Financial markets follow certain patterns and trends, which can be characterized by the term “market cycles.” Regardless of the asset class - stocks, bonds or cryptocurrencies - price action depends on market sentiment, the number of investors willing to buy or sell assets, and how investors make their investment decisions based on their emotions towards the market.
Due to the unpredictability of markets, it is difficult to predict how they will behave. However, investors can understand market fluctuations and make informed decisions by studying and understanding past patterns and cycles. The material examines the market cycles of cryptocurrencies.
What are crypto market cycles?
Market cycles are certain trends and patterns that are influenced by the psychology of investors, as well as the general health of the economy. As the name suggests, the cycles repeat. Every market faces this naturally, and the cryptocurrency market is no different. However, compared to the stock market, cryptocurrency cycles can be significantly shorter due to rapid price movements.
The cryptocurrency market cycle consists of four distinct phases:
accumulation,
markup,
distribution
blackmail.
Each phase can be differentiated by the sentiments of market participants and market activity itself. In each cycle, the price of an asset will move from an all-time low to an all-time high and vice versa.
Generally speaking, crypto market cycles start with little market interest. As interest and demand grow, cryptocurrency prices begin to rise. At some point, prices peak and begin to stabilize before starting to fall. A decline occurs when market interest declines and supply exceeds demand. At the end of each cycle, a new cycle begins.
It is extremely difficult to accurately determine the starting and ending points of a market cycle. However, cryptocurrency market cycles can be used by investors as an analysis tool or as additional information to better understand market dynamics.
Accumulation phase
Every market cycle begins with an accumulation phase. It is sometimes considered the end of a previous cycle because it begins shortly after a significant market crash when prices are at their lowest levels. Overall market interest decreases and trading volume decreases, which usually results in market stability.
At this stage, many long-term HODLers of investment positions are eager to close their positions and are likely to set low prices for their assets to reflect their lack of confidence in the market. At this point, corporate insiders, experienced traders and whales all start buying again. The general consensus is that the worst is behind them and that they have a decent chance of making money on any deal. This group of investors believes that the market will recover soon and is not missing out on the opportunity to invest.
At the moment, it is unlikely that retail investors will enter the market as sentiment remains neutral and there is no clear trend. However, positive news about the general state of the market can now attract the attention of participants and possibly move the market into the next stage, the premium phase, as market sentiment begins to move from negative to encouraging neutrality.
Characteristics of the accumulation phase:
Assets are bought by a group of investors (usually long-term holders) or whales who think the market has already found its bottom.
Due to the difficulty of predicting whether assets will continue to decline, some market participants may still view this as a risky time to invest.
There is no clear pattern due to the continued low level of investor interest, minimal price volatility and low trading volume.
Market sentiment is generally skeptical and uncertain
Markup phase
At this stage, the price action enters a sustained uptrend. At this point, the market trend became clear and is often referred to as the bull market phase.
Media attention, especially positive headlines related to cryptocurrency, is beginning to attract interest in the market, while attracting the majority of early adopters.
Skilled investors begin to enter the market using their technical analysis skills to identify a growing number of higher lows and higher highs. As the market demand for cryptocurrencies increases, the prices of cryptocurrencies begin to increase in value.
Since upward price movements are much easier to spot during the markup stage, this may be an opportune time for new entrants to enter the market. Additionally, many investors view growth stage dips or pullbacks as buying opportunities rather than warning signs of price decline.
At this point, the greater fool theory comes into play. As the price of cryptocurrency skyrockets, greed takes over and common sense and rationality fade into the background. FOMO drives novice investors and newcomers. The entry of these investors into the market will cause significant growth in market volume and market valuations will become exorbitant. At the same time, experienced traders begin to take profits.
Soon prices begin to level off or slow down. The latest wave of investors, typically undecided, see this as a great buying opportunity. This usually results in skyrocketing cryptocurrency prices within a very short period of time. Prices reached their peak, and the mood of market participants turned from neutral and boring to euphoric.
Characteristics of the markup phase:
Investor confidence is rising as market sentiment shifts towards optimism and excitement.
The Crypto Fear & Greed Index will be close to 100, on the far right of the spectrum.
Large increases in trading volume occur when new groups of investors enter the market.
The price chart continues to rise, often reaching all-time highs (ATH)
As the phase comes to an end, FOMO investors begin to gather and buy near the top.
Propagation phase
Market prices plateau as buyers and sellers in the market are in balance. On the one hand, there are market players who still want to buy because they believe the bull market remains strong. On the opposite side are sellers who want to maintain their profits because they think “the best is behind them.” As a rule, these are investors who purchased cryptocurrency at the beginning of the markup phase or even earlier and expect the markdown phase, a bear market, to begin soon.
While there is still a lot of trading at this stage of the market, asset prices tend to fluctuate within a range as bulls and bears are on edge.
Since it is unknown whether the uptrend will continue or whether a bear market is on the horizon, this phase may cause the overall market sentiment to change from optimism to uncertainty. Analysts often use the Crypto Fear & Greed Index to measure changes in overall market sentiment.
More negative sentiment, adverse news and uncertainty among traders may finally be enough to weigh on prices and trigger a sell-off. At the very least, as uncertainty begins to mount that the bull market may be coming to an end, the market's fear grows over time.
At the end of this phase, the market will move in the opposite direction. Technical patterns that indicate peak pricing, such as double and triple tops or head and shoulders, are most likely to occur during the distribution phase.
This phase can take anywhere from a few weeks to a few months (or in some cases years) as the fundamentals take root. Typically, the higher the extreme highs, the faster prices fall. Investors who missed out on selling earlier at a profit now settle for breaking even or taking a small loss.
Distribution phase characteristics:
Investors who entered the market early will begin to take profits and close their positions. Those who think prices will continue to rise continue to buy or at least hold their positions.
Insecurity and other negative emotions begin to surface, but overconfidence and greed still prevail.
Pricing varies within a relatively narrow range
Trading volume increases when price volatility is low
Blackmail phase
The bubble finally bursts during the markdown phase, resulting in a downward price trend.
For most market participants, the “markdown period” of a bear market is the worst. This begins once the supply of crypto in the distribution phase exceeds demand, and this is the time when the market is driven by anxiety. Selling pressure is mounting as participants' concerns about the future state of the market grow.
In some cases, this cascading effect can drive asset prices to heights not seen since the premium period. At this stage there will be no new capital entering the market or any buying interest. Even positive news may not reverse the downward trend in prices during this time as investors take precautions to limit losses in a challenging market environment.
The markdown phase is the most psychologically difficult for investors who are either unaware of the persistence of market cycles or choose to ignore them. They will either get stuck selling too late or not sell at all. Those who don't sell at all will hold on to their crypto assets, which can reduce their long-term return on investment (ROI).
This phase, however, is beneficial for short sellers; it is a time when they can profit from a falling market.
When the market concludes that “the worst is over” and prices cannot go any lower than they are, the markdown phase will continue. Then asset prices will stabilize and move within a narrower range.
Some investors will return to the market and buy assets at "discount" prices once market conditions stabilize. This indicates that the price decline phase has ended. The return of investors is also a sign that the accumulation phase has begun again.
Understanding Market Cycle Trends
Essentially, the market cycle moves from greed to fear and then again from fear to greed. Every cryptocurrency market starts at a relative initial value point that cycles up and down.
The greed and euphoria that follows the launch of a new crypto asset drives prices higher until there is uncertainty about the blockchain's value, growth, or tangible practical application. At this point, the market becomes doubtful, causing more and more traders to sell their assets and fueling the downtrend.
Once the price drops to the point where potential profit is possible, greed takes over again, starting the cycle all over again.
Having looked at the main market cycles, we can provide a more detailed explanation for understanding and identifying market cycle trends in cryptocurrency using Bitcoin as an example.
At the beginning of the accumulation phase, institutional investors and early adopters buy assets at low prices. During this period, prices bottom out as those who held off the last high experience some anger and depression.
The price of Bitcoin is starting to rise. There are elements of hope and disbelief.
As the premium phase progresses, investors become excited, which accelerates the market's growth. A little greed comes into play as FOMO buyers jump in, buying from those who came first (now they're selling at a premium). Market sentiment is one of awe, belief and euphoria. At this point it would be wise to sell or HODL.
Bitcoin is now entering a distribution cycle phase where it is distributed highly. This is the best time to sell.
Bitcoin declines during the markdown phase. It's a mixture of anxiety and denial. You can go short and ride the bounces when the price of Bitcoin falls.
Bitcoin is falling faster and faster as sentiment shifts from worry to panic. Since people are panic selling, you can continue to short the market.
At the end of the markdown phase, Bitcoin bottoms out. This is a signal for another cycle. Early investors are starting to accumulate again in anticipation of a new cycle
Factors influencing crypto market cycles
Macroeconomics
Whether crypto assets go through a bullish or bearish phase can be greatly influenced by the state of the overall economy, as well as various government policies. Cryptocurrency prices may fall if the economy is struggling, and vice versa.
Bitcoin halving
Bitcoin halving occurs approximately every four years (after every 210,000 blocks) and halves the reward that miners receive. At the same time, the number of new bitcoins that can be created is limited, which reduces the supply of bitcoins entering circulation.
This reduction in supply could cause the price to rise if demand for Bitcoin remains high. The premium phase has historically followed the Bitcoin halving, making it an important event to watch. This is another Bitcoin correlation effect.
Strategies for Investing with the Market Cycle
Understanding each stage of the crypto market cycle will help you plan your investments for the highest possible profits. The best course of action is to invest in crypto assets during their accumulation phase and then sell them during their distribution phase. Investors can do this to get better deals on crypto assets and then sell them at a higher price. Here are some tools an investor can use to better understand market cycles.
Chain Analysis
Online analytics tools such as IntoTheBlock, Glassnode, Nansen, CoinMarketCap and Dune can help identify market phases by providing information on supply, demand, market psychology and whale activity.
Crypto index of fear and greed
It is extremely important for investors to monitor sentiment in the cryptocurrency market by following business news and using the Crypto Fear & Greed Index. Lower scores indicate more fear and higher numbers indicate more greed on this scale of 0 to 100. It is based on variables including market momentum, volatility and social media activity.
The media and word of mouth are reliable sources for determining market sentiment and tone. It may be a smart idea to sell if everyone in the sector is shouting buy in a euphoric tone (the premium phase), as this suggests that the market is ready to turn down again.
On the other hand, it can be a good buying choice when the market enters a capitulation phase and even experienced traders are considering selling. The rule of thumb is to buy when others are selling and sell when others are euphoric.
Author: Vadim Gruzdev, analyst at Freedman Сlub Crypto News