What is a bear market?

Bear markets are the nightmare of the financial world, bringing massive price declines. But every downturn is followed by renewed optimism—here’s how you can turn crises to your advantage.

Bear markets may sound frightening, but they’re as much a part of the financial system as ebb and flow. When assets drop by 20% or more from their recent highs, it’s considered a bear market. This often leads to pessimism and decreased demand. For investors, understanding these dynamics is crucial to protect their portfolio or even identify new opportunities amid the downturn.

The good news is that financial markets are cyclical, so bear markets never last forever. Downturns are followed by recovery phases, and with a smart strategy, investors can even benefit in the long run.

Bear market definition 

A bear market occurs when asset prices drop by 20% or more from their recent peaks. Trading activity slows, investors grow nervous, and this phase often lasts for months or even years. Historically, bear markets happen roughly every 3 to 5 years and last around 10 months—after which the market typically rises again. In contrast, bull markets, or growth phases, can last several years.

Not every drop is a bear market, and a bear market doesn’t equate to a recession. A 10% drop is classed as a correction, while a bear market involves a 20% or more decline, often signalled by factors like falling corporate earnings, decreased demand, and significant interest rate hikes.

Meanwhile, a recession is when GDP falls over two consecutive quarters.

Cycles and market phases

Financial markets move in cycles consisting of four phases: expansion, peak, stagnation, and then the sell-off. During the sell-off phase, prices hit their lowest, often driven by panic-selling and widespread pessimism. Investor psychology plays a key role here, as fear amplifies this “wealth destruction phase.”

After this, the market enters a recovery period where prices begin to rise again—the start of a new expansion phase.

Origins of the terms "bear market" and "bull market"

The terms “bear” and “bull” originated in the 17th century. Rising markets were likened to a bull thrusting its horns upward—symbolising price increases. The bear, preparing for hibernation, represented falling prices. These metaphors still describe market optimism and pessimism today.

Bear markets in history

Bear markets have repeatedly shaken the financial world—from the 1929 crash to the dot-com bubble burst in 2000 and the 2008 global financial crisis. These periods are challenging, but they often lay the foundation for the next bull market. Those who stay calm during a crisis can often benefit later.

Triggers of traditional bear markets

• Economic recession: When the economy slows, corporate profits fall—and so do stock prices.

• High inflation: Rising prices erode purchasing power, prompting central banks to raise interest rates, which makes borrowing more costly and dampens economic activity.

• Geopolitical crises: Wars, trade conflicts, or global crises cause uncertainty and often lead to sell-offs as investors seek safe havens.

The impact of bear markets on investors

Bear markets can quickly shrink the value of a portfolio, especially problematic for those nearing retirement, who have less time to wait out the downturn, potentially disrupting financial planning.

Long-term investors, on the other hand, may see opportunities, as buying undervalued assets can yield high returns later. Mental preparation and resilience are crucial to avoid panicking and to stay committed to one’s strategy.

Bear markets in the crypto world

The crypto market isn’t immune to bear markets—often called “crypto winters” here. These phases are notorious for extreme price fluctuations. An example is Bitcoin’s price crash from €18,000 to about €3,000 between 2017 and 2018, showing that bear markets are temporary—since 2019, Bitcoin has rebounded by over €50,000.

What drives bear markets in crypto?

• Regulations: Strict regulations or outright bans on cryptocurrencies can lead to severe market drops, as seen with actions from China and other governments.

• Security issues and fraud: Major exchange hacks have triggered panic sell-offs in the past. The 2022 Terra Luna crash wiped out billions within a week, dragging other cryptocurrencies down with it.

• Macroeconomic factors: Like traditional markets, cryptocurrencies are affected by global economic conditions like inflation and interest rate policies.

The risks of crypto bear markets

Crypto bear markets are known for extreme volatility. Some assets can skyrocket, while others may nearly lose their entire value. A lack of liquidity makes it difficult for investors to exit positions without significant losses.

However, disciplined investors see these bear markets as opportunities to buy undervalued assets and expand their positions long-term—provided they withstand the emotional toll.

How to protect yourself in a bear market

Bear markets are challenging but not insurmountable. With the right strategies, investors can protect their portfolio and even find opportunities to maximise gains.

• Diversification: Spread your investments! A broad mix across asset classes like stocks, bonds, commodities, and cryptocurrencies reduces the risk of a single sector’s collapse impacting you too severely.

• Hedging: Hedging strategies like buying put options or using inverse ETFs can help minimise losses.

• Stablecoins in the crypto market: Stablecoins like Tether (USDT) or USDC offer a safe haven in the volatile crypto market. Being pegged to traditional currencies, they avoid the extreme volatility of other cryptocurrencies.

• Avoid panic selling: Panic selling is the worst approach. Realising losses prevents future recovery gains. Stay calm and stick to your long-term strategy.

• Cost averaging: By investing a fixed amount regularly, regardless of market conditions, you can lower the average price of your assets over time, avoiding the risks of market timing.

• Mental strength: Bear markets are mentally challenging. Enduring red numbers in your portfolio requires nerves of steel. However, even the worst bear market eventually ends.

• Turning downturns into opportunities: Disciplined investors use downturns to buy in at low prices. This requires a clear plan and—most challenging of all—control over one’s emotions.

Conclusion

Whether traditional finance or cryptocurrencies, bear markets are part of the game. Understanding their nature helps investors keep their cool and potentially profit. With diversification, a long-term strategy, and mental resilience, you can weather any crisis. After every bear market, a bull market follows—bringing recovery and growth.

Frequently Asked Questions (FAQs)

What is a bear market?

A bear market occurs when asset prices drop by 20% or more from recent highs, leading to a decline in investor confidence and trading volume.

How long do bear markets last?

On average, bear markets last about 10 months, while bull markets can last several years or even over a decade.

What triggers a bear market?

Bear markets are triggered by factors like economic recessions, rising inflation, or major geopolitical events, which lead to a loss of investor confidence and widespread selling.

How is a bear market different from a bull market?

A bull market features rising prices and optimism, while a bear market brings falling prices and pessimism. Both are natural parts of financial market cycles.

How does a bear market affect cryptocurrencies?

Cryptocurrencies experience extreme price volatility in bear markets, with regulatory actions or security breaches potentially worsening the downturn.

Can you profit in a bear market?

Yes, strategies like short-selling, hedging, and using inverse ETFs can allow investors to profit in bear markets, though these strategies are higher risk.

How can I protect my investments in a bear market?

Portfolio diversification, hedging, and avoiding panic selling are key measures. Discipline and a focus on long-term goals are essential.

What role do stablecoins play in crypto bear markets?

Stablecoins provide a stable store of value in the volatile crypto market, being pegged to traditional currencies and helping investors avoid market fluctuations.

Does a bull market always follow a bear market?

Yes, a bull market generally follows a bear market as part of the cyclical nature of financial markets.

Should I sell my investments during a bear market?

Selling during a bear market often means realising losses. It’s usually better to hold through the downturn and even consider buying more if you have a long-term perspective.