Definition
Markets that experience prolonged and/or significant growth are referred to as bull markets. On the other hand, markets that experience sustained and/or substantial declines are called bear markets. Both types offer unique opportunities and challenges.
Whether you’re looking into cryptocurrency, stocks, real estate, or any other asset, you’ll often hear markets described as either a bull market or a bear market. To put it simply, a bull market is one where prices are rising, while a bear market is one where prices are falling. Because markets can be volatile on a day-to-day (or even moment-to-moment) basis, these terms are typically reserved for:
- Longer periods of mostly upward or downward movement
- Significant upward or downward swings (20% is the widely accepted threshold)
What is a Bull Market?
A bull market, or bull run, refers to a period when the majority of investors are buying, demand surpasses supply, market confidence is high, and prices are increasing. If you notice prices rising rapidly in a particular market, this could be a signal that most investors are becoming optimistic or “bullish” about the price continuing to rise, which may indicate the beginning of a bull market.
Investors who believe prices will continue to rise are known as “bulls.” As confidence increases, a positive feedback loop occurs, attracting more investment and driving prices even higher.
Because the price of cryptocurrencies is heavily influenced by public sentiment, some investors use a strategy focused on gauging the optimism of other investors in a particular market. This is known as “market sentiment.”
What Marks the End of a Bull Market?
Even during a bull market, there will be fluctuations, dips, and corrections. It’s easy to misinterpret short-term downward movements as the end of a bull market, which is why it’s important to take a broader view of the price action over a longer time frame. (Investors with a shorter timeframe often talk about “buying the dip.”)
History shows that bull markets don’t last forever, and at some point, investor confidence will begin to wane. This decline can be triggered by events ranging from unfavorable legislation to unexpected situations like the COVID-19 pandemic. A sharp price drop could mark the beginning of a bear market, where more investors believe prices will keep falling, leading to a downward spiral as they sell off their assets to limit losses.
What is a Bear Market?
Bear markets are defined as periods where supply exceeds demand, confidence is low, and prices are falling. Pessimistic investors who believe prices will continue to drop are referred to as “bears.” Bear markets can be tough to navigate, especially for inexperienced traders.
It’s notoriously difficult to predict when a bear market will end or when the lowest price point has been reached. The recovery process tends to be slow and unpredictable, influenced by external factors such as economic growth, investor psychology, and global events.
However, bear markets also present opportunities. If your investment strategy is long-term, buying during a bear market can yield significant returns once the cycle turns around. Short-term investors may look for temporary price spikes or corrections. More advanced investors may use strategies like short selling, which involves betting that an asset’s price will decrease. Another strategy is dollar-cost averaging, where investors commit to investing a set amount of money (e.g., $50) regularly, regardless of market conditions. This approach spreads risk and allows you to invest through both bull and bear markets.
Where Did These “Bull” and “Bear” Terms Come From?
As with many financial terms, the origins of “bull” and “bear” aren’t entirely clear. However, it’s widely believed that they stem from the way each animal attacks: bulls thrust their horns upward, while bears swipe downwards with their claws. There is a rich history of theories and evidence regarding the origins of these terms, and if you’re curious, this Merriam-Webster explainer offers further insight.