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By Josef Tětek — Bear markets can be brutal. It’s better to prepare for them, than try and predict them.
Bitcoin has had its fair share of bear markets in the past. When price mania takes hold, corrections soon follow and the fallout can mean long periods where investors lose confidence. Below, we’ll briefly recap the most significant, to see what we can learn from them.
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The first bear market, 2011–2012
From a historical $29 on June 8, 2011, Bitcoin imploded to $2.10 on November 18, 2011. The first bear market saw swift market panic, and months of sideways action followed:
The first bear market, 2011–2012. Chart data source: CoinMetrics.io
The most painful bear market came long before most of us had even heard about Bitcoin. Over ten years ago, the price of bitcoin reached almost $30 on the infamous Mt. Gox exchange, only for a “stairway to hell” pattern to take it to $2.10 a few months later.
Bitcoin dumped 93%! But consider this: even at that all time high (ATH) price of $30, from today’s perspective that’s a deal no-one would refuse. Who wouldn’t want to stack some bitcoin for $30 dollars a piece, right? Of course, nobody back then could anticipate that in ten years, bitcoin would be hovering around $50k.
Lack of conviction meant that after that initial drop, it took more than a year for the price to recover and climb to new heights. But the perception of what Bitcoin is has evolved over the past decade. It went from geeky experiment to darknet currency to inflation hedge, and now shows potential as the basis of a new global monetary system.
The price recovered, breaching the previous ATH in early 2013. It never dipped below that price level again.
The second bear market, 2014–2016
From $1135 on December 4, 2013 to $175.6 on January 14, 2015, this second crash was again followed by months of sideways action:
The second bear market, 2014–2016. Chart data source: CoinMetrics.io
These most likely cause? At the turn of 2013/2014, two things happened: the Silk Road marketplace was shut down (Ross Ulbricht is now serving a double life sentence without the possibility of parole), and the Mt. Gox exchange collapsed. With two major bitcoin venues shut down and major losses sustained by their users, it seemed to some like bitcoin was dead and useless.
As bitcoin dropped 85% from top to bottom, “bitcoin obituaries” with smug told-you-so undertones became all the rage.
But those who’d been there during the first bear market had learned their lesson: Bitcoin comes back — with a vengeance! Builders kept on building, and some of the most pivotal tech was created during the second bear market. The first hardware wallet, Trezor was released in early 2014, and in January 2016 the Lightning Network whitepaper was published.
And again, when the price finally recovered above the 2013 ATH, which didn’t happen until early 2017, it never dipped below $1000 ever again.
The third bear market, 2018–2020
From $19640 on December 16, 2017 to $3185 on December 15, 2018, followed by months of sideways action:
The third bear market, 2018–2020. Chart data source: CoinMetrics.io
The most recent bear market has been dubbed “the crypto winter”, mostly because the last major shakeout to a low around $3000 came in the winter of 2018/2019. This bear market was quite tough because a hopeful rally in early 2019 got wiped out by market panic. But again, Bitcoin recovered with vengeance and may never return below its previous ATH of $20k again.
As with earlier bear markets, the ecosystem of bitcoin-focused projects continued to grow. The Trezor Model T and Shamir Backup, BTCPay Server, most Lightning Network wallets and tooling, and so many other tools and services we use today.
How to spot a bear market coming
Per traditional definition, a bear market occurs when “prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.” The first part is easy to quantify: yes, bitcoin has dropped by that much, and more, from recent highs. But the latter is very subjective.
A whole industry of onchain metrics has been built over the years to try and determine prevailing investor sentiment. But the problem with such metrics is that they themselves are built on subjective interpretations of what’s going on:
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Some analysts try to predict short and long term price action by pointing out a correlation between price rallies and the block reward halving cycle, a 4-year cycle which halves the rate at which the Bitcoin supply increases. And it does feel convincing:
Block reward halvings and price action 2010–2022, log scale. Chart data source: CoinMetrics.io
The problem with the Halving cycle hypothesis is that, so far, we only have two full data points: the periods after the first and second halvings. We are now in the third period and, even if price action follows a similar pattern this time around, it still doesn’t have to mean anything.
Per the efficient market hypothesis, predictable and widely-known facts such as the supply halving can’t have a massive effect on the price. There are other unseen factors in place such as fiat currencies failing as a reliable store of value. The human mind likes to find patterns in the noise, and Bitcoin’s volatile, upward-trending chart is very seductive in that regard.
The long-term Bitcoin price chart might tell us something much more interesting than the existence of a halving cycle. This is what we see when we look at the same chart from a different perspective:
Price action 2010–2022, log scale. Chart data source: CoinMetrics.io
Instead of two halving cycles, we get six historic ATHs. The price doesn’t seem to dip below the previous ATH once it has been breached for the second time. If that were to hold true in the future, it would mean the price wouldn’t return below $20k if we were to enter a bear market now, and it wouldn’t go below $69k if we later breached the most recent high a second time.
The explanation for this price action may be psychological. Those yet undecided about bitcoin usually only take the first step once bitcoin has been confirmed “not dead”, i.e. when it breaches the previous ATH. Regular old fear of missing out (FOMO). Admittedly, this observation isn’t bulletproof: the price briefly dipped below the $230 ATH set in April 2013, and is currently below the twice-breached ATH of $50k from 2021.
This optimistic model of ATHs acting as buffers is more of a personal rule of thumb, not a science. It will make sure I stack decisively if we were to dip close to $20k, helping temper emotions. That said, I don’t plan to wait around for magical opportunities that may never come and instead stack sats regularly, without paying much notice to the price.
Overall, I don’t think anyone can spot a bear market forming. Bitcoin is traded 24/7 all around the world, both on centralized exchanges as well as peer-to-peer. The market is continuously influenced by both local and global effects, such as the collapse of the Lebanese pound, or the pandemic. The best you can do is pick your favorite rule of thumb metric and stick to some basic rules.
Rules for navigating a bear market
“Hey Josef, what is this — just a bunch of historical charts and some barely working rule of thumbs?” I know, I know. But this is the unvarnished truth: nobody has a crystal ball, and technical analysis doesn’t work better than a coin flip — even if you paid big bucks for it.
Sometimes it’s better to acknowledge the chaotic nature of the market and prepare instead of predicting. Having a couple of bear markets under my belt, these are my personal rules for surviving the next crypto winter, whenever it comes.
Do not trade. First-time traders usually aim for “buy low, sell high”. But somehow, they end up doing the opposite — because their emotions get in the way. Trading is a very stressful zero-sum game, where most people lose their money. A recent Business Insider article pointed out that between 70–97% of day traders end up losing their money! Only experienced traders (who learned their lessons the hard way) and exchanges end up in profit.
Do not use leverage. There are two types of leveraged traders: those who have experienced a soul-crushing liquidation notice, and the naive who think they have everything under control. Trading bitcoin with leverage is an easy way to to end up in a poor house or an asylum.
Do not leave your coins on exchanges. During a tumultuous time such as a raging bear market, exchanges can end up insolvent. This has happened many times in the past, with Mt Gox, Quadriga, and Cryptopia being only the largest ones. Not your keys, not your coins always — always — applies. Use a battle-tested open-source hardware wallet such as Trezor if you want to stay safe.
Do not try to pick “solid crypto projects”. Go to Coinmarketcap/Historical Snapshots and check out the pre-bear market rankings. Then see how many of those coins have stayed in the top 20 until now. Not many, right?. The problem with betting on altcoins is there are too many with no credibility. More and more projects are created on a daily basis, with little going for them but sleek marketing. Bitcoin is global stateless money. It is perceived as such by millions of investors, political leaders, and ordinary people around the world. Bitcoin is the solid crypto project with massive potential you are looking for!
You Are Not Too Late To Become Wildly Wealthy With Bitcoin
Zoom out. Both in terms of price charts and fundamentals, it pays to take a step back and consider things from a broader perspective. Bitcoin has been doing its thing for thirteen years and no matter how bad it sometimes looked, it always recovered. Bitcoin is antifragile — volatility, attacks, schisms, and attempts at ban or regulate make it stronger in the end. But to reap the full benefits, you have to have the conviction to hold (or even stack more) in the hard times as well as the good times. That’s why you need to…
Study. Seminal works such as Vijay’s The Bullish Case for Bitcoin, Saifedean’s The Bitcoin Standard, or Parker Lewis’ Gradually, then Suddenly were mostly written during the 2018–2020 bear market. And they remain a great read in fair and stormy weather alike. Studying these works will help you see past the short-term slump and help you make the right decision for your future.
And finally, don’t obsess over ATHs — look at the yearly lows for a change!
It’s all about the sats
When you let go of the fiat mindset and instead tune in to the prospect of hyperbitcoinization, bear markets actually become enjoyable. You get to stack more sats at a relaxed pace while buzzword-fueled mania dies down, and fundamental tech gets built without the pressure to release early.
Bear markets offer a life-changing opportunity for many. Bitcoin is potentially one of the biggest breakthroughs in human history, and having the ability to acquire a sufficient amount of bitcoin at low price levels could mean an escape from poverty and the 9–5 grind for millions.
There’s nothing unexpected or scary about bear markets. They’re part of the process of Bitcoin becoming a global neutral monetary standard. So next time the bear strikes, be prepared and welcome it with open arms: it means more time to stack!
This article was originally published in Bitcoin Magazine, January 2022.
How to spot a bear market was originally published in Trezor Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.