Bear Market Analysis: Depth Understanding and Response Strategies

Key Points Overview

What is a bear market? A bear market refers to a market condition where asset prices decline over a long period, typically lasting from months to years, reflecting a loss of investor confidence and signs of economic recession.

Causes of Bear Markets Economic recession, geopolitical crises, policy adjustments, and the bursting of market bubbles are the main triggers.

Response Strategy Stop-loss, position holding, dollar-cost averaging, short selling hedging, and switching to low-risk assets are various strategies that can help get through tough times.

Historical Insights Mature assets like Bitcoin have experienced multiple bear markets, but in the long run, they have all achieved full recovery.

The Nature of a Bear Market

From the perspective of market dynamics, a bear market is a prolonged downward price cycle. During this process, asset valuations continue to adjust due to the deterioration of economic fundamentals, investors' expectations are revised downward, and risk assets are shunned.

Unlike short-term corrections, a bear market reflects deep-seated economic imbalances—rising unemployment, declining corporate profits, and increased financing costs. In this environment, high-risk assets like stocks and cryptocurrencies are the first to be hit, while safe-haven assets such as government bonds and stablecoins are favored.

There is a market saying that describes it aptly: “Upstairs takes the stairs, while downstairs takes the elevator.” Behind this seemingly contradictory phenomenon is psychology: when optimistic, investors lay out their strategies cautiously, whereas when pessimistic, they rush to flee.

As prices start to fall, fear, uncertainty, and doubt (FUD) spread rapidly. Holders are eager to cut their losses, profit-takers rush to cash out, and new selling pressure keeps pouring in. In a high-leverage market environment, this situation is more likely to trigger a chain liquidation, leading to a price avalanche.

Factors Inducing a Bear Market

Economic pressure

When economic growth slows and a recession arrives, corporate profitability is impaired, and investors' demand for risk assets declines. Historically, every severe recession has been accompanied by a noticeable bear market.

Geopolitical risks and policy changes

International conflicts and trade frictions can trigger market panic, prompting funds to flow into safe-haven assets such as government bonds and fiat currencies. At the same time, the central bank's interest rate hike cycle will raise financing costs and suppress the valuations of high-growth assets. The bear market in 2022 was born from this.

Self-correction of asset bubbles

When prices deviate too far from the fundamentals (such as the internet bubble in 2000), they will eventually face revaluation. This kind of adjustment is often fierce and rapid, with pullbacks reaching 50%-80% or even deeper.

Black Swan Event

The outbreak of the COVID-19 pandemic in 2020 led to a decline of over 70% in global stock markets and the cryptocurrency market within weeks, which is a typical case. Policy shocks and financial risk events can also trigger a rapid bear market.

Leverage and Credit Risk

Excessive leverage exacerbates volatility. Once the stop-loss line is triggered, massive passive liquidations intensify the decline, creating a vicious cycle. The 2008 financial crisis was the result of a real estate bubble + excessive leverage + a broken credit chain.

Historical Comparison: Several Deep Bear Markets of BTC

2018-2019 Period

Bitcoin surged to nearly $20,000 at the end of 2017, and then fell into a deep correction. Throughout 2018 and the first half of 2019, BTC dropped by more than 84%, setting the record for the longest bear market at that time. Many altcoins saw declines of over 90%.

Impact of the pandemic in 2020

During the pandemic outbreak, BTC fell over 70% in just a few weeks, briefly dropping below $5,000. This was the last time Bitcoin reached this price level in history. The subsequent rapid rebound showed that institutions and long-term holders were positioning themselves counter-cyclically during the crisis.

2022 Structural Bear Market

Starting from a low point of nearly $4,000 in 2020, Bitcoin rose to a peak of around $69,000 in 2021, an increase of over 1670%. However, with the Federal Reserve's aggressive interest rate hikes, BTC fell below $15,600 in the second half of 2022, a decline of 77%. This bear market reflects the reality of the entire crypto market's sensitivity to interest rates.

Bear Market and Bull Market: The Duality of the Market

A bull market is characterized by steadily rising prices, while a bear market is defined by continuously falling prices—behind this seemingly simple distinction lies a complex market psychology.

In a bear market, a common “consolidation” phase occurs — prices oscillate repeatedly within a range, and volatility is significantly lower than during the decline. At this time, trading volume shrinks, participation decreases, and the market enters a wait-and-see phase. This stagflation phenomenon is more frequent in bear markets.

From an investment mentality perspective, a bear market means that most people are losing money or sitting on the sidelines, with participation and activity levels far lower than in a bull market. This is especially a test of psychological quality for novice traders.

Five Survival Strategies in a Bear Market

1. Active Deleveraging and Risk Management

The most direct way to save yourself is to cut losses on some positions and exchange them for stablecoins or fiat currency. If your sleep quality significantly declines during a bear market, it indicates that your position size has exceeded your psychological capacity. Position size is always the first line of defense in risk management.

2. Hold on for dear life (HODL strategy)

Historical data shows that mature assets like Bitcoin and the S&P 500, despite undergoing bear market trials, ultimately achieve full recovery or even reach new highs. If the investment horizon spans 5-10 years or longer, a bear market should not serve as a signal for panic selling.

3. Dollar-Cost Averaging (DCA)

Regularly investing a fixed amount during a bear market (such as a fixed monthly investment) can reduce the average holding cost. For example, purchasing 1 BTC at $100,000 initially, and then buying another at $80,000 later, brings the average cost down to $90,000. Long-term investors who stick to this strategy often reap substantial profits in the next bull market.

4. Hedging and Short-term Trading

Experienced traders hedge spot risk by shorting. Holding 2 BTC in spot while shorting 2 BTC contracts in the derivatives market can effectively lock in risk. Additionally, day trading and swing trading can also profit from trends, but they require strict stop-loss discipline.

5. High rebound and high throw (high-risk operation)

In a bear market, occasional rebounds occur, and this “dead cat bounce” phenomenon attracts those who chase highs. However, this is a high-risk strategy — rebounds are often unsustainable, and once a mistake is made, one may be trapped at even lower points. Even professional traders can easily face significant losses during this stage.

Why is it called a “bear market”

The term originates from the image of a bear—a bear swiping down with its paw symbolizes a downward price trajectory. Correspondingly, a bull market is represented by the imagery of a bull thrusting its horns upward.

One academic explanation suggests that the concept of “bear” may have originated from medieval fur traders who would sell bear pelts in advance before actually acquiring them—this is strikingly similar to the logic of modern short selling.

Cognitive Upgrade and Conclusion

Bear markets are an inevitable part of market cycles, woven together by multiple factors such as the economy, policies, and psychology. Although experiencing a bear market can be uncomfortable, proper discipline and planning can help investors turn risks into opportunities.

According to the latest data, the current BTC price is $88.13K, which still has significant room compared to the historical high of $126.08K, reflecting the possibility of structural adjustments in the market.

Different investors have varying optimal strategies: conservative ones tend to hold cash or allocate to bonds and stablecoins; long-term holders adhere to dollar-cost averaging; while trading experts achieve profits through short selling and swing trading. The key lies in clarifying one's own risk preference and formulating and strictly executing a plan.

The bear market will pass; history has proven that mature assets will ultimately break new highs. But before that, overcoming psychological fear and adhering to the discipline of a plan is the true essence of cultivation.