Indicators to Get an Early Signal When Crypto Bear Market is Ending - FX Leaders FX Leaders

Indicators to Get an Early Signal When Crypto Bear Market is Ending

A crypto bear market is also called a crypto winter market. Both terms refer to market conditions when the prices of crypto coins are trending downwards. The term “Bear Market” is common across the cryptocurrency industry, and traditional financial markets like commodities, real estate, bonds and equities. Crypto bear markets take place when the prices of a majority of cryptocurrencies have shed over 20% of their value, in such a way that the prices keep dropping persistently. 

Bear markets take place either before or after a global economic recession. Metrics for identifying economic recessions range from indicators such as hiring, inflation, wage growth and interest rates. Usually, there is a huge potential for low revenues and fewer profits when an economy is declining. Furthermore, the onset of a bear market could mean high unemployment levels as well as challenging conditions for setting up businesses. 

A bear market is usually characterized by the following 4 stages: 

Taking profits – This is a moment of high prices, where investors and traders begin closing their positions and collecting profits. 

Declining trading activity – This phase is characterized by weakening economic indicators. Investors face lots of panic and uncertainty. This causes the situation to get worse and results in capitulation. 

Speculation – The market enters a period of speculation, where traders, investors and entrants are pursuing to buy assets and speculate that the price will rise once the bear market ends. This drives the price up as well as spikes the trading volume. 

Prices adjust to a lower level – The market stabilizes once again after the prices of the coins have fallen, but much more slowly this time. The bear conditions eventually become bullish, and investors return. 

Warnings signs of a cryptocurrency bear market

The following are some red flag signs that you are trading within a bear market. These are important signs to learn, since it’s vital to understand a situation, before learning how to get out of it. 

Death cross – a death cross takes place when the 50-day moving average of an asset crosses the 200-day moving average. 

Lower trading volume – Lower trading volumes than usually indicate that investors are holding their coins due to high unpredictability. 

Backwardation – Backwardation is a technical formation that happens when the price of an asset’s futures market goes lower than its current market price. 

In this article, we will look at some good indicators for knowing when a bear market is ending. Think of an indicator as a hint or market marker that helps point out an area of interest that reveals a close alignment with the intended result. Indicators are used to monitor the health of asset markets. 

Indicators to Get an Early Signal When Crypto Bear Market is Ending

Rehiring after mass layoffs during crypto winter

Mass layoffs are often a sign of a bear market. This is because the majority of companies in the blockchain industry rim down their expenses in order to survive the difficulties of crypto winter. During this year’s crypto winter, big industry players like Meta have announced major layoffs. This is what happened during the 2018/19 bear market, big corporates like Bitmain, Huobi, ConsenSys, and Coinfloor made mass layoff announcements. 

The onset of the 2022 bear market saw Coinbase announce an 18% staff reduction. Gemini exchange, on the other hand, cut down its staff by 10%.  

Therefore, if mass layoffs are a sign of an imminent bear market; then the opposite also holds that mass rehiring is a good sign of an imminent bull market. Companies beginning to hire again is a signal for an ending bear market. It also shows there are new projects being launched and that developers are getting notable funding. There is a big challenge with funding throughout bear markets, and the worst of all faces the developer ecosystem which intends to continue building during crypto winter. 

Bitcoin’s 200-week Simple Moving Average

Bitcoin’s 200-week SMA has been a good signal for showing the end of a bearish market a couple of times throughout the history of Bitcoin. The indicator shows a weakening bear market when the price of BTC drops below the 200-week SMA before rising back above it. 

For example on the Bitcoin chart shown below, the arrows indicate instances where the price of Bitcoin broke below the 200-week Simple Moving Average, only to climb back later on. The SMA on the chart is marked by the blue line. All of those instances came before a market uptrend of the overall crypto market. 

The green line on the chart represents Bitcoin’s recovery above the aggregate purchase price of the general BTC market. Note that traders opt to use the green line as a confirmation of whether the crypto market is reversing positively or negatively. 

The 2-year moving average multiplier

A simple method for traders (newbies) to identify the end of a bear market is the 2-year moving average multiplier. This metric measures the 2-year moving average. The next step is to then multiply Bitcoin’s price with the 2-year MA and a 5x multiplication.

Each time the price of Bitcoin drops below the 2-year MA, the general market becomes bearish. However, when the price soars back above the 2-year moving average, the market enters a bullish zone. Therefore, traders identified an opportunity to take profits when the BTC price rose above the 2-year moving average, hence signalling a complete bull market. 

This is an important indicator for traders to use whenever they want to continue accumulating their assets. The bear market ends when the price of BTC clears above the 2-year moving average.

Relative Strength Index

The Relative Strength Index or the RSI is another handy tool for identifying lows during a bear market. Throughout past bear markets, Bitcoin’s RSI dropped into the oversold region. BTC hits its optimum bottom in 2019 when its RSI score hit 16.

Market value to realized value (MVRV)

Market value to realized value identifies periods where the price of Bitcoin is extremely undervalued or overvalued compared to its true (Intrinsic) value. Previous bear markets have usually hit a Z-score below 0.1. 

A Z-score is a standard deviation test for pointing out extreme market conditions between the market value and the realized value. 

Considering Bitcoin’s historical perfomance, the MVRV indicator indicates the coin still has more room for a downside, which will be followed by a significant period of the price trading sideways.

About the author

Skerdian Meta // Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.