Crypto bull and bear markets, explained

• Bull markets are defined by a sustained upward trend in prices, while bear markets are characterized by a prolonged downward trend.

• In bull markets, investors focus on accumulating and diversifying assets, while in bear markets, they prioritize risk management and may utilize strategies like going short with futures.

• Bull markets are fueled by optimism and confidence, leading to increased buying activity, whereas bear markets are driven by fear and pessimism, resulting in widespread selling pressure.

Bull and bear markets are terms used to describe prolonged periods of rising or falling prices, respectively. 

In crypto markets, bull markets can last for many months and are generally driven by widespread investor optimism. Bear markets, or "crypto winters," can also last several months and occur when overall investor sentiment declines. 

Traders may attempt to take advantage of these naturally occurring trends by adapting their investment strategies, such as using crypto derivatives, or diversifying across multiple crypto assets.

While crypto and traditional markets both experience bull and bear markets, there are some notable differences and influential factors that separate them apart:

• Trading hours: Traditional financial markets trade during specific hours and close on weekends and holidays. Crypto markets, however, operate 24/7/365. This creates a more flexible, accessible and convenient market, allowing investors from any country to trade without interruption. Some argue that the crypto industry’s unrestricted trading hours mean that there are no circuit breakers to help dampen volatility.

• Market maturity: Some of the earliest traditional markets emerged in the 18th and 19th centuries, including the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). In comparison, the first crypto markets arrived with the launch of the Bitcoin protocol in 2009. Research suggests that the nascent market has attracted increased speculation compared to traditional markets, leading to higher volatility.
  Additionally, many cryptocurrencies tend to have significantly smaller market capitalizations, trading volume and liquidity than established traditional assets. For example, Apple’s (AAPL) market capitalization is higher than the market capitalization of the entire crypto market.

• Volatility: In traditional markets, bull and bear markets are generally defined by any increase/ drawdown of over 20%. However, in the crypto market, much higher price swings can occur. During the 2018 crypto winter, Bitcoin price fell by more than 83%.

• Social media influence: One study shows that social media can play a significant role in influencing volatility during crypto bull or bear markets. While another found that social media tends to only have a short-term effect on stock markets.

There are several theories as to why these markets are named after bulls and bears. 

The leading one comes from London in the 1700s where observers noted the manner in which a bull attacks by thrusting its horns upwards, and the bear comes from the way a bear attacks its prey by swiping its paws downwards. 

Both animal attack patterns are meant to resemble the way markets behave (upward for a bull market, downward for a bear market).

Catalysts

Some argue that crypto bull and bear markets follow a cyclical 4-year pattern, centered around Bitcoin’s halving event (which marks a 50% cut in the Bitcoin reward miners receive for mining new blocks). The halving event has historically led to bull markets, and the existing historical data seems to support this theory, it remains too early to say with any certainty. 

It’s worth noting that liquidity cycle uptrends are better at predicting bull market catalysts than Bitcoin halving are. However, thus far, each halving event has lined up with an expansion of liquidity in the market. 

Other historical catalysts that lead to bull markets in crypto include institutional and country adoption (like El Salvador accepting Bitcoin as legal tender in September 2021), maturation of the infrastructure, or a positive change in regulations.   

Historically, bear markets have immediately followed a major price increase in a short period of time where demand vastly outpaced the available supply. This typically leads to a liquidity crunch as demand wanes. However, bear markets have also coincided with a shift in investor sentiment following things like negative changes in regulation (for example, China banning Bitcoin mining in September 2021) and high-profile frauds and scams (like the Luna and FTX collapses detailed below).

Duration

The length of bull and bear markets can vary significantly. Historically, however, both crypto and traditional bear markets tend to last shorter than bull markets. 

In traditional markets, bear markets last on average 1-2 years compared to bull markets that can last for several years. In fact, the longest bull market lasted 12 years between 1987 and 2000, whereas the longest bear market lasted 3 years between 1946 and 1949. 

In the crypto market, the longest bear market lasted 1 year and 8 months and the longest bull markets lasted 2 years and 11 months.

Bull market vs bear market

Both bull and bear markets are cycles driven by the relationship between supply and demand. In bull markets, demand outpaces supply, and in bear markets, supply outpaces demand. 

While they both involve significant price movements and shifts in investor sentiment, their underlying causes, duration, and other factors differ. 

For example, bullish markets tend to be more liquid than bearish markets, mainly due to higher trading volumes and increased demand for assets. Higher liquidity may make it much easier to buy and sell large volumes of cryptoassets without impacting their market prices.

During the 2021 crypto bull run, the price of Bitcoin increased by over 1,300% between March 2020 and November 2021, with its price reaching an all-time high (at the time) of around $68,000.

This led to an overall growth in the crypto market and could be attributed to several factors, including several high-profile institutional investments (like Tesla and Microstrategy investing in BTC), high liquidity thanks to central banks' money printing in response to the COVID-19 pandemic, and a growing interest in NFTs and decentralized finance (DeFi).

The 2021-2022 bear market that followed saw the price of Bitcoin decline by 77%, crashing all the way down to around $16,000. This period was marked by two major catalysts: 

• Terra Network collapse – The Terra network collapsed in May 2022 following the de-pegging of its algorithmic stablecoin, TerraUSD (UST), from the US dollar. This triggered a massive sell-off of UST, leading to the decrease in value of both UST and Terra Network’s native token, LUNA. This event not only wiped out billions of dollars from the crypto market cap, but also resulted in the arrest of Terra’s founder, Do Kwon.

• FTX collapse – The FTX exchange collapsed in November 2022 following a series of events triggered by a report highlighting the close financial ties between FTX and its sister company, Alameda Research. The ensuing crisis, marked by a massive bank run and failed acquisition attempts, led to FTX's bankruptcy and criminal charges against its founder, Sam Bankman-Fried. 

Bull markets

In crypto bull markets, it’s common to see traders encourage others on social media to “HODL” — simply buy and hold a cryptoasset as prices appreciate, or “buy the dip” —  purchase cryptoassets whenever prices temporarily deviate from the uptrend. 

The goal of this latter strategy is to continue accumulating cryptocurrencies and profit if prices recover from the downturns.

In some instances, certain digital assets or crypto sectors may perform better than others at different stages of a bull market for a variety of reasons. In a bid to try and capture these potential gains, some investors may opt to diversify across multiple cryptoassets. 

Diversification is generally considered to be a useful tool for spreading risk across multiple assets or markets.

For more experienced traders, they may decide to try and increase their profitability by using derivatives that give them the opportunity to use leverage to make outsized profits at the cost of increased risk. Popular types of crypto derivatives include:

• Margin trading – Practice of using borrowed funds from a broker to trade a cryptoasset
• Futures –  Agreement between traders to buy and sell an asset for a certain price at a future date
• Perpetual swaps – Type of futures contract that doesn’t have an expiry date.

Traders must be aware that trading derivatives can be risky as it typically involves leverage, which may expose them to liquidation if the trade behaves in the opposite manner of their prediction.

For more information, check out our Kraken Learn Center guide, What are crypto derivatives?

Bear markets

In bear markets, many investors tend to prioritize risk management strategies, such as selling their assets for more stable alternatives (like cash and stablecoins). This may help traders protect their portfolios from futher losses. 

A common trading strategy for bear traders, or bears, is short selling. This involves borrowing assets, selling them immediately and repurchasing those assets at a lower price, profiting from the price difference measured in fiat.

Dollar-cost averaging is a common investment strategy for investors who wish to invest in the market without having to time it. DCA involves investing a fixed amount of fiat into crypto at regular intervals, like purchasing $100 worth of BTC every month, regardless of market fluctuations. 

This may be an effective method for accumulating cryptoassets during a downturn and reducing the overall cost-basis (average purchasing price of assets). Additionally, it takes out the guesswork of trying to time the market with a single lump-sum investment. 

Similar to bull market trading, advanced traders who are adept at noticing a bull or bear market and trade crypto derivatives like futures to go short and try to profit from any potential further decline.

Bull and bear traps

A bull trap happens when a cryptocurrency rises during a bear market, leading investors to purchase more crypto. However, once all purchases have been completed, the decline in demand causes a drop in price, and investors incur a net loss on their investment.

A bear trap is a temporary dip in a bull market, falsely indicating that prices might be about to fall further when, in fact, they are not. Investors who get “trapped” sell their crypto assets to avoid losses, only to see the market continue to grow.

Understanding the unique characteristics of crypto bull and bear markets, how long they can last and how other traders position themselves during these events can be vitally important for new crypto users.

Knowing what sets these market phases apart may allow investors to make better-informed trading decisions and help them to adapt their strategies accordingly.

Now that you understand how bull and bear markets work, you may want to take the first step on your crypto journey.

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