If you have been following the world of cryptocurrencies in the last year or so, then you know how Bitcoin is rising one day and falling the next. When it is on the rise for a longer period of time (this is called a bull market), everybody gets excited and starts buying, usually when it is at its high point. When the Bitcoin price starts dropping (this is called a bear market), people get scared for their money and start selling. This is a prevailing story of the so-called bull and bear markets.
And then you might have a neighbour with a smile on his face, despite the low Bitcoin prices. And you might wonder what is wrong with him and how can he be happy if everyone is talking about how Bitcoin is obsolete and will soon vanish. It is apparent that your neighbour knows how the crypto markets work.
Currently, it is safe to say that we are in a bear market. Prices are falling and everyone seems to be selling their cryptocurrencies. However, some people (like your neighbour) see it as an opportunity to raise their stake in the game.
People react differently in the bull and bear markets. They are often driven by fear — fear of missing out, fear for their money, fear of losing, and so on. In this article, we will show you how bull and bear markets work and explain why your neighbour has a smile on his face, whereas you are biting your nails and praying for a price reversal.
Current status of the crypto market
2018 hasn’t been the best year for cryptocurrencies if we focus solely on the prices, which, if we are honest, is still the main thing that people are interested in. The total crypto market capitalization right now is about 80% lower than it was at the peak of the hype back in January.
But that’s all it was really — hype. And as you already know, this is how crypto markets work and it is why they are often more volatile than traditional markets.
But is this a good reason to say that crypto is obsolete and won’t survive? I would say definitely not. The market conditions may trigger “bad thoughts and scary predictions” but it doesn’t mean that crypto is failing.
What we have to do is to extend the charts back to October of 2017 to see the market cap that is comparable to the one we see today, i.e., around $150 billion. The price of Bitcoin then was similar to its price today.
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For the entirety of 2017, the market was extremely bullish, and ever since early 2018, the market is in a bear trend. So let’s take a closer look at both types of markets and explain your neighbour’s excitement when he sees Bitcoin being in the red.
Bull & Bear Market Explanation – what do animals have to do with it?
The basic explanation of these terms is actually very simple and useful if we want to understand various bitcoin predictions.
- Bear market: when the public is pessimistic. This creates a market where the prices are falling, encouraging fear of losing money and therefore a selling of the assets.
- Bull market: when the public is optimistic. This creates a market where the prices are rising, encouraging fear of missing out, and therefore a buying the assets.
Why do we use bulls and bears to refer to market conditions?
When a bear attacks, it swipes its paws down, so in that sense it kind of makes sense that a bear market is the one that has a downtrend. When a bull attacks, on the other hand, it lowers its head and uses its horns to thrust the opponent up in the air. In this sense, it also makes sense to say that a bull market is the one in which the prices rapidly climb.
What is a market correction?
Markets always have cycles, so they go up and they go down. This is perfectly normal. Here it is vital to understand the difference between demand and pure speculation.
If the prices are rising and then fall dramatically, this is known as a correction. The traditional consensus is that a 10% drop constitutes a market correction. A “bear market,” in crypto world, however, is usually at least a 20% drop in the market.
If Bitcoin would be a part of traditional markets (like Nasdaq and gold on the market), it would rise or fall solely proportionally to demand. But the supply of Bitcoin is limited, so people use it as a store of long-term value. This fact, along with Bitcoin representing a better means of transactions, is often what drives up the price. In that sense, Bitcoin is precious and rare, providing another healthy reason for the rise in price.
However, there are less healthy rises where Bitcoin price goes up simply because people think it is going to continue rising indefinitely. We mentioned this at the beginning and it is called hype. It is driven by pure speculation and a greedy wish of getting easy money.
The problem with speculative bubbles is that they are not backed by real-world use-cases, but by little more than people’s emotions, hunches, hopes, and dreams.
At some point, the price inevitably stops rising and begins to stall. When this happens, the fear comes back into play and the money starts to leave crypto. Some people stay in for the long term due to their strong belief in Bitcoin, and others stay because they simply hope that it will rise again. The panic sets in when the price gets even lower.
This is a well-known cycle of all things that are being traded on open markets. It can have a snowball effect when the price starts to drop and lead to more selloffs and a further decline in prices, which, in turn, raises the possibility of unnecessary losses. And while you are crying over your losses, your neighbour smiles.
The benefits of a market correction
First of all, a market correction always provides an opportunity for people to focus on the technology.
Those who were in it only to make a quick buck will get disinterested, leave the market, wait for better times or not come back at all. But people who actually see real utility in the technology, will stay and fight through it. Longer bear trends will also eliminate tokens that don’t have a real-world use-case. We know that some tokens were created in the ICO craze with the sole purpose of riding the hype wave of 2017.
It doesn’t mean that crypto is dying just because the prices are falling. No one can predict how the market will behave, but the technology is being continually improved by those who actually participate in its development.
Second of all, more and more cycles of bull and bear market strengthen the belief in Bitcoin and in the blockchain technology in general. The tech gets more supporters and becomes a movement. And if something becomes a movement, it is much easier to raise awareness of any problems that this world might have — technological, environmental, political, cultural, etc.
Technology can save time and money, it can feed the hungry and provide homes to the homeless. The blockchain technology, for example, can save lives by enabling a full transparency and traceability of the ingredients in the food and pharmaceuticals (around half a million people die every year due to fake malaria medicine). It can be used for art authentication, fighting against counterfeiting high-value goods and detect counterfeit drugs.
The blockchain technology has achieved many things so far, and it was rarely just for money. More often than not, it was for a greater good.
Given the above, all the market cycles are here to strengthen the technology and its community. What would happen if Bitcoin would have a price of a few thousand dollars for an indefinite period of time? We don’t know. It might become a unified currency around the world.
Why is your neighbour smiling when there is a bear market?
John Mcafee, who we have written about before, had some very funny (and true) thoughts about all the panic sellers. He tweeted the following:
People have panicked. But there’s no fucking need. We’re in a bear market. They suck, yes, and not like a hooker with no teeth. But I’m 73 and have seen this dozens of times in many markets. Bear markets are like Winter. It’s always followed by a glorious Spring. Fucking relax.
— John McAfee (@officialmcafee) November 20, 2018
The speculative hype bubble was caused by excessive expectations of future growth. While the market settles down and remains in a bear run, the rest of the crypto industry can focus on improving and developing the blockchain technology, which will eventually lead to an innovation that might just spark the next bull run.
People who are investing in a bear market are usually the ones who believe in the technology enough to know that it will stabilize and rise again. So, your smiling neighbour might have already cashed out his Bitcoin earnings and is investing again. Either that or he still has his Bitcoin and is waiting (the crypto community would say HODL) for the next bull cycle to come.
I’m not alone in advising calm. Nearly every major player in Crypto is telling everyone to relax. The forces pushing prices down are temporary and will soon burn out. In the meantime have a drink, woo your spouse or just take a walk in the sun.https://t.co/pYKp6NDsDv
— John McAfee (@officialmcafee) November 20, 2018
John McAfee says he will relax, have a drink and take a walk in the sun. Our advice would be, whatever you do, try not to react in the heat of a panic. Calm down, google it, ask questions, make your research, educate yourself and then act.
When you are ready to enter the world of cryptocurrencies in a safe and easy way, register to Kriptomat.
Disclaimer: Our blog posts do not represent an investment advice and nothing in them should be construed as investment advice. Blogs merely provide information and education for the interested public.