What is a bear market?

Bear market definition

A bear market occurs when asset prices drop by 20% or more from their recent peaks. Trading activity slows, investors grow nervous, and this phase often lasts for months or even years. Historically, bear markets happen roughly every 3 to 5 years and last around 10 months—after which the market typically rises again. In contrast, bull markets, or growth phases, can last several years.

Not every drop is a bear market, and a bear market doesn’t equate to a recession. A 10% drop is classed as a correction, while a bear market involves a 20% or more decline, often signalled by factors like falling corporate earnings, decreased demand, and significant interest rate hikes.

Meanwhile, a recession is when GDP falls over two consecutive quarters.

Cycles and market phases

Financial markets move in cycles consisting of four phases: expansion, peak, stagnation, and then the sell-off. During the sell-off phase, prices hit their lowest, often driven by panic-selling and widespread pessimism. Investor psychology plays a key role here, as fear amplifies this “wealth destruction phase.”

After this, the market enters a recovery period where prices begin to rise again—the start of a new expansion phase.

Bear market origins

The terms “bear” and “bull” originated in the 17th century. Rising markets were likened to a bull thrusting its horns upward—symbolising price increases. The bear, preparing for hibernation, represented falling prices. These metaphors still describe market optimism and pessimism today.

Bear markets in history

Bear markets have repeatedly shaken the financial world—from the 1929 crash to the dot-com bubble burst in 2000 and the 2008 global financial crisis. These periods are challenging, but they often lay the foundation for the next bull market. Those who stay calm during a crisis can often benefit later.

Triggers of traditional bear markets

• Economic recession: When the economy slows, corporate profits fall—and so do stock prices.

• High inflation: Rising prices erode purchasing power, prompting central banks to raise interest rates, which makes borrowing more costly and dampens economic activity.

• Geopolitical crises: Wars, trade conflicts, or global crises cause uncertainty and often lead to sell-offs as investors seek safe havens.

The impact of bear markets on investors

Bear markets can quickly shrink the value of a portfolio, especially problematic for those nearing retirement, who have less time to wait out the downturn, potentially disrupting financial planning.

Long-term investors, on the other hand, may see opportunities, as buying undervalued assets can yield high returns later. Mental preparation and resilience are crucial to avoid panicking and to stay committed to one’s strategy.

Bear markets in the crypto world

The crypto market isn’t immune to bear markets – often referred to as “crypto winters”. These phases are known for sharp price swings. For example, Bitcoin fell from around £15,500 to just under £2,600 between 2017 and 2018. But bear markets don’t last forever. Since 2019, Bitcoin has rebounded by over £43,000.

What drives bear markets?

• Regulations: Strict regulations or outright bans on cryptocurrencies can lead to severe market drops, as seen with actions from China and other governments.

• Security issues and fraud: Major exchange hacks have triggered panic sell-offs in the past. The 2022 Terra Luna crash wiped out billions within a week, dragging other cryptocurrencies down with it.

• Macroeconomic factors: Like traditional markets, cryptocurrencies are affected by global economic conditions like inflation and interest rate policies.

The risks of bear markets

Bear markets are known for extreme volatility. Some assets can skyrocket, while others may nearly lose their entire value. A lack of liquidity makes it difficult for investors to exit positions without significant losses.

However, disciplined investors see these bear markets as opportunities to buy undervalued assets and expand their positions long-term—provided they withstand the emotional toll.

How to protect yourself in a bear market

Bear markets are challenging but not insurmountable. With the right strategies, investors can protect their portfolio and even find opportunities to maximise gains.

• Diversification: Spread your investments by holding a mix of different cryptocurrencies to reduce the risk of one asset’s drop affecting your entire portfolio.

• Stablecoins: Stablecoins like Tether (USDT) or USDC offer a safe haven in the volatile crypto market. Being pegged to traditional currencies, they avoid the extreme volatility of other cryptocurrencies.

• Avoid panic selling: Panic selling is the worst approach. Realising losses prevents future recovery gains. Stay calm and stick to your long-term strategy.

• Cost averaging: By investing a fixed amount regularly, regardless of market conditions, you can lower the average price of your assets over time, avoiding the risks of market timing.

• Mental strength: Bear markets are mentally challenging. Enduring red numbers in your portfolio requires nerves of steel. However, even the worst bear market eventually ends.

• Turning downturns into opportunities: Disciplined investors use downturns to buy in at low prices. This requires a clear plan and—most challenging of all—control over one’s emotions.

Conclusion

Whether traditional finance or crypto, bear markets are part of the game. Understanding their nature helps investors keep their cool and potentially profit. With diversification, a long-term strategy, and mental resilience, you can weather any crisis. After every bear market, a bull market follows—bringing recovery and growth.