Bear Traps are one of the cunning traps prominent in the stock market. Since the initial days, the crypto ecosystem has witnessed several bear traps.
This article is a comprehensive guide to the bear traps in crypto, exploring their history, escape strategies, prominent examples, and more details.
What is a Bear Trap?
If you observe the bulls and bears, bulls normally thrust their horns upwards and the bear has its paws downward. Similarly, in the stock market, a bull signifies rising prices, and a bear signifies falling prices. When the prices start falling, people will fear that it is the beginning of a bear market, and they start selling their assets, further dropping the price.
Those who sell are called bears and those who buy are bulls. When the market declines, bears will start selling their assets. Also, some of them may begin short-selling. But, after the initial downflow, what if the price goes up? Now, those who expect the price to decline will lose their trades. So, when a false indication of falling prices is shown initially, and the market suddenly shifts to rising action, this is called a bear trap.
A common misconception is that most bear traps are carefully organized events by market makers and other whales. Sometimes, the story of a future market decline will become part of people’s shared reality, and whales inhabited by their instincts may benefit from doing the reverse. It won’t be a part of a master plan but an accidental victory.
How do Bear Traps Work?
Bear Traps work in various ways. But the basic mechanism involves a combination of similar factors:
- Initial Downward Trend: This starts with the price of a crypto asset showing a genuine downward movement. This creates a sense of bearish momentum. The fear index will increase and normal holders will start selling the asset. This attracts short-sellers. They borrow the asset, sell it at the current market price, and intend to repurchase it later at a lower price.
- Sudden Price Reversal: The downward trend appears to continue, but then, without warning, a sudden twist arrives. The price starts going up.
- Short Squeeze: As the price starts to flow up, the short-sellers start losing their money. losses. They are forced to buy more amount of assets to keep their short positions. This creates a “short squeeze,” where they buy back the asset, thus increasing the price.
Famous Crypto Bear Traps in History
The crypto ecosystem has witnessed several notable bear traps. Most of the time, due to issues with legal regulations and other speculations, news will circulate the community that the crypto market is falling. This creates a FUD (fear, uncertainty, and doubt) among the holders. Many of them will start selling thus affecting the prices. But because of the inherent good, certain crypto will rise again.
In December 2017, Bitcoin experienced a similar price correction, leading many to believe that crypto doomsday is near. However, the bull attacked the bear, and prices saw an upfall in early 2018. Just after the Bitcoin price correction, in early 2018, Ethereum faced a similar scenario. In both these cases, short sellers were in heavy loss.
In May 2021, a correction swept through the entire cryptocurrency market. Many altcoins experienced a significant downfall. Crypto experts believed that all coins except Bitcoin and Ethereum would crash. Many started selling all the altcoins. Suddenly altcoins like Cardano (ADA) and Solana (SOL) started showing recovery, trapping the short-sellers.
How to Escape a Bear Trap?
To escape the bear trap, you have to identify it first. There is extreme difficulty in identifying a bear trap. You cannot tell which is a real price downfall and which is a bear trap. Only market-making whales and insiders will be aware of it if it is a pre-planned one. But there are always ways to minimize the risk of falling prey to a bear trap. Here are some things to consider:
- Follow the News: Follow the news to know what the crypto world is up to. Stay updated with the particular asset you are trading. But always be skeptical of the news.
- Technical Analysis: Use your technical analysis skills to know the market flow. Utilize technical indicators and advanced software to know what will happen next. Look at MA and RSI to identify the support and resistance levels.
- Set Stop-Loss Orders: You can set up a stop-loss order by setting a predetermined price. The order automatically sells the asset once it reaches the fixed price. This will decrease your losses.
- Diversify Your Portfolio: By diversifying your portfolio, the bear trap of a particular coin won’t affect you much. Depending on a single coin always has risks.
- Long-Term Holding: Short-term fluctuation is inherent to the crypto market. By focusing on long-term value and potential, you are less likely to panic sell during FUD.
Is Bitcoin Now in a Bear Trap?
Bitcoin is a strong asset with great use cases. Short-term bear traps may happen but it is a coin to hold for the long term. However, if you are a short-term trader, it is important to do thorough research before delving into conclusions.
Final Thoughts
The bear trap is not a silly thing to ignore. If you happen to be a victim of a bear trap, it shows something about your psychology. Fear, uncertainty, and doubt are the major psychological factors that are playing behind the bear trap. It is very important to know the mechanics of bear traps and to build a controlled mind.
As we said earlier, there won’t be necessarily an all-knowing market maker at play in bear traps. Bear traps may happen because of the normal market sentiment. When bears and bulls are in equal proportion, there is a strong chance for bull traps. Also, it can be triggered by various factors like big whales manipulating the market. Various other factors like news, the community, and external issues may cause bear traps.
However, when more regulations from governments arrive, we may see some decrease in bear traps. Anyway, it is important to stay informed. With thorough research and a certain amount of luck, you can navigate the crypto market with ease. Thank you for reading.
Read more: What Is Stock Trading? And Types Of Stock Trading