Retreat signal or layout opportunity? Understanding the fall cycle.

Quick Summary

The down cycle is a natural phenomenon in financial markets, not the death of the market. Mature assets like Bitcoin have historically recovered from deep declines multiple times. The key lies in understanding the causes, identifying coping strategies, and flexibly adjusting positions within the range of psychological tolerance.

The Nature of Downward Cycles

A downtrend cycle occurs when asset prices continue to decline for several months or even years. This is different from short-term price fluctuations and reflects a deeper adjustment due to a loss of investor confidence and a deterioration of economic fundamentals.

Since its inception, BTC has been in a long-term upward trend and is one of the best-performing assets in history. However, Bitcoin has also experienced several severe downturns—sometimes with declines exceeding 80%, while many altcoins have seen declines of over 90%.

Why has the market fallen?

The downtrend cycle is often influenced by multiple factors:

Economic recession and slowing GDP growth will directly lower corporate profit expectations, prompting investors to sell risk assets to avoid losses.

Geopolitical conflicts, trade frictions, and other sudden events can trigger market panic, causing investors to lean towards safer assets—fiat currencies, bonds, and stablecoins.

Asset bubbles burst just like the collapse of the internet bubble in 2000; when valuations deviate significantly from fundamentals, a correction is inevitable.

Monetary Policy Shift - Rising interest rates will increase financing costs and dampen market sentiment. The significant decline in 2022 was partly due to this.

Black Swan Events such as the pandemic shock in 2020 triggered panic selling and extreme volatility.

These factors sometimes act individually and sometimes appear in combination. The financial crisis of 2008 was the result of the resonance of the housing bubble, excessive leverage, and systemic issues.

Decline and Rise: The Dual Nature of the Market

From a chart perspective, the differences are quite intuitive—prices rise during an uptrend and fall during a downtrend. However, there is a subtlety: downtrends are often accompanied by prolonged periods of sideways consolidation, during which prices remain stable, trading is light, and volatility is low. While sideways movement can also occur during uptrends, it is more common in downtrends. For most investors, a prolonged period of price stagnation is clearly not an ideal situation.

Lessons from History: Several Classic Cases of BTC Decline

Winter of 2017-2019

Bitcoin reached a peak of around $20,000 in December 2017, then entered a bear market. By 2018-2019, the cumulative decline exceeded 84%.

Impact of the Pandemic in 2020

At the beginning of the outbreak, BTC fell by more than 70% in the first half of 2020. This was also the last time Bitcoin traded below $5,000.

High Point Retreat in 2021-2022

From a low of under $4,000 in 2020, BTC surged to nearly $69,000 by the end of 2021, an increase of over 1,670%. However, what followed was a correction of more than 77%, with the price briefly dropping below $15,600 in November 2022.

These cases confirm a reality: even the most stable assets are not immune to periodic declines.

Five Strategies to Tackle Downtrends

1. Control risk exposure

The most direct defense is to reduce your position by selling assets for fiat currency or stablecoins. If you feel uncomfortable watching the account numbers decline, it indicates that your position size has exceeded the risk level you can tolerate.

2. Observe the changes.

In some cases, the wisest course of action is to do nothing at all. Historical data shows that established assets like the S&P 500 and Bitcoin eventually recover from past declines. If your investment horizon is measured in years or decades, then the current downturn is simply not a reason to sell.

3. Dollar Cost Averaging Strategy (DCA)

Many people believe that the downturn cycle is the golden period for implementing fixed amount investment, especially for mature assets like Bitcoin. The brilliance of this strategy lies in regularly buying in without timing the market, allowing you to significantly increase your position during low price periods, thus averaging down your overall cost. For example, if you initially buy 1 BTC at a price of $100,000, and then buy another 1 BTC when the price drops to $80,000, your average cost would decrease to $90,000.

4. Short selling or hedging

Experienced traders profit or protect existing positions by shorting or hedging. They make money by following downward trends through day trading or swing trading, and can also use shorting to offset the risk of their spot positions. For example, if you have 2 BTC in your wallet, you can open a short position of 2 BTC on an exchange to balance potential losses if the market continues to decline.

5. Counter-Trend Trading (High Risk)

This is the practice of looking for rebound opportunities during a decline, also known as “bear market rally” or “dead cat bounce.” However, counter-trend fluctuations are inherently volatile, as bulls attempt to extend a short-term rebound. Once it is confirmed that the decline has not ended, the market may immediately reverse, and many traders will take profits at local highs. If the operation is executed incorrectly, they may get caught in the rebound, watching helplessly as the decline resumes. Even experienced traders can suffer significant losses during this process.

Origin of the Name

The metaphor of “bear” comes from the image of a bear - a bear swings its paws downwards, symbolizing the downward trajectory of prices. In contrast, “bull” comes from a bull thrusting its horns upward, indicating an upward posture. These terms have been in use since at least the 19th century, and there is even a theory that suggests “bear” originated from ancient fur traders who sold bear skins before acquiring them, which is akin to the modern logic of short selling.

Overall Understanding

The down cycle is driven by multiple factors such as economic, geopolitical, or speculative reasons. Although experiencing a decline can be uncomfortable, it is an inevitable part of market operations. With proper discipline and planning, investors can both protect their assets and seek opportunities during downturns.

During a downtrend, many people choose to hold or turn to low-risk alternatives (bonds, fiat currency). The dollar-cost averaging strategy is popular for its long-term effectiveness. Short selling and contrarian trading carry higher risks and are only suitable for traders with the corresponding knowledge and experience. Regardless of the strategy adopted, the focus should be on making rational decisions based on one's own risk tolerance and investment time frame.

Latest Bitcoin Data Reference: The current BTC price is approximately $88,170, which still has downward space from the historical high of $126,080, while also being well above the historical low of $67.81, fully demonstrating that even after experiencing periodic adjustments, the long-term trend still provides value support for holders.