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Gomoon's Guide to Bear Markets



Cryptocurrency is officially in a bear market.


This won’t come as a surprise to many who have been keeping even the most vague eye on the cryptocurrency markets in recent weeks, but for some it wasn’t officially confirmed until Bitcoin fell under $30,000 in early June. How do we know cryptocurrencies are in a bear market as opposed to a typical mid-cycle correction? In Gomoon’s Guide to a Bear Market, we take you through three ways in which you can tell that the crypto bear market is here.


What is a bear market?


Before we dive into the cryptocurrency side of things, let’s look at what a bear market actually is. Bear markets are periods in which an asset class experiences a slow and steady contraction of valuations, often over a period of months or years, leading to share prices dropping and stagnating. Sentiment over the sector is low, investors get no returns on their capital, and everything in the sector seems utterly dead. Many exit the market out of boredom, or because they have accepted their losses and want to move on.


Bear markets are long and brutal. The cryptocurrency space last experienced one between 2018 and 2020, during which time many mainstream media outlets predicted that the space was indeed finished. This proved to be monumentally incorrect.


How is a bear market identified?


Investopedia describes the onset of a bear market as follows:


“Bear markets are often associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can also be considered to be in a bear market if they experience a decline of 20% or more over a sustained period of time—typically two months or more. Bear markets also may accompany general economic downturns such as a recession.”


When it comes to traditional markets, a 20% correction is a serious thing. In the cryptocurrency world of course, this can be achieved in a matter of minutes, so the same rules can’t apply. Indeed, Bitcoin has dropped 50% over many weeks and gone on to reach a higher price, so this really isn’t a valid assessment.


If we can’t go by traditional financial metrics, then what can we use to determine if crypto is in a bear market? For this we need to look at charts, but don’t worry - we’ll explain everything as we go. Let’s begin.


Highs and Lows


We can get a very clear idea of when a bear market is starting by looking at the performance of the total cryptocurrency market cap. This is simply the dollar value of all the coins in the entire market, and looking at its ups and downs can give us a very clear idea of when bull and bear markets are starting and ending.


Here’s how the total cryptocurrency market cap fared in 2017 and 2018:



The cryptocurrency market cap started 2017 being worth around $15 billion and ended it being valued at over $764 billion. This wasn’t a slow and steady rise, it was a period of fast growth followed by a parabolic jump that was then followed by an equally big crash on the other side.


The upward momentum in 2017 illustrates the concept of ‘higher highs and higher lows’, a pattern that is typical in a bull market - price jumps up a little, drops to a point higher than it started, and then moves up further. This pattern repeats until the market tops out:


Some argue that the bear market started at the peak of the top spike, but this is not technically true - no one knew if it was a temporary break before a higher valuation, which is a phenomenon we saw in 2021. However, the 2018 chart shows us very clearly that a bear market had begun - the valuation did the exact opposite of 2017, setting in lower highs and lower lows as the market steadily unwound:



This pattern looks to have repeated throughout 2020-2022:


As we can see, 2021 saw the same pattern of higher highs and higher lows until November when the flip happened, and price has been stepping downwards ever since. This is a clear sign of a bear market.


Resistance


When price is stepping downwards as it has been since November, the concept of ‘resistance’ becomes critical to determining whether a bear market is starting. Resistance areas are points on a chart where it is clear that the market has decided that the asset in question isn’t worth more than a certain figure.


In the 2018/19 bear market, this area of resistance was very clear (see the blue box):



As we can see, faith in the cryptocurrency space effectively evaporated in May 2018 once buyers failed to push it past the area of resistance, with the bear market really kicking in right after.


When we look at 2022 we can see a similar thing, with price in freefall once this area of resistance acted like a brick wall in April:



It doesn’t need a trading expert therefore to see the importance of resistance!


Sentiment


The higher/lower pattern and the activity around resistance areas gives us a clear idea of when a bear market might be starting, but there is also the more intangible factor of sentiment to analyse.


When a market is in a bullish phase, there is only good news coming out. In the case of cryptocurrency there are stories about banks opening trading desks; countries adopting coins; companies accepting them as payment; various financial institutions, hedge funds and famous investors buying in…it is a tide of relentlessly good news. Even bad news gets washed over by the tide of euphoria sweeping it along to new highs.


When that tide turns, things get nasty. Suddenly there are stories of individual investors losing their life savings, of hedge funds getting liquidated, of countries banning crypto, of companies making job cuts. It is a barrage of bad news, and no good news makes any difference.


We saw this in 2017 and 2018 when the market changed from bull to bear, and we saw it again in mid-2021 when the same thing happened - Bitcoin went from being an inflation hedge to being a pollution-spreading unregulated monster in the eyes of the world’s press in a few short weeks.


Sentiment is not just restricted to the asset in question. With regard to the wider financial market, you only need to open a newspaper, do your grocery shop or fill up your car to know that the world is financially in a mess right now. In situations such as these, people want to make every penny count - and that doesn’t involve buying speculative assets.


Buy the Bear


It cannot be denied, therefore, that crypto is in a bear market, and in a bear market everybody is upset and angry, both themselves for not selling sooner and at other people because that’s what angry people do.


It takes time for these wounds to heal and for people to move on, but they will. People will leave the market, Google searches will collapse, and the world will move on. During this time the media will also, once again, pronounce crypto dead and move on.


The depths of the bear market are the hardest times to think about and care about an asset class…but they are also the best times to buy.



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