a decisive role in how a market will behave. In the bear markets, investor sentiment turns negative and investors' confidence in the market is shaken. Therefore, the investors' withdrawing their money from the market makes the decline even harder.
There are more sellers than buyers in bear markets. This causes the supply to increase while the demand decreases in the market and consequently the prices decrease.
What strategies should be followed in the bear market?
The bear market, where making a profit is much more difficult than the bull market, poses great risks, especially for inexperienced investors. Nevertheless, it is possible to make a profit by following some investment strategies in bear markets.
One of these strategies is to take a short position. Short position refers to investors making a profit when they pay the debt at the lower price by borrowing the asset the price of which they expect it to drop . This strategy, which offers the opportunity to make a profit in bear markets, carries a risk as it may result in large losses in a possible trend changes.
Another strategy that is less risky than a short position is to use option contracts . Option contracts offer the right to buy or sell an asset at a predetermined price until a specified date. In bear markets, investors have the right to sell at a predetermined price using put options and can protect against price decline.
Apart from these strategies, many investors prefer to wait for a trend change in bear markets by withdrawing their money from the market.
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DISCLAIMER: The statements contained here are not investment advice. Never trade without researching the markets thoroughly and without comments from different circles. Read the comments of the investors you trust and consult their opinions. Remember that every trading transaction involves risk. Make your own decision when taking any action. jaseen, cannot be considered directly or indirectly responsible for any damages or losses arising or allegedly arising from investment products or services.
