Crypto trading has become quite established today. Understanding cryptocurrency market cycles is undoubtedly the biggest hack toward winning in the crypto-trading game. Why? Because it is critical to making strategic decisions and potentially increasing your earnings. But what exactly do we mean by crypto market cycles and why is it so important? Why should you care about market cycles?
Here is the answer; understanding market cycles can give you an edge in the crypto market. By being able to identify when a market is set for a prolonged uptrend or downtrend, you can adjust your investment strategy accordingly to reduce risks and increase profitability.
In this article, we dive deeply into the topic of cryptocurrency market cycles to give you a comprehensive knowledge of what they are, how to identify them, and how to use them to succeed in cryptocurrency trading. Are you ready to learn one of the top hacks to profitably navigate the crypto market and take your trading activity to the next level? Read on to find out!
What is a Crypto Market Cycle?
Like any other financial market, the crypto market goes through cycles of both growth and decline. Notably, there are also times when the crypto market remains flat, ranging sideways only. These different seasons, often referred to as market cycles, are a natural part of the cryptocurrency market and can greatly affect the prices of crypto assets.
Cryptocurrency market cycles are simply the trends and patterns that play out in the crypto market due to several factors, including ruling sentiments among market participants and the prevailing economic conditions. It can also refer to the patterns that all crypto assets form as different investors concurrently react and speculate on price actions, depending on their distinct fundamental analysis and technical analysis conclusions.
Generally, crypto market cycles are driven by a variety of factors, including government policies, investor sentiments, macroeconomic elements, and social media hype among others. Additionally, these cycles can also be affected by market correlation with the leading cryptocurrency bitcoin (BTC), bitcoin halving, and other social metrics. This is so because bitcoin has the highest market dominance.
Notably, while there are mainly two seasons in the cryptocurrency market, the crypto market cycle has four phases. I know you are eager to learn about them but before we discuss these two market seasons and the associated four phases, let us look at how long a particular market cycle can last.
How Long Can a Crypto Market Cycle Last?
A crypto market cycle can last from a few minutes to decades, depending on a trader’s time frame. For a scalper or day trader, a full cycle can be completed in minutes or hours, while position traders and long-term investors find that cycles lasting months to years are more beneficial to their decision-making.
Bull and Bear Market Explained
Like any other market, the cryptocurrency market goes through cycles of growth and decline. These cycles are often referred to as bull and bear markets.
A bull market is described by a long period of surging crypto prices and positive market sentiments. During this market season, more green candles are printed on charts than red candles. That is, the crypto spot market sees more buyers than those who dump their assets. Likewise, in the derivative markets, long positions tend to be more than short positions. It is in a bull market, the idea of fear of missing out (FOMO) prevails, with more buyers tending to jump on the bandwagon.
During a bull market, investors are optimistic about the prospects of crypto assets and are willing to pay high prices for assets. This creates a positive feedback loop where higher prices attract more investors and push prices even higher.
A bear market, on the other hand, is characterized by sustained price declines and negative market sentiments. Here, more red candles are seen on cryptocurrency charts than green candles, signifying that the crypto sellers have overpowered the buyers. When sellers face fear, uncertainty, and doubt (FUD) about a crypto asset’s price movement, they tend to sell more.
During a bear market, investors are pessimistic about the prospects of the market and unwilling to pay high prices for assets. This creates a negative feedback loop where falling prices trigger market participants to panic-sell their assets while scaring off new investors.
It’s worth noting that the terms “bull” and “bear” are not based on the actual price level of an asset but on the direction of price movement. In other words, there could be a bull market even if asset prices stay well below all-time highs.
An example of a crypto bull market is the one that took place in 2017. At the end of 2016, bitcoin price was around $800, and by December 2017 the price had risen to over $19,000. This period was marked by a surge in interest in cryptocurrencies and blockchain technology, which attracted a large number of new investors to the market. During this period, many investors made handsome gains as different coins/ tokens formed new all-time highs. But in December 2018, the bear market emerged. This saw bitcoin price falling to around $3,200.
It is worth noting that crypto markets are very volatile and cycles of bull and bear markets can be shorter and more intense than traditional markets. Additionally, it is difficult to predict when a bull or bear market will begin or end, and the specific reasons behind these market cycles are also difficult to pinpoint. On the whole, bull and bear cycles are a normal part of any market and the crypto market is no exception.
Now, let’s take a closer look at the four phases of the cryptocurrency market cycle, what influences them, how they can be detected, and how you as a crypto trader can benefit from them.
The Accumulation Phase
The accumulation phase is the first phase of the crypto market cycle. It is characterized by a low trading volume and a slow increase in the prices of crypto assets. Here, the crypto market is said to be in a state of ‘accumulation’ as prices of assets are usually at the bottom of the charts. Low prices allow investors to bag more coins/ tokens.
In this phase, the excitement level in the crypto community is usually low with only a few people showing interest in buying crypto assets. But experienced individual and institutional investors take this period to buy their favourite cryptocurrencies in bulk and at discounted prices.
Every trader can take advantage of this phase by researching and identifying undervalued cryptocurrencies with strong long-term potential. You can also fish out established crypto assets that have declined hugely, which could be by 50% or more from their all-time highs. You could buy these cryptocurrencies at their low prices and hodl, pending when their prices would surge. If you apply this strategy to weak coins or tokens, the low prices may even dip more.
Notably, both global and local economic conditions can affect the cryptocurrency market. During the accumulation phase, positive economic conditions and macroeconomic factors can lead to increased interest and demand for bitcoin and other cryptocurrencies.
The Markup Phase
The markup phase is the second phase of the crypto market cycle. It is commonly deemed as the start of the bull season. The markup phase is characterized by a huge increase in 24-hour trading volumes on crypto exchanges and a significant increase in the value of bitcoin (BTC) and other cryptocurrency assets. This phase is driven by increased investor interest and hype as more retail investors enter the crypto market to trade.
The ‘big fool theory’ comes into play in this market phase. How? As prices of different digital assets begin to rally massively, greed begins to dominate the market as many traders push common sense and rationality to the back seat. Here, the inexperienced investors and amateurs begin to FOMO (fear of missing out), whereas the skilled traders book their profits while stepping back to monitor the movement of the market.
One factor that influences the markup phase is social sentiments. The positive social media hype surrounding bitcoin, altcoins, or even memecoins can greatly spur investors to troop into the cryptocurrency market. The FOMO effect can also drive the markup phase as investors who do not want to miss out rush to buy cryptocurrencies not minding their already high prices.
The Distribution Phase
After the markup phase comes the distribution phase. This third phase of the crypto market cycle is often regarded as the beginning of the bear market. It is defined by the slow decrease in the volume of transactions and value of crypto assets. In this stage, patterns like a ‘double or triple top’ is usually formed, signalling that a particular crypto price is set to retrace.
This distribution phase is primarily driven by a combination of fear, greed, and hope. Here, the positive sentiments seen in the markup phase start to turn negative. Smart investors often sell off their crypto assets in this phase. As the selling pressure increases, the prices of cryptocurrency assets plummet steadily. Consequently, the excitement begins to reduce in the crypto community.
Insider trading—where people trade the market based on their knowledge of certain classified information about a specific cryptocurrency—can also influence the distribution phase. If they know the price of a crypto asset would plunge, they could sell off their assets or enter short positions with a high margin and leverage. This action can cause the price of such an asset to fall massively.
The Markdown Phase
The markdown phase is the last phase of the crypto market cycle and it is commonly known as the crypto winter period. It is distinguished by a steady decline in the price of bitcoin (BTC) and other cryptocurrencies. At this stage, there is usually a relatively low interest in buying cryptocurrencies from investors while the selling pressure tends to be on the high side.
Here, more red candles are seen on crypto charts than green candles. This then leads to crypto prices breaking their support levels and forming new all-time lows. As a result, fear and panic saturate the crypto community while crypto critics begin to attack the technology. Investors who are caught up in this stage are usually newbies and inexperienced traders.
A picture of the four phases of a crypto market cycle can be seen in the price performance of bitcoin between late 2017 and late 2019. Traders observed the accumulation phase from early 2015 to late 2016, with a slow but steady increase in the value of bitcoin.
From the beginning of 2017 to the later days of 2017, a markup phase was observed and the value of BTC rose rapidly, reaching an all-time high of almost $20,000 in December.
The distribution phase started from early 2018 to late 2018, when bitcoin’s price value dropped significantly. The markdown phase for the largest crypto by market capitalization was subsequently observed from early 2019 to late 2019 and the price of bitcoin continued to plummet, clinching a low of around $3,000.
How to Take Advantage of Crypto Market Cycles
Now that you know what crypto market cycles are, it’s time to learn how to beat them and use market psychology to your advantage. It is important to understand that the crypto market is likely behaving very counterproductively.
The point of greatest financial opportunity is at the end of the market cycle (the peak of the markdown phase). When the market is down, 80% in the case of cryptocurrencies, it can be a good time to start buying as historically, it will take anywhere from 30 to 169 weeks before cycling back to a new all-time high.
To gauge market sentiment and the tone of market sentiment, the media, and word of mouth are good places to watch. If everyone in the industry is screaming to buy with a euphoric tone (markup phase), it could be a good time to sell as it would indicate that the market is about to go back to the downside.
On the other hand, when the market is entering a capitulation phase where even experienced traders are considering exiting the market, this is a good time to buy. Typically, the key is to buy when everyone else is selling and sell when everyone else is getting emotional. This tallies with the statement made by the famous businessman Warren Buffet, “Be fearful when everyone is greedy and be greedy when everyone is fearful.”
If you have read to this point, you will agree with me that the crypto market never stays stable rather it moves in cycles and seasons. Therefore, understanding how crypto market cycles work is a crucial step for any crypto investor to make informed decisions and potentially increase profits. In other words, it is pertinent for you to always be aware of the state of the crypto market before you press the buy or sell button.
More so, always remember that investing in cryptocurrencies involves a relatively higher level of risk due to high volatility. On this premise, it is good to diversify your portfolio, set stop losses where necessary, and not invest more than you can afford to lose.