adam nowakowski D4LDw5eXhgg unsplashCrypto investors have had a positive year so far with the market producing excellent returns on some tokens including Bitcoin, Ethereum and Ripple. However, the crypto market is volatile and can change course at any time. To help you prepare, here are 3 warning signs of a bear market that you should look out for.
1. Decreasing trading volume
One of the first signs to look out for is decreasing trading volume. This refers to a decline in the amount of trades that are being placed in a specific time period. If trading volume starts to reduce, it could be a sign that investors are losing interest in the asset and potentially turning towards alternative assets.
Low trading volume indicates low demand, which would in turn decrease the value of crypto assets. Cryptocurrencies are deflationary which means that their value can increase and decrease in line with current demand. If demand is high, cryptocurrencies will gain value.
As an investor, it is important to watch out for gradually declining trading volume. If you notice that this is happening, it may be wise to pull out of your investment before prices drop lower.
2. Strong economy
If you invest in traditional assets, a strong economy is usually taken as a positive sign. However, crypto investors could take a strengthening economy as an early sign that the crypto market could turn bearish.
When the economy is weak, investors turn to alternative assets such as cryptos in a bid to hedge against inflation. However, a strong economy could make traditional assets more attractive to investors which could reduce demand for crypto assets.
A good way to monitor the strength of the economy is to use the DXY chart. The DXY is an index that measures the strength of the US dollar against 6 other global currencies. This index is considered to be one of the most accurate representations of the economy and is used by investors worldwide to better understand the performance of the traditional stock market.
If the DXY goes up, this is a sign that the performance of the US is strengthening. Crypto investors should look out for this and prepare for potential sell-offs.
3. Regulatory action
Crypto assets are still very new which means that regulatory policy is constantly changing. In some cases, crypto regulation can cause the price of an asset to drop and the market to turn bear. Therefore, it is important that crypto investors keep up to date with regulatory decisions.
A good example of a regulatory action that caused a bear market was the SEC’s recent case against Ripple (XRP). When the US Securities and Exchange Commission filed a lawsuit against Ripple Labs in 2020, the price of XRP dropped dramatically from 58 cents to 21 cents. Investors who kept up with market regulation could have sold their assets before the huge price drop. However, those that were not aware of the decisions would have been hit with a big loss.
The crypto market is highly volatile and it is difficult to predict the exact outcome of events. However, understanding factors that could influence the market is a good way to make informed investing decisions.
