What Do “Bullish” and “Bearish” Mean?
Market sentiment can be different across assets and asset classes. For example, the crypto market could be bullish while stocks are bearish. Or Bitcoin prices could be bullish while Ripple is bearish.
Bullish and bearish are a way to describe market sentiment, which can change at a moment’s notice. This is different from a recession or depression, which are economic terms with firm definitions that describe general market conditions.
Where Are These Terms From?
You can remember the terms “bull” and “bear” by the animals' actions. Bulls swiping their horns up represent prices going up. Bears swatting down with their paws represent prices going down.
There are also historical references to bulls and bears that may have led to their use in financial markets. There is disagreement about where the terms officially came from, so there are multiple alleged origin stories.
According to some experts, a 1709 essay used the term “bear” in a proverb to describe a seller of an imaginary object. Bear was short for bearskin jobber, a middleman in the bearskin market. The saying went, “It’s not wise to sell the bearskin before catching the bear.”
Assigning imaginary things value and selling them happened outside of the bearskin market. In the 1720 South Sea financial crash, the term “bear” emerged to describe stock sellers.
However, other sources say the terms came from a more barbaric origin. In early 1700s London, a popular spectator sport was animal fighting.
A bear or bull would be chained up and attacked by dogs and forced to fight to the death. The swipe-up and batting-down attack patterns of the animals would have been common knowledge due to these fights. Historians think this common knowledge was naturally translated to metaphors outside of battles, like in finance.
How Are Bullish and Bearish Markets Different?
Bullish markets have characteristics like low funding rates, increased retail trading volume, and massive startup fundraising rounds, to name a few. Bear markets, by contrast, have high rates, lower trading volume, and are challenging to raise money in.
An excellent example of a bullish market is the crypto market during early 2021 after covid stimulus checks went out. Social narratives were driving a massive volume of trading on Dogecoin and other meme assets.
Many crypto companies raised money at multi-million dollar valuations with no product or track record. NFTs like CryptoPunks, NBA Topshot, and Bored Ape Yacht Club skyrocketed to billion-dollar market caps in weeks.
What Causes Bullish and Bearish Standard Markets?
In non-crypto markets, bullish and bearish markets are influenced by geopolitical events, central bank decisions, and economic factors.
In recent years significant events like Russia invading Ukraine, Covid-19, the Fed raising rates, and supply chain crises have caused bearish market conditions. Before that, low rates, reduced taxes, and a strong economy caused bullish market conditions.
As we cover later in the article, the way outside factors causes bullish and bearish markets in traditional markets like equities and crypto are very different. Traditional finance markets involve trillions of capital dollars and decades of regulation, infrastructure, and study.
This means it takes significant changes on the macroeconomic scale to flip a whole market bullish or bearish. Because crypto is small relative to traditional finance, it has much more volatility.
Events that cause a 10% decline in equities could cause a 30% decrease in crypto. This is introductory investor psychology. In uncertain times most investors cut their risky investments and hold their low-risk ones.
What Is a Bullish Market in Crypto?
Bullish markets are characterized by large capital inflows and increased risk-taking behavior. You might notice many new crypto companies entering the market and raising money.
Crypto bull markets are also characterized by marketing saturation. You might notice companies, even non-tech ones marketing new crypto products.
Sports teams selling NFTs and banking companies advertising crypto products are both examples.
Trading in a bullish market can be highly profitable. When the market is bullish new cryptocurrencies and NFTs are hyped up. Whatever the “new thing” is is the hot thing. And there’s always a way to profit.
What Causes a Bullish Crypto Market?
Here are some examples of the killer apps that drove hype in previous markets:
NFTs drove much of the 2021 crypto bull market. DeFi, in general, drove the 2020 and 2021 markets. P2P smart contract lending and liquidity farming were two major DeFi use cases.
The point of these examples is that every bull market has some perceived or tangible innovation that drives capital to flood into the market.
Bullish markets generally come from a good economic outlook combined with cheap debt and entrepreneurial opportunities. Technological or legal developments can spur bull markets as well.
What Is a Bearish Market in Crypto?
Bear markets are characterized by low trading volume. For example, NFT trading volume is down as much as 94% since its high of the 2021 bull market.
In crypto bear markets, volume crashes and finding buyers to unload positions on can be challenging. With no buyers, market prices crash.
In theory, this is an excellent opportunity to buy undervalued assets. Buying undervalued assets during a bear market can be a wise investment strategy, as they can be cheaper than currencies in a market with a bullish trend.
But as we know, bull markets come with sky-high valuations. This means most tokens won’t reach their all-time high price again.
Bearish trends are driven by low volume. If you see volume lowering across an asset class, it’s a good indicator you are in a bear market.
What Causes a Bearish Crypto Market?
Geopolitical uncertainty, economic recessions, or high-rate environments cause bearish markets. These factors usually cause a pullback in the stock market.
The crypto market has unique weak spots that cause bearish markets. For example, the crypto markets are vulnerable to government regulation.
Legislation unfavorable to blockchain protocols, developers, and companies can cause extreme bearish sentiment.
Crypto is a nascent industry; investors and financing link major protocols and companies. A bank or lending institution going under can cause the market to become bullish overnight.
How Should Investors Respond to Bullish Crypto Markets?
Bullish markets are when you want to be taking profits. Disciplined traders know it’s easy to get greedy during a bull run and not sell. You should always have a plan for profit-taking in the next bull run.
Often bull markets follow the pattern of Bitcoin and Ethereum price increases, followed by a trickle-down to altcoins and digital assets like NFTs.
Fast run-ups and explosive growth characterize bull markets. You can tell a bull market is ending when splashy launches and bullish news doesn’t spike prices as high as it would earlier in the cycle.
There are diminishing returns later in a bull market as smart money rotates its capital out of speculative assets. Altcoins are especially risky to hold during the end of bull markets.
If you want to know more about how to trade bullish markets, you should check out our blog post on how and when to take crypto profits.
How Should Investors Respond to Bearish Crypto Markets?
The secret to surviving crypto bear markets is just not to trade. In bear markets, the counterparties you’re trading against are likely underwater and trying to pull any capital out that they can.
It is difficult to make profitable trades during bear markets. However, a downturn can be an excellent time to build up a prominent position in an asset you are long-term bullish on.
Cryptocurrency markets follow cyclical patterns. This means you can build an investment strategy around how assets perform coming out of a bearish trend. You can test strategies like this using Pluto’s backtesting tools to see how you would perform in any historical crypto market.
Should Investors Assume Bullishness or Bearishness as a Default?
Crypto Investors should seek to be unbiased when building a thesis around an asset or asset class. In crypto, it is advantageous to be cynical and protect your capital at all costs.
Depending on the time frames, you should be careful assuming one sentiment by default. Most who work in the crypto industry are long-term bullish on the technology.
But wise investors understand that even promising technology like crypto can endure longer periods of bearishness. These are called crypto winters.
The cryptocurrency market is very volatile compared to the stock market. Sentiment can flip to bearish in the best of times and bullish in the worst of times.
All that’s needed is a catalyst like economic data or new blockchain technology. Small triggers can cause bullish outlooks and a short-term uptrend in price. Significant catalysts can overshadow the market and can cause you to make emotional trades.
Regardless of market sentiment, the best investment advice is to make a plan. Check out Pluto’s new strategy builder. You can use it to make automated crypto trading strategies that take advantage of market conditions. Try making a bullish and bearish strategy and comparing the simulated results. You might be surprised by the results!