Few developments spark more fear in investors than a bear market, a period when investors sell off stocks, bonds, commodities, or other assets. These downturns are marked by a decline in a market’s value of at least 20%, and they can stretch from two months to years as investors offload risk and safeguard their assets by converting them into cash.

Bear markets tend to be sparked by an unforeseen event, such as the subprime mortgage crash of 2008, which triggered a huge plunge in markets and led to the Great Recession. Now, the sudden rise in consumer prices that began in 2021 seems likely to trigger another bear market. That’s because inflation typically spurs the U.S. Federal Reserve to raise interest rates, which makes capital more expensive and damps economic growth.

These market downturns often strike in tandem with recession and rising unemployment. In contrast, a bull market is driven by economic growth and marked by a steady increase in asset valuations.

What does a crypto bear market look like?

Cryptocurrency

markets are much more volatile than stock or bond markets. Unlike publicly traded companies, Bitcoin and other cryptocurrencies don’t produce financial performance data such as earnings that investors typically use to attach a valuation to a security. Nor do they generate a stream of steady income like bonds—which also can be easily valued by investors.

As a result, crypto investors are primarily driven by market psychology. That’s why digital assets are a much more speculative asset class than traditional securities. It’s also why crypto bear markets in the past have been lengthy and punishing—it took Bitcoin almost three years to break free of what enthusiasts called “crypto winter,” the downturn that commenced with a crash in November 2017 and erased 81% of the token’s value at the bottom.

Still, when it comes to bear markets, cryptocurrencies behave much like other investments: they lose value for an extended period of time until something happens to reinstill confidence. In 2020, for example, a bear market in crypto triggered by the outbreak of Covid-19 switched to a bull market when lawmakers and the Fed delivered trillions of dollars in stimulus to companies and households to cope with fallout from the pandemic.

What are the signs a crypto bear market is coming?

The signs a bearish period is looming in crypto are quite similar to those in traditional markets. The first red flag is hype. In crypto’s case, that’s marked by the rapid acceleration of digital assets to all-time highs without a commensurate change in their usefulness in daily life. When the market capitalization of cryptocurrencies quintupled over the 12 months between June 2020 and June 2021, investors predicted Bitcoin would soar to $1 million per token and usher in a new era of digital finance for the masses.

Bitcoin reached an all-time high of $69,000 per coin and a market value of $1.3 trillion in November 2021. Yet other than the introduction of non-fungible tokens (NFTs), widespread adoption of crypto didn’t materialize and a selloff across the sector began in December 2021.

Another sign of a bear market in crypto is correlation. That’s when one asset class tracks the performance of another. Beginning in 2021, Bitcoin, Ethereum, and other leading cryptocurrencies started matching the ups and downs of stocks, especially the shares of high-flying technology companies.

Cryptocurrencies were designed to do the opposite. As blockchain-based, decentralized assets, they are not supposed to be affected by the behavior of traditional securities. And yet, the correlation between crypto and stocks shows that investors weren’t making that distinction: They bought stocks and crypto when bullish sentiment was strong and began dumping both when the market’s mood shifted amid rising inflation, interest rate increases, and geopolitical instability in Europe. In other words, if stocks swoon, so, too, does Bitcoin.

Crypto bull vs. bear markets: What are the differences?

Here are some of the less obvious distinctions between the two:

• Quick rebounds vs. slow recoveries.

  In bull markets, cryptocurrencies are frequently hit by unexpected developments such as China’s crackdown on Bitcoin mining in May 2021. Yet, digital assets quickly shake off such risks and continue to soar in value. In bear markets, such surprises reinforce falling confidence and rebounds are quickly erased. That happened in April 2022, when investors mistakenly believed the impact of interest rate hikes had been fully priced into the market. Yet, in the next month, crypto continued to plunge along with the stock market.‍

• Buying the dip vs. hodl

  . When crypto drops in bull markets, many investors race to scoop up digital assets because they are confident it’s a blip in a rising market. When investors fear a bear market is tightening its grip they either sell or “hodl,” which is crypto-speak for holding fast to positions no matter what. In a bear market, crypto social media fills with pleas to “hodl” and it becomes a loyalty test for believers. 

• ‍Momentum vs. technical analysis. Crypto bull markets are driven by emotion. Investors make wild predictions about the growth of Bitcoin and virtually high-five each other on social media. Crypto bear markets are marked by investors poring over price charts and searching for past patterns to get a handle on where the “market floor” may be. This type of technical analysis brings a semblance of order to an otherwise chaotic market, and it’s more prevalent during downturns.

What are the considerations when trading in a bear market?

Investing in a falling market, much less the crypto market, is not for the faint of heart. For starters, the major cryptocurrencies tend to march in lockstep with Bitcoin so it’s hard to find digital assets that may go up when everything else is going down. That’s different from the stock market: Not only are some sectors, such as health care, largely insulated from economic downturns, but many stocks pay dividends that can buffer falling share prices.

There are ways to short-sell cryptocurrencies—profiting when prices drop instead of rise—using derivative instruments such as futures contracts or options. Crypto bears are constantly investing in this way—even during bull markets—to pocket profits from short-term declines in asset prices. Yet, trying to short cryptocurrency is a challenging and complex trade, not to mention much riskier than just waiting for the return of a bull market.

Perhaps the primary consideration is investor confidence—if investors believe in the future of cryptocurrencies, then bear markets offer a chance to build a portfolio on the cheap. That’s what long-term investors do in the stock market. Eventually, bear markets turn into bull runs that send prices to new highs. 

The bottom line

Bear markets drag down cryptocurrencies just like any other asset class. Yet, they may be more severe and longer lasting than downturns in other markets. Unlike equities or bonds, which are directly linked to the fortunes of the economy and Fed policy, Bitcoin and other tokens are driven primarily by speculation.As a result, it can be harder to know how and when crypto will slide into a bear market, and how it will flip the script and enter a bull run. It’s possible that the correlation between Bitcoin and stocks is a new indicator investors can track to predict the direction of the market—if stocks shake off a slump, perhaps crypto will, too. And then those investors who went shopping during the downturn may be rewarded.