Bear Market: what is it and how does it work?

Whether you are an experienced investor or a beginner in this market, it is likely that you have heard the expression “ Bear Market ” while researching an asset – especially equities that are traded on the exchange. As one of the most used by the market, this term refers to periods of devaluation.

The expression can also be used when the crypto market is down, since the same criteria are used. Understand how the Bear Market works and which factors most influence this type of variation.

What is Bear Market?

The Bear Market (“bear market”, in free translation) is a term widely used in the financial market and now also in the crypto segment. It is generally associated with pessimistic investor sentiment about the economic outlook.

The expression is believed to have originated due to the way bears attack their prey, knocking them down with their paws. Likewise, in a bear market, stock prices fall.

During a Bear Market, the predominant feeling is one of fear and uncertainty, and actions are aimed at selling assets in order to limit losses. This selling cycle causes asset prices to fall, generating a negative effect on the entire market.

Although the Bear Market is associated with financial losses, it can also be seen as an opportunity for savvy investors to buy assets at lower prices. However, it is important to remember that investing during this period can be risky and requires a careful approach with a long-term focus.

How does Bear Market work?

Characterized by a downward trend in prices, the Bear Market occurs in periods of recession, political instability or financial crisis.

In this scenario, investors tend to sell their assets, which leads to a drop in asset prices. As a result, other investors also become concerned and start to unload the portfolio, creating a “snowball” effect and general dissatisfaction in the market.

During the Bear Market it is common for the demand for assets to be low, while the offer is high, which contributes to the fall in prices. It is worth mentioning, however, that this period does not affect all companies and cryptocurrencies in the same way, since it is influenced by several factors, such as the nature of the business, the financial strength of the company, the quality of its management, etc.

How long does a Bear Market last?

When it comes to the duration of a Bear Market, there is no set deadline to be established. In fact, this period can vary widely depending on the economic conditions and the factors that triggered the fall in the prices of the cryptocurrencies involved.

In general, a Bear Market is characterized by a prolonged downward trend in prices, with a significant decline in asset values ​​for at least a few months. In some cases, this low moment can last a few months or extend for years.

An example of a Bear Market that lasted a long time was the period between 2007 and 2009, when a global financial crisis led to a sharp drop in stock prices around the world. At that time, the Dow Jones Industrial Average dropped more than 50% and the stock market’s full recovery took years.

What factors influence the market decline?

Bear Market can be caused by many factors such as economic recessions, financial crises, political instabilities, changes in government policies, etc. In the crypto market , the effect is even more widespread, as a fall in Bitcoin (BTC) tends to “pull” other tokens with it.

Some factors that can influence a bearish moment are:

  • Economic conditions : when the economy is in recession, investors tend to be pessimistic about companies’ profit prospects and sell their assets, which can lead to a drop in prices;
  • Political instability : political uncertainty can lead investors to become cautious and sell their assets;
  • Financial crises : investors lose confidence in the financial system, and end up disposing of assets;
  • Changes in government policy : Policies seen as negative – such as tax increases or tighter regulations – can lead to a drop in prices;
  • Negative news about companies : Negative news can include a drop in profits, financial problems or corporate scandals;
  • Currency fluctuations : when a country’s currency devalues ​​against other currencies, national companies find it difficult to compete with international ones;
  • Increase in interest rates : this scenario encourages demand for other types of assets, such as government-linked debt securities, which offer a safer and more predictable return.

Bull Market vs Bear Market

Just as there is the Bear Market in times of low, there is also the opposite: the Bull Market (“bull market”, in free translation), which represents the high period in the volatile asset market. The expression refers to the way bulls attack their enemies, lifting them up with their horns.

That is, the main difference between the terms is the direction where the market is moving. During the Bear Market, investor sentiment is generally bearish as they are concerned about the economy and business prospects. In the Bull Market, the investor is more optimistic and confident.

Usually, the sectors most affected by the Bear Market are more sensitive to economic conditions – such as real estate, construction and finance in general. In a bull market, on the other hand, the sectors that tend to do best are those that are on the rise, such as technology, healthcare and consumer.

How did the Bull Market and the Bear Market come about?

It is not new that expressions related to the fall and rise of the market exist. They date back to the 18th century and appeared on the London Stock Exchange, where there was a custom of placing statues of a bull and a bear outside the building to represent the markets.

Although these expressions appeared a long time ago, they are still frequently used today to describe the general trend of the financial market. They help you understand investor behavior and make informed decisions about how to invest in different types of markets.

How to invest in Bear Market moments?

Despite the fact that the Bear Market represents the bear market, it does not mean that it is time to pause investments. Quite the contrary: the downward trend in prices can be an excellent strategy to diversify the portfolio and take advantage of “promotions” in the crypto market.

The best way to minimize risk during a market downturn is to build a diversified portfolio. Bonds are a safer option than stocks as they offer predictable cash flow and a fixed return. In the crypto segment, investing in solid currencies – such as BTC and Ether (ETH) – are the best option.

Finally, it is important to maintain a long-term investment horizon and not react impulsively to price fluctuations. History has shown that the market recovers after the downturns, and those who manage to hold their positions can benefit from an eventual recovery.