27.08.2021 Crypto Basics

Bull and bear markets explained

bull and bear market

The bear and bull are animals used as analogies in finance and economics to describe the price movement of a market. When a bear attacks its opponent, it strikes down with its hand. Therefore, a bear market has a negative outlook and is trending downward. Conversely, when a bull attacks its predator, it strikes up with its horns. Hence, a bull market has a positive outlook and is growing and trending upward. 

The prices of cryptocurrencies are largely influenced by supply and demand. A trend is created when a continuous gap exists between those who want to buy the asset (the demand side) and those who want to sell it (the supply side). This gap sets the stage for the trend to begin and then forms as it continues. 

Whales who hold large accounts engage in buying or selling over a period triggering a trend upwards or downwards, respectively. It is a form of manipulating the market. They push the market in either direction in their favor. 

All assets are subject to a particular trend, which becomes apparent when analyzing the price charts.

When a trend is bullish in a given market: 

  • The current price peak is higher than the previous one
  • The current price trough is higher than the previous one.

On the contrary, when a trend is bearish:

  • The current price trough falls lower than the previous one
  • The current peak is lower than the previous one.

In the crypto market, it is essential to understand when a bullish trend is followed by a bearish and vice versa. An investor would need to rely on technical or fundamental analysis to identify and confirm these trends. 

Many indicators exist to help the investor identify a trend in the crypto market, some of which are technical such as volume, moving averages, and support and resistance. Other indicators are called fundamentals, such as network activity (mining cost, transaction value, and unique addresses). 

Profiting from buying and selling crypto assets is straightforward. Sell when prices reach the peak of the trend and buy when prices reach the bottom. Two questions arise here: 

  • What chart time frame should you use to identify a bullish or bearish trend? 
  • How would you know an upward or downward trend has reached its peak or bottom and now is reversing? 

The answer to the first question depends on whether you are a trader or an investor. A trader or speculator could buy an asset and sell it after a few hours or days or maybe weeks. So, if you want short-term gains, you might want to spot trends using hourly, daily, or weekly charts. 

On the other hand, an investor buys and holds his investment because he believes that the market will have a bullish trend in the long term. An investor decides to enter or exit the market by mainly using monthly and yearly timeframes. 

Keep in mind that there are more complex trading mechanisms than just buying and selling by using your own account. Short selling is one example that involves lending, borrowing, and margin trading. 

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