The term bear market refers to a negative trend in the prices of a market. It is widely used not only in the cryptocurrency space but also in the traditional markets, such as stocks, bonds, real estate, and commodities markets.
Generally speaking, a bear market refers to a strong market downtrend that presents significant falling prices over a relatively short period of time. When compared to traditional markets, cryptocurrency markets are smaller and thus more volatile. Therefore, it is quite common to see stronger and prolonged crypto bear markets, where 85% price drops are not that rare.
In traditional markets, some say that a bear market is indicated when a 20% price drop occurs within a 60-day period. This downturn is typically the result of investor pessimism related to a loss of confidence in the overall performance of the market prices and indexes. In response to pessimistic market sentiment, investors start selling their holdings, further impacting the falling prices and often leading to capitulation periods. A few examples of some US indexes include the Dow Jones Industrial Average (DJIA), the S&P 500, and the Russell 2000.
While a 20% drop in market prices is usually regarded as the beginning of a bearish trend, most signs of an impending bear market are not that obvious. Traders and analysts use numerous tools and systems to help them recognize other, less obvious, bearish signals and trends. Examples include moving averages (MAs), the Moving Average Convergence Divergence (MACD), the Relative Strength Index (RSI), the On-Balance Volume (OBV), and other technical analysis indicators.
Bear vs. Bull Markets
The opposite of a bear market is a bull market, which arises when investors are feeling optimistic. Rising prices (bullish trend) create a positive market sentiment and as traders feel more confident, they tend to invest more and more, causing a further increase in prices. Economists say that between 1929 and 2014, there have been 25 bull markets and 25 bear markets in the US. The average bear market loss was -35%, while the average bull market gain was roughly +104%. These trends reflect how market momentum sustains the continuous price increases (on bull markets) and decreases (on bear markets).