What a bear market feels like, and how it develops

A treatise on dashed expectations

One the greatest blessings of being in crypto from 2017 to 2022 was the chance to experience a full bull-bear-bull cycle. Being the mental midget that I am, I rode that express train to hell and back (before finally selling early this year). In retrospect, I wouldn’t recommend this particular investment strategy but hey, it more or less worked out in the end. Most importantly, I know what a bear market feels like first hand.

How a bear market develops

In a sentence; a bear market forms as bullish expectations are repeatedly invalidated.

In a bull market assets go up over time. There are dips along the way, but on a whole prices trend higher. On a long enough time frame, investors learn to take this state of affairs for granted. Investors develop an expectation that after any dip, prices will rebound to the upside. This thesis is validated so often that it becomes dogma. Unfortunately, at some point the market tips into bear territory…

For reference, check out this chart from the transition of the 2017 crypto bull market, into a full scale bear market in 2018. Notice how each time the bull market investor thinks the dip is a buying opportunity, and higher highs are on the horizon, their thesis gets invalidated. Over time a failure to launch becomes very demoralizing.

An unwitting investor will carry their bull market mindset into a bear market. They are convinced that after any dip, prices go up. The first time this fails to happen, they think oh my, isn’t that strange. A little fluke, it will be different next time. However, next time happens and it’s not different. Prices fall further. The bull market investor buys the dip again, and again, and again. The bull market investor is a very obstinate creature. Once reality dawns on the bull, however, the transition to bear can be quite violent.

When the bull market investors turn bearish it’s a sight to see. We call it capitulation. You’ll know capitulation because it looks like stocks limit down, Bitcoin down 20% in a day, bond yields gapping up, etc…* When markets crash it’s a sign that the bull market investor has finally woken up (9 months too late) and realized, holy mother of god, prices aren’t going to go up! Quick, for the love of god, sell it all!!!

*In this new paradigm that we’re in. Traditionally, bond yields would gap down when markets crash

Once this panic selling sets in, that’s probably a good sign that the bottom is not too far off. At the very least, if you start buying after a mass capitulation, you’ll probably be doing just fine a year or two out.

I think we’re getting closer to the big capitulation in the stock market, and perhaps even closer to capitulation in the Treasury market. I sense vibes in the air, the smell of napalm in the morning. I believe a realization is dawning on millions of bull market investors: asset prices don’t always go up. The bulls are running scared, the bears are coming out of hibernation.