In the world of trading, such as stocks and crypto, there are certain patterns that determine the trend of increasing and decreasing market prices. Bear markets and bull markets commonly refer to the rising and falling trends.
A number of conditions can trigger bear markets and bull markets. As an investor, it is important to know the direction of these trends in order to make the right strategy to get the maximum profit. So, what is a bear market and a bull market? Why are both considered so important in the world of trading? Let’s find out through this article.
What is Meant by a Bull Market?
Crypto prices basically fluctuate continuously. In this case, the term “bull market” is often used when most crypto prices increase for a long time, since bull markets tend to last for months to years.
A bull market is a market condition in which prices are rising or expected to increase. This term generally refers more to the stock market or crypto, but it can also be applied to other types of traded securities, such as real estate, bonds, and commodities.
Understanding Bull Markets
A bull market is said to represent optimism, investor confidence, as well as expectations that strong prices will continue for a long period of time. It is not easy to predict exactly when the trend in the market will change. The hardest part is the psychological effect and speculation, which sometimes play a big role in the market.
Added to this is the absence of a specific, universal metric used to identify a bull market. However, the most common definition of a bull market is a situation where the price of a stock or crypto is up 20% or more from its lows.
Because it is difficult to predict, analysts usually only recognize bull market phenomena after they occur. One of the most notable bull markets in history was between 2003 and 2007. During that time, the S&P 500 increased significantly after previously declining, or in crypto, when in 2021 Bitcoin hits a price of $69,000 USD.
What Causes a Bull Market
Bull markets generally occur when the economy is strengthening or already strong. They tend to be in line with the strengthening of the gross domestic product (GDP) and a decrease in unemployment. Often it also coincides with an increase in company profits.
Investor confidence will also tend to increase during the bull market period. This makes the demand for shares or crypto positive, as well as increasing the number of Initial Public Offering (IPO) activities or the sale of initial shares from companies to the general public or investors.
Bull Market Characteristics
Bull markets see increased trading volume due to investors’ buy-and-hold strategy for capital gains and higher valuations as investors are willing to pay more. Apart from that, a bull market is also characterized by greater liquidity in the market because the demand for securities increases, with fewer sellers making it easier for investors to buy and sell quickly at a reasonable price.
Companies that perform well in bull markets also choose to reward their shareholders by increasing dividends. This method is considered to attract investors who tend to focus on income.
Finally, the number of companies going public may increase, as well as raising capital through IPOs during a bull market. Investors also have the opportunity to participate in the growth of other promising new companies.
Bull Markets vs Bear Markets
Apart from a bull market, another term for financial market conditions is a bear market. The opposite of a bull market, a bear market is marked by falling prices and is usually shrouded in pessimism.
The origin of the use of the terms “bull” and “bear” to describe the market stems from the way the animals attacked their opponents. The bull thrusts its horns in the air, while the bear swings its claws down. The action is used as a metaphor for the movement of the market. If the trend is up, it means a bull market. Conversely, if the trend is decreasing, it is a bear market.
The occurrence of bull and bear markets often coincides with economic cycles, which broadly consist of four phases:
- Expansion (growth)
- Recession (weakening)
- Trough (lowest point)
The start of a bull market is often a leading indicator of economic expansion. Because public sentiment about future economic conditions drives stock prices up, even before the wider economic cycle, such as the growth of gross domestic product (GDP).
Likewise, a bear market usually appears before an economic contraction, such as when the recession in the United States (US) causes the stock market to fall for several months leading up to a decline in GDP.
Take Advantage of a Bull Market
Any investor looking to take advantage of a bull market should make an early purchase to take advantage of price increases and sell when they reach a peak.
However, with the fluctuating movements in the crypto market, it is not easy to determine the lowest point and peak. Even so, investors can use their own tricks as a reference to optimize taking advantage of the bull market phenomenon.
In the following section, we will explain various strategies that investors often use during bull market periods.
Buy and Hold
One of the most basic strategies in investing is buying a particular security and holding it so that you can potentially sell it at a later date. This strategy must involve the trust of investors because the optimism that comes with a bull market will help drive the buy and hold approach.
Increased Buy and Hold
Another variation of this buy and hold strategy involves additional risk. The buy and hold approach is gaining momentum as investors continue to increase their holdings in certain securities, as long as their prices continue to rise. One common method of increasing ownership is to purchase a fixed number of shares, plus each increase in the share price of a predetermined amount.
Retracement is a temporary stock price reversal against an ongoing trend. Even during a bull market period, it is unlikely that the share price will continue to rise. On the other hand, there is a possibility of a small decline over a shorter period of time, even when the general trend is increasing. Some investors will watch for retracements in a bull market and buy during this period, assuming that the bull market will continue and the price of the security in question will soon rise again, allowing investors to get a discounted purchase price.
Full Swing Trading
Taking advantage of a bull market aggressively can be said to be the most aggressive way. Usually, investors who use this strategy will take a very active role, using short-selling and other techniques, to get maximum profit when shifts occur in the context of a larger bull market.
An Example of a Historical Bull Market
There have been several significant bull markets throughout history, each with its own characteristics and drivers. Here are some examples of the biggest bull markets in history:
The Roaring Twenties
Rapid economic growth, rising asset prices, and increased consumer spending marked the Bull Market that occurred in the 1920s. It ended due to the stock market crash in 1929.
The Japanese Bull Market
Rapid economic growth accompanied by rising prices marked the Bull Market that occurred in Japan in 1980. It ended with the explosion of the Japanese asset bubble in the 1990s.
Reagan Bull Markets
In the 1980s, the stock market experienced a bull market driven by Reagan’s economic policies, as well as the strong performance of the technology sector. This bull market lasted from 1982 until it ended in 1987 due to the crash of Black Monday in the stock market.
Bull Markets of the 1990s
The rapid growth of the internet and technology sectors fueled the bull market, also known as the dot-com bubble. This is evident in the S&P 500 index, which increased by more than 200%. This condition lasted from the early 1990s to the early 2000s.
Bull Market of 2009
This bull market started in March 2009 and lasted until February 2020, making it the longest bull market in history. Strong income growth, low interest rates, investor optimism, and an increase in the S&P index by more than 300% drove this condition.
Digital New Era (2020 – 2021)
The COVID pandemic unexpectedly accelerated the development of digital technology. At that time, the need for digital payment systems increased in almost every industrial sector. Transactions with digital currency (cryptocurrency) also received a lot of attention throughout 2020-2021.
The emergence of the multibillion-dollar NFT market also played a key role in kick-starting this new era, where technology adoption is becoming more advanced and effective. It’s no surprise that cryptocurrencies have grown phenomenally over the years of the pandemic period.
It is known that the price of Bitcoin skyrocketed from $6,000 USD in March 2021 to a peak of $69,000 USD in November 2021. Similarly, Ethereum increased from $1,491 in March 2021 to $4,878 in November 2021. Ethereum has recorded the highest increase of all time.