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Bull vs bear market.png

Bull vs bear markets

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PDAX

July 08, 2022

6 min read

BeginnerTrading

TL;DR

“Bull” and “bear” markets are industry terms used to describe the conditions of both the crypto and stock markets. A bull market refers to a prolonged period wherein market prices typically go up, while a bear market is one wherein prices usually fall.

The rise and fall of crypto and stock prices are usually dictated by various economic conditions such as supply and demand, employment rates, and even the enactment of laws and geopolitical events.

Bullish or bearish?

Like changing seasons, the trading industry goes through prolonged periods of differing investor sentiments. There are times when investors feel optimistic about putting their money to work into new ventures, and there are also times when investors are more cautious  and would rather have their money safely back in their possessions. 

These polar opposites are called “bull” and “bear” markets. To put it simply, a bull market is an extended period within the market wherein stock prices are trending upward, while a bear market is when the trend is overwhelmingly trending downward. 

This is why investors themselves are often characterized as being “bullish” or “bearish” to refer to their risk appetites. A bull market is one that is currently dominated by bullish investors and a bear market sees the bulls lying low, overtaken by fear and uncertainty.

As no one can say for certain when a bull and bear market can start and end, it is up to traders and investors to study market conditions diligently in order to evaluate how the market is going to perform next.

What is a bull market?

While there are no hard requirements that constitute a bull market, the universally accepted rule of thumb is the occurrence of a 20% bump in the market price from the most recent low along with signs that the price will continue to trend upward. 

While the term was originally used to describe the behavior of the stock market, it has been carried over into other trading and investment platforms like cryptocurrency.

There are many variables at play that could potentially trigger a bull market, especially variables that are directly linked to the performance of the economy. For instance, one key factor that often boosts investor and consumer confidence is a political election–since the economy is essentially in the hands of our world leaders. Those with a proven track record of implementing effective economic policies are known to inspire bulls to invest. 

Another major trigger for a bull market is a higher employment rate and wages. Though it seems like companies might suffer from paying their employees more, higher wages translate to higher spending power for the public and further stimulates the economy.

One of the most prominent bull markets in history lasted from March 2009 to March 2020, resulting in a 400% growth in stocks. Experts speculated that if it weren’t for the COVID-19 pandemic that disrupted the global economy, that bull market might have continued well into the present. 

In February 2020, the Dow Jones Industrial Average achieved a record high of 29,551 points. The Dow Jones Industrial Average is a stock index composed of 30 noteworthy companies in the United States and is considered by many as a standard indicator of how well the overall market is doing.

Similarly, the Philippine Stock Exchange Composite Index (PSEi), the local version of the Dow Jones, achieved a high of 7793.25 points at the start of 2020. This marked a substantial increase from the low of 1745.39 points that it achieved in March 2009.

What is a bear market?

Contrary to a bull market, a bear market is often characterized by a 20% fall in market prices against recent highs. A bear market signals decreasing investor confidence and a negative outlook on economic potential.

As it is with the bull market, there are many factors that could negatively influence the performance of a market. One of the most notorious triggers for a bear market is a war, whether it be already active or still speculative. The very mere probability that a war will take place, can severely affect investor trust and the market ratings. 

This is because wars can potentially disrupt the global supply chain and raise the prices of oil, causing an all-out chain reaction across all industries and resulting in poor market performance.

Case in point, the recent Russian invasion of Ukraine may have potentially caused the 17% plunge in the price of Bitcoin, a week after Russian troops crossed the border between the two countries, which also coincided with a downturn in the stocks and commodities markets. 

Another example is the global Covid-19 pandemic that lasted for most of 2020 and 2021. The pandemic disrupted all sectors and industries and forced the closures of numerous commercial establishments, some of them permanently. While some industries supplying basic commodities thrived, many, such as those in the service and entertainment industries suffered greatly during the pandemic. 

Why bears and bulls?

The most commonly accepted explanation for the origin of the terms bull and bear markets is that they were largely inspired by the survival and defense mechanisms of the animals they were named after. A bull is an aggressive animal that attacks by thrusting its horns in an upward motion. A bear, on the other hand, will often crouch and use its large claws to strike low. 

To pay homage to the bull, there is a popular sculpture put up in 1989 in the middle of Wall Street. The “Charging Bull” is made to symbolize the optimism and prosperity of one of the world’s most prominent financial districts.

Conclusion 

Analyzing bear and bull markets is always important for any kind of investor. During upward trends, investors and traders might be tempted to take on more risk than they’re actually capable of taking. Additionally, during downward trends, traders might end up selling too many of their assets prematurely. 

The key tactic is “timing” the markets just right–being able to buy in early at the start of a bull run and selling them for a profit before the next bear market begins. By analyzing signals and keeping track of current events, investors can use reason and logic to be in a better position to make decisions as opposed to relying on one’s emotions and impulses. 

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.

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