In the field of crypto investment, bear markets and bull markets are standard terms. Many beginner investors often wonder what these are and how they relate to the rules of investment.
What is a Bull or Bear Market?
To begin with, bull markets and bear markets are not marketplaces where bear and bull are sold. Instead, they are jargons for finance and investment.
A bull market refers to a period of time when financial assets keep growing in value, with optimistic market sentiments.
On the other hand, a bear market refers to the opposite, i.e., a period when financial assets keep dropping in value, with pessimistic market sentiments.
For instance, in the stock market, a surge (over 20%) in stock prices from a low point indicates the arrival of a bull market, and a drop (over 20%) in stock prices from a high point indicates the arrival of a bear market. One industry myth about the origin of the two terms goes like this: When the London Stock Exchange was first established, there was a bulletin that was filled with stock quotes of bulls (homophonic with the bull) when the market was booming, and when the market is falling, the bulletin looked empty and bare (homophonic with bear). Moreover, the market throve when the stock prices rose. Investors and stockbrokers were all packed in a small exchange, which looked like a herd of bulls in a traditional bull market. Hence, such markets became known as bull markets. In a bear market, the market goes into hibernation just like a bear.
Analysis of Influencing Factors
Many factors contribute to the arrival of bear/bull markets. Roughly speaking, such factors include basic ones and technical ones. Basic factors refer to economic and political factors outside the market. Such factors tend to bring an upheaval in the stock market. Economic factors include changes in the interest rates and money supply, whereas political factors cover wars, changes of regime, major international political events. On the other hand, technical factors include buying sprees, dumping, trading methods, etc.
Characteristics of Bear and Bull Markets
The characteristic of a bull market is the universal optimism and positive growth of the market, which often breeds greed. Bear markets, on the other hand, are associated with a universal expectation of price drops, which tend to instill fear in stockholders. As such, we often hear quotes like, “there is no limit to both bull market growth and bear market drop.” When dealing with the market, you will experience fearless growth in bull markets as well as price drops in bear markets that happen without any reason. In a bull market, market caps can always go up to a point where everyone forgets about risks. In contrast, in a bear market, no matter how low the market cap is, the market always continues to plummet.
How Should You Prepare for a Bull or Bear Market
Bear and bull markets are the result of changing risk preferences. Like a pendulum, risk preferences always go from one end (extreme optimism) to the other (extreme pessimism). Scaremongering investors about their investments being too early in a bull market and advocating market rebounds in a bear market are both lunatic. For instance, in the three-day market simulation, a technical price correction due to the impact of short-term bear news also represents a process in which investors can identify new opportunities. However, in reality, most investors are still influenced by changes in the stock index. They are often manipulated by the big players who are in charge of the market conditions. Investors should remain rational and consider the degree of such price corrections by themselves instead of believing in all the made-up bear news. Additionally, they should formulate their own trading strategy and stick to it. Remember, a strong mindset is a key factor that can help you stick through both bull and bear markets.