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SFM Labs - Bull and Bear Markets

Updated: Jun 8, 2022

A quick disclaimer upfront: all information given in this presentation is researched and intended to be educational and illustrative to the specific topic as always. Any companies, products, people, or other items mentioned do not constitute an endorsement, recommendation, or relationship. Every owner has to do their due diligence, as the decisions and responsibility about any investment lie with the owner. This is no financial advice.

Origin of the terms bull market and bear market

The terms bull market and bear market derive from the respective animals and their behaviour. The bull drives forward offensively with its horns, and the bear strikes downward with its paws and remains defensive. Conversely, this means that bull markets are emerging and growing markets and bear markets are stagnant declining ones.

What is a bull market?

A bull market is a market in which the demand for a product, good or trading currency is greater than the supply. The purchasing power is strong, the increase in the market of the respective commodity is given and the value increases.

This is initiated by an upward trend that takes place over several periods of time. The reactions that follow positive trends are chain reactions, as investors respond to the positive behaviour of other investors and invest money. This is also referred to as "bullish" behaviour.

What is a bear market?

A bear market is the opposite of a bull market. Here, the supply of a market of products, goods or trading currencies is greater than the demand. The purchasing power is low, the goods are bought less in the market and the value decreases.

This is initiated by downward trends that take place over several periods of time. The reactions that follow the fall in value are also chain reactions, as investors also react to the negative behavior of other investors and rethink investments. This is also referred to as "bearish" behavior.

How do changes in the market happen?

A market situation is always assigned to a certain period of time, as described before. This time period refers to the integrity of the market in the respective market segment, which can be changed by various things and even transitioned and transformed into the respective other market at short notice. If a persistent and ongoing trend is disrupted or affected, this can lead to a turnaround in investor behavior.

Reasons for changes in a market situation include:

1. Availability of goods

This aspect mostly refers to traditional trade goods, which are in constant demand. If there is a scarcity (for example, due to crisis situations), the price increases because the demand is immense, if the product is abundant (for example, due to overproduction), the good is cheaper because people want to sell as much of it as possible.

In the investment market of shares and cryptocurrencies, this is not directly present, but this is passively influenced. For example, if there is a currency that depends on the success of a chain of stores, a trading platform, or an industry that has to bear strong fluctuations, this can also affect the price.

2. Psychological changes

People's behavior always plays an important role in investments. Although the maxim "invest only what you are willing to lose" and "never invest with emotions" are valid, people are emotional beings. This leads to the fact that with certain events such as long development times, world crises, false news or manipulations on the market or similar the behavior of the investors can change. The sale of currencies then gives the investor a feeling of security, as he frees himself from the risk situation, but this is usually associated with heavy losses. This security is supposed to displace the newly emerged feeling of fear, uncertainty and doubt (in short "FUD").

On the contrary, there is of course also the positive aspect in which a market, for example due to a technological breakthrough, tempts the investor to buy more currency for the upcoming gains. The initiation of this behavior is called "FOMO" (Fear of missing out).

It is important to know that a short-term fluctuation, correction of the market or change of the chart does not mean the change from one market to another. Volatility (the fluctuations of a price segment due to constant trading in relation to the given funds) is always present and can lead to changes in the short term even with large fluctuations, especially in high risk assets. Here it is important to see whether the market stagnates or rises with the situation and takes this as an indicator over the long term or comes back in the short term (also called rebounce).

For all markets, it is important to know which commodities act how in which market situation. There are various commodities and currencies that act more strongly and more volatile in certain markets, but are also associated with more risk. Conversely, there are goods and currencies that grow only very slightly when the market is rising sharply, but lose very little of their value in a recession. In this context, it is always important to exercise due diligence with regard to the options available.

Future outlook on the development of market cycles

The market segments (especially in the area of stocks and cryptocurrencies) repeatedly go through various cycles. An important benchmark for the future is the availability, adaptation, and expansion of the systems. If this grows, more money flows into the market, which better cushions various market fluctuations and thus makes the market generally stable. Market segments become more stable, long-lasting segments of a certain direction become rarer, as there is no major market influence here - apart from extraordinary events in the world.

But as in many other markets, there is one thing to know here: a market always remains a market with supply and demand, and as long as there is always a desire for more, a market will exist.



Gandalf - SafeMoon Educator

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