Bull vs Bear Market: what they mean and their difference
March 28, 2023
The difference between bull and bear markets is not just that one is positive and the other negative. These market phases are part of a multifaceted cycle of emotions and behaviour that involve all the different market participants. Let us therefore delve deeper into the definition of bull vs bear market.
What are market cycles?
Before discussing the differences between bull and bear markets, a few clarifications are in order. All financial markets, regardless of type, are characterised by a cyclical path, i.e. a pattern that tends to repeat itself over time. This is due to the predictability of human behaviour and the cyclical nature of our emotions-actions.
Each market and context, however, has different rhythms: the economic cycle of an entire country can last up to 20 years on average, while the cycle of a small market such as crypto lasts from 1 to 4 years.
There are famously 2 major phases that make up the market cycle: bull and bear markets. The difference between the two is their direction, technically called the market trend: it can be bullish, bearish or neutral.
Going into more detail, the cycle is actually made up of four stages often called by different terms. In the crypto market, these are usually the terms used:
- Accumulation or Recovery (expansion)
- Run-Up or Mark-Up (peak)
- Distribution or Recession (contraction)
- Run-Down or Mark-Down (depression)
When the market is in the Run-Up phase, it is called a bull market, while in the Run-Down phase it is a bear market.
Especially in the crypto market, these phases bring out the substantial differences between different types of players in the market: from novices and amateurs to professional and institutional traders, also referred to as smart money. The resources at their disposal are directly proportional to their timing and effectiveness during the market cycle, as we will emphasise in the following paragraphs.
Precisely because cyclicality derives from people’s expectations and behaviour, psychology and market sentiment are very important in economics and finance. This is the key that will help us understand the meaning and difference between bull and bear markets.
Bull Market: meaning and definition
The meaning of bull market is linked to the image of the bull running and stopping at nothing: an attitude that perfectly depicts the behaviour of the market and its participants at this stage.
The bull market is anticipated by the accumulation phase. After bottoming out, smart money detects tentative signs of growth and starts to buy, believing that the lowest support level has already been reached and that this is the moment of greatest financial opportunity. The level of ‘hype’ and FOMO is still low, more often a ‘buy the dip’ approach occurs, i.e. buying when the price is at its lowest. At this stage there is still the residue of negative mainstream sentiment: the media exploit it to the hilt, influencing small and new investors.
This is followed by the Run-Up phase, the real meaning of Bull Market. The smart money has now succeeded in pushing up the price: it is now obvious even to small investors that the bulls have been released. So they too enter, adding volumes to the market: with an ever steeper curve, the price approaches the ATH, exchange reserves contract as more and more buyers drain the supply in search of a gain on new ATHs, although the uptrend is already well underway.
Typically, it is around this point that new investors come in, driven by FOMO and the optimism created by continued price rises and media hype, resulting in pushing the price even higher. These latter rises usually have very weak foundations: the bulge given by players who do not know the market usually deflates just as quickly.
Bear Market: meaning and definition
There are many examples of bear markets in history and they are invaluable in understanding how to deal with future ones. Here is how this phase usually develops.
After the Run-Up, a transition phase begins: the first seed of doubt creeps in among market participants. Hence the meaning of Bear Market: hibernation time approaches.
First though, how do you get to the distribution phase? The arrival of volumes from the mainstream creates volatility and large price corrections, and reaching the peak phase also means liquidation of positions and realisation of profits.
Thus, the balance between buyers and sellers gradually shifts: the latter begin to prevail, as they do not want to miss the opportunity to make a profit. As a direct consequence of the selling pressure, prices fall.
Sentiment at this stage is ambivalent: some think of a temporary drop, others are preparing for a bear market.
Everyone knows that sooner or later the bull market comes to an end: those who are motivated by greed and optimism wait until the very end and often sell too late. Those, on the other hand, who have a strategy and carry out technical analysis sell according to their risk-return rate, often before the peak runs out.
The market in this phase contracts: it is the prelude to depression, the heart of the bear market.
At the onset of depression, discouragement feeds on itself and pessimism generates cascading sales: after the smart money has liquidated its bullish positions, small and new investors follow late, generating further price declines.
The latter, not knowing the dynamics of market cycles and the meaning of bear market, did not sell at the right time, so they are caught in the first disappointments, spreading FUD in the general sentiment.
Once you reach the bottom of the market and price cycle, you start again from the accumulation.
Bull vs bear market: how to recognise them with technical analysis
Technical analysis is the main tool to avoid falling into the psychological traps of market cycles.
There are several indicators and methods of analysis that can help even beginners: first of all, we have trendlines, which show us the direction in which the price is heading. Supports and resistances, on the other hand, help to identify the lows and highs of a cycle.
Then there are more specific signals such as death cross and golden cross that can anticipate a bull or bear market. The Fear&Greed index then can provide you with sentiment data, allowing you to understand what phase of the cycle you are in.
In general, the more data you have to confirm a trend, the less likely you are to make mistakes and fall into traps such as bull and bear traps. This, only after understanding the difference between bull vs bear markets.