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LearnAcademyCrypto investing: Fundamental conceptsLesson 4: Investing in Bull and Bear Markets

Lesson 4: Investing in Bull and Bear Markets

After completing this lesson, you will be able to:
Know what a bull market is.
Know what a bear market is.
Understand how investors unwittingly make bear markets longer.
Know how long a bull market typically lasts.
Know how long a bear market typically lasts.

Welcome to the fourth lesson in Kriptomat Academy’s guide to fundamental investment concepts. This lesson is about investing in bull and bear markets.

Let’s start by defining bull and bear markets.

  • According to economists, bull and bear markets are characterized by widespread price gains or losses of 20% or more.
  • The bull market refers to rising prices, while prices fall during a bear market.
  • An easy way to remember which market is which is by thinking of how the animals attack. Bears swat their enemies downward, while bulls use their horns to throw them upward.
  • The price trend must last for at least two months to be recognized as an official bull or bear market. If they last for a shorter period, they can be called bull trends or bear trends.
  • A bear trend following rising prices can be called a price correction.

In the fiat world, bull markets tend to last longer than bear markets

  • The average bear market lasts 289 days.
  • The average bull market lasts 991 days.

The crypto market has been around for only about 10 years. In that time, bull and bear markets seem to run at a different schedule.

  • Markets see periods of one to two years of relatively stable prices that are tending slightly upward or downward.
  • These periods are punctuated by sudden peaks that establish new high prices.
  • These peak prices endure for just a few weeks or months before prices drop into a new stable period with prices that are substantially higher than before the peaks.

The fundamental rule of investing is to buy when prices are low and sell later – in the short term or the long term – when prices are high. This means that most investment advisors recommend selling during bull markets and buying during bear markets.

  • But many new and experienced investors do exactly the opposite!
  • Seeing prices plummet, they fear that their portfolios will lose all value, so they sell at a loss.
  • This fuels the bear market, making it last longer.
  • When prices are rising, they make purchases, hoping to benefit if the upward price trend lasts.
  • In both cases, investors base their decisions on emotions: hopes or expectations that the current price trend will last. 

Professional portfolio managers recommend that clients continue their low-risk investment strategies during both bear markets and bull markets.

  • Those strategies include cost averaging and diversification.
  • Assuming those strategies remain in place, a bear market is an opportunity to purchase crypto at a discount, especially new or volatile crypto that hasn’t yet had much exposure in the market. These cryptos will find their natural price only once the bear market ends.
  • A bull market is an invitation to study price charts and find cryptos that have a history of outperforming the market. It’s possible that these particular cryptos will beat the market again and reward a small investment with a large gain.

Cost averaging is the most important strategy during bear markets

  • This long-term strategy helps you profit by purchasing crypto at the bear market’s low prices.
  • Since you’re investing the same amount of money each month, you acquire more crypto when the price is low – so you’ll have more tokens that rise in value when the market recovers.
  • Your portfolio value may fall during the bear market, but assuming there is a recovery eventually, it will regain its value.

Maintaining portfolio diversity is a key strategy during bull markets

  • Diversification makes it more likely that your portfolio will perform well when prices rise.
  • If you’ve limited your investment to just one or two cryptocurrencies, then events that affect those currencies or their market niches could prevent you from gaining during the bull market.
  • Crypto investment advisors recommend that a portfolio contain at least 10 different cryptos to avoid the risk of missing out on a bull market’s widespread price gains.

So – what have we learned?

  • Bull and bear markets happen when price rises and falls of 20% or more last at least two months.
  • Many investors succumb to natural anxiety and make poor decisions during bull and bear markets.
  • In general, experts advise against tracking daily changes and sticking to long-term goals and strategies.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

What is a bear market?

Two consecutive quarters of shrinking GDP.
Four months of widespread rising prices in a market.
A marketplace without price controls or fiscal supervision.
Two months of widespread falling prices in a market.

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What is a market correction?

The price drop that follows a spike.
Revised figures for prices and trading volume.
The erasure of erroneous data from the blockchain.
Expulsion of scammers from the market.

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Which of the following can extend the duration of a bear market?

Cost averaging.
Selling off assets as prices drop.
Portfolio diversification.
Decentralized crypto exchanges.

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What is the root cause behind many losses in bull markets and bear markets?

Failure to take Ethereum 'gas' fees into account.
Failure to take advantage of tax benefits on crypto trading.
The belief that current market trends will continue indefinitely.
The belief that certain coins and tokens are immune to market factors.

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How does diversification work in bull markets?

A diversified portfolio is more likely to include the top gainers in an upward-trending market.
Diversification minimizes the risk of buying into the market after the bull market's big gains have all been tallied.
Diversification minimizes the risk of selling at a loss.
A diversified portfolio reduces the transaction fees associated with any single cryptocurrency in the mix.

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Kriptomat Academy content is informative in nature and should not be considered a personalised or any other investment recommendations or advice.
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