The simplest definition of a bear market is a market that is declining. In a volatile market like crypto, prices are constantly rising and falling, so a more accurate definition of a bear market is a period of sustained or extreme downward price action.
Bear markets vs bull markets
The opposite of a bear market is a bull market – a long period of sustained upward price action. Investor behaviour changes depending on the market’s bearish or bullish sentiment. While bull markets tend to see more speculation, more optimism, and generally more trading activity, bear markets see investors hunkering down or selling off positions as fears of further losses set in. Investors are more risk-averse during bear markets and prefer risk-off assets, like gold and bonds. Part of the reason the crypto market has been hit so hard in the past few months is that crypto is still considered a risk-off asset.
What causes a bear market?
Ultimately, a bear market is caused by having more sellers in the market than buyers, driving the prices of assets down. There are a few macroeconomic factors that make this happen. Take the current bear market as an example. Rising inflation, the war in Ukraine, and the possibility of a global recession are all contributing to bearish sentiment. None of these issues can be solved quickly, so the current bear market has the potential to last for a while.
Past crypto bear markets
To better understand what happens during a crypto bear market and how long one could last, it’s good to take a quick look into crypto’s history at three past bear markets. January 2012 – July 2012 Lawsuits and hacks spurred this early bear market in crypto. TradeHill, the only Bitcoin exchange of note at the time other than Mt. Gox, was mired in regulatory problems and had to shut down. That alone could be considered enough to start a bear market, but a series of hacks drove prices down even further. The first major incident happened in March 2012. Linode, a web hosting provider, was hacked to the tune of 46,000 BTC. One of the victims of the hack was Bitcoinica, a margin trading service. Bitcoinica’s pain didn’t stop there though – the service was hacked again in May, losing 18,500 BTC from their hot wallet. These events were enough to suppress the price of BTC for about 6 months before sentiment began to turn bullish again. November 2013 – January 2015 This prolonged bear market began partly due to the FBI shutting down Silk Road. Silk Road was an online black market, most notably used for buying and selling illicit drugs. While feelings on Silk Road may vary from person to person, there’s no denying that it was the first real example of the widespread adoption of Bitcoin as a currency. Due to the FBI stepping in, it’s understandable that many BTC holders could have been worried enough to sell their holdings. Silk Road being shut down wasn’t the only factor in this bear market – the now-infamous Mt. Gox also played a role. In early 2014, the major Bitcoin exchange stopped all Bitcoin withdrawals and blamed a bug in BTC for the decision. Three weeks later, the exchange filed for bankruptcy, claiming it had lost a total of 850,000 Bitcoin. As new evidence emerged of Mt. Gox’s mishandling of customer funds, investor enthusiasm waned, and Bitcoin tumbled down the charts after a brief recovery. The bleeding stopped in January 2015, but it wasn’t until later that year that prices began to rally again. December 2017 – March 2019 The period referred to as the ‘crypto winter’ began after a steep decline after many cryptos reached all-time highs in December 2017. What followed was a long period of downward price action and consolidation. By that time, Ethereum was rising as a competitor to Bitcoin in the cryptocurrency space, and with its increased importance came initial coin offerings (ICOs). Many ICOs turned out to be nothing more than scams and many investors lost big money. Some companies had even gone so far as to change their names to include ‘blockchain,’ trying to cash in on the trend. In addition to the ICO bubble popping, rumours of trading bans in China and the hack of Coincheck, a Japanese crypto exchange, created even more uncertainty in the market. Bearish sentiment would last until March 2019, when prices finally began to pick back up.
