Even the most accomplished athletes require rest to maintain their health. Financial markets, like any other, also require a reset after a record-breaking performance, which is likely why bear markets exist.
So, in this blog, you will understand everything about crypto bear markets.
Now, let’s get started.
Understand the Crypto bear market
It can be difficult to comprehend the past six months of the crypto bear market, but we wanted to let you know that the digital asset class has not seen such a severe downturn in a long time.
Since the beginning of 2022, the crypto market has been steadily declining. Six months into the year, the terms “bear market” and “crypto winter” are being bandied about far more than usual.
Markets enter bear territory when crypto declines by 20% from their high, according to one definition. However, a 20% drop is a subjective figure, just as a 10% drop is a fictitious reference point for a correction.
Many people are wondering, “Is this going to last forever, and is crypto permanently in a bear market?”
No, not if you keep your eye on the big picture and stay invested!
According to reports, the total market capitalization of the crypto market has fallen from $3 trillion at its all-time high to around $877 billion – a value erosion of more than 70% in a matter of 7-8 months.
Let us remind you that, It is not a new phenomenon.
It has happened numerous times in the past, ever since the launch of Bitcoin. The most recent was from late 2017 to December 2020, when crypto prices fell and hovered far below prior peak prices.
But, what causes a bear market in the crypto space?
A crypto bear market, or any bear market for that matter, cannot be attributed to one or two factors. A bear market is typically caused by a complex combination of several factors. It could be as simple as a market bust following a boom, or it could be the result of a financial disaster that affects investors in a specific asset class.
A bear market usually occurs before or after an economic downturn. To assess the health of the economy, investors closely monitor key indicators such as hiring, wage growth, inflation, and interest rates. When investors see a declining economy, they predict a sharp drop in firm profits. As a result, they sell their stocks, resulting in lower prices and markets.
It’s not different for the crypto market. Let’s go through some reasons for the Crypto bear market:
It is a monetary policy tool that central banks use to reduce the amount of liquidity or money supply in the economy. During the early stages of Covid-19, when governments around the world were printing billions of dollars of cash and pumping it into the economy in an attempt to prop up the economy during a time of crisis when all businesses were forced to close.
Inflation began to take hold in 2020 as a result of the US government printing money to stimulate the economy. While the effort did help to prop up the economy, it also created a problem of readily available cheap cash. Governments are now working to reduce the readily available cash in the market and essentially cause a mini-recession to reduce inflation.
It is accomplished by raising government interest rates, which have an inverse relationship with asset classes such as stocks and now cryptos.
Excessively high valuations:
During a bull run, valuations tend to skyrocket beyond what is reasonable at the time. However, such exorbitant valuations do not last long, and a price correction is almost always unavoidable in any asset class, including cryptos. As a result, the current bear market is also undergoing a minor value correction. Not-so-good crypto projects are being filtered out, while the good ones will see through it all.
Poor investor sentiments:
It is another cause of market bear runs. Investors who have losses of more than 70%, 80%, or even 100% on their books will undoubtedly have difficulty re-entering the market. Understandably, confidence tends to be low during these phases. As a result of basic market dynamics, poor sentiment leads to poor demand, which leads to lower demand and thus asset value erosion.
What are the Phases of a Crypto bear market?
Crypto Bear markets typically consist of four distinct stages.
- The first phase is characterised by high prices. Following this period, investors begin to exit the markets and book their profits.
- Asset prices and trading activity fall in the second phase, company earnings fall, and previously optimistic economic indicators deteriorate. As the mood worsens, some investors succumb to fear, a condition known as capitulation.
- In the third phase, speculators enter the market, raising prices and trade volume.
- Crypto continued to fall, albeit at a slower pace, in the fourth and final phase. Bear markets eventually turn into bull markets as lower prices and positive news re-attract investors.
Crypto bull vs bear markets: An overview
Individuals or organisations that function differently are sometimes referred to as “bulls” or “bears.” Bulls buy crypto assets with the expectation that the market will soon rise, while bears sell crypto assets with the expectation that the market will fall.
A bull market occurs when prices within a specific area must or are expected to rise significantly. A bull market exists when prices rise by more than 20% after two 20% drops. When markets are bullish, it is interpreted as a sign that the economy is expanding and performing well.
Investment strategies in a crypto bear market
Accumulate by averaging your costs:
Dollar-cost averaging is an investment strategy in which an investor divides the total invested amount among periodic purchases of an asset to reduce the impact of volatility on the overall purchase.
Diversify your cryptocurrency holdings:
Diversification is critical in combating volatility. A prudent investor will diversify his or her portfolio among various crypto assets. The process of diversifying the portfolio among various crypto assets is entirely dependent on the investor’s risk tolerance.
Consider the long term:
A bear market could be the ideal time to diversify your portfolio with long-term cryptocurrency investments. With prices so low, focus on investments that will pay off in the long run, as short-term investments are less likely to pay off in this environment.
Make wise investments:
It is critical to understand your risk tolerance before investing in any asset class. This is especially true for volatile asset classes like cryptocurrency.
All indications in the cryptocurrency market indicate that the bear market is here to stay. The likelihood of a bull market resumption appears very low, owing to a variety of issues ranging from inflation to geopolitical tensions to regulatory obscurity. However, this does not mean that the crypto market has reached a fork in the road and will never recover.
So, this is the best time (to earn upto 17% APY) for crypto staking at a high yield account like 24Carret.
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