It is not a secret for anyone, that cryptocurrencies are extremely volatile, and often we can see huge price swings. This is what makes bear traps possible. Let’s see what exactly is a bear trap and what should we do if we notice one.
What is a bear trap?
In the cryptocurrency world, a bear trap is a situation, where traders think a coin is going down. As you might guess, the result is often a significant loss.
To be more specific, a bear trap happens when investors believe prices are going to rebound, after a period of decline.
Although bear traps are difficult to identify and avoid, there are still some red flags that can help. For example, if you notice a fall in the price and then rebound right before it falls again, this seems like a bear trap.
Another sign is the low buying volume, when the prices rebound, as it indicates that there isn’t a demand for the cryptocurrency to sustain the price increase.
How to identify one?
Fortunately, there are a few signs that could help you identify a bear trap:
If the market is rallying and suddenly takes a dive, that seems like a bear trap;
If you notice a coin making significant gains, and then falling back to the original price;
Sudden increase in trading volume, followed by a sudden drop;
Price action of the coin
What will happen if you fall into a bear trap?
If you are an individual investor, falling into a bear trap can lead to some big losses, and that is why we always suggest you do good research before making any investments.
Be aware that quickly rising prices are often a sign of an overheated and overvalued market. Furthermore, remember that past performance isn’t always an indicator of future results. Just because a cryptocurrency has a great past, doesn’t mean that it has the same future. Keep that in mind.
Can we avoid a bear trap?
As we already suggested, to avoid a crypto bear trap, you must do good research before you invest in any asset. You must be aware of all the factors that could drive crypto prices up and down.
Moreover, you can also use stop-loss orders to let you automatically sell your assets when they fall below a specific price.
Have we seen crypto bear traps in the past?
As we already said, cryptocurrencies are volatile, and we can notice huge price swings, which makes bear traps so common. Here are some examples of crypto bear traps we have seen in the past:
March 2017 - Ether price reached $50, and afterwards crashed to $10 just a month later (about an 80% decrease)
December 2017 - Bitcoin Cash reached about $4,000, and in a few months fell below $800
January 2018 - Bitcoin reached about $19,000, and crashed below $7,000 only three months later.
The common thing between all the examples is that when the prices were crashing many people started investing in them, hoping it was a temporary decline, and of course, many traders lost money.
What to do if you fall in a bear trap?
You must know that if you fall in a crypto beat trap, saving your investment isn’t possible. If you decide to sell your assets at a lower price, it will be a loss for you. What you can do is wait for the market to recover, hoping that it will, at some point.
Conclusion
Crypto bear traps are among the reasons we always suggest you do research before investing in any digital assets. Unfortunately, if you fall into one, there is no perfect solution. All you can do is hope for the best.
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