What is a bull market?
It refers to a period of favorable economic conditions. As a result, prices rise and investors have a good opinion about the likelihood of sustained growth and consequently, they start buying more. Some markers of such periods or that they are likely to come are:
- Low unemployment – during economic growth usually fewer people are unemployed;
- GDP growth;
- High demand – due to the higher demand the supply will have to adjust and grow to lead to more production and higher prices of scarce products;
- Overpriced projects – during times of growth some projects can be overpriced in the crypto world due to the higher optimism among investors about future prices;
- Interest in media – if the media mentions something and relates it with a good outcome, more people may invest in it soaring its price. Celebrities are another factor that can rise the price of a cryptocurrency;
As we said due to the increased demand crypto prices will increase, however not every increase should be considered a bull run. In traditional finance (TradFi) a bullish period is considered when there is at least a 20% increase over a longer timeframe. In the crypto world due to their smaller size markets are much more volatile compared to the traditional ones. Consequently, when crypto prices rise by more than 40% over a day or two it is considered a bull run.
It is essential to keep in mind that this term refers to overall growth over a longer period of time. That means that there still be some fluctuations but in the long term there is still growth.
What marks the end of a bull run?
Due to the higher demand, the supply will grow. Also, after some time the demand may become smaller. Both things can make the market saturated leading to a period of decline. Macroeconomic factors also can heavily influence the crypto world. If there are unfavorable economic conditions in major countries, this will negatively impact the crypto world. Also, some unexpected disasters, events, or diseases like COVID-19 can lead to it.
If prices rise too quickly, assets may become way too overpriced. This is called a bubble. When people realize that an asset has a too high price they may start selling it. As a result, the price of the asset will drop. Other investors may panic and sell their assets too. Sometimes this may lead to a long downturn which is called a bear market.
What is a bear run?
It occurs when the economic conditions are bad – unemployment is high, demand is smaller, and real GDP doesn’t grow or becomes smaller. As a result, investors are uncertain about the future and don’t risk buying. There must be a longer period of decline of prices and it has to be at least 20% (around 10% it’s called a correction) if the asset is more volatile, the decline usually is higher. The causes of such periods of time may be government mismanagements, natural disasters, pandemics, wars, and the decline of major economies. It’s important to notice that during such periods the highest profits can be made because you buy when the prices are at their lowest. However, predicting when the dip will be can be very challenging and the prices can drop below your expectations leading to losses. Due to the fairly high risk of not knowing how much prices will drop people prefer to sell or at least not to buy.
Bull vs. bear market: Key differences
Bullish periods are the opposite of bearish ones. The first one refers to prolonged economic growth which is at least 20% while the second one refers to a decline which is also at least 20%. On average bearish periods are shorter than bullish. In periods of economic downturn inflation and unemployment grow while real GDP declines with investors’ eagerness to invest. On the other hand, in bearish periods real GDP grows, unemployment is low and people trust more in the market more.