What is a Crypto Market Cycle?
Crypto market cycle is a recurring pattern that emerges from the psychology of market participants, and the overall economic environment. The cycle begins with a lack of interest in the market, but as demand grows, asset prices rise to match it. Eventually, prices reach a peak and begin to decline as interest wanes, and supply exceeds demand. Knowing the characteristics of each stage and how typical users approach them can help you participate in the market more intelligently.
This article discusses the four stages of the crypto market cycle, the factors that influence it, and the technical indicators used to analyze it.
The Four Stages of the Crypto Market Cycle
The first phase is accumulation, which typically begins after the end of the previous cycle when sellers have left the market, and prices are expected to stabilize. During this phase, market volume is usually lower than average, and interest in the market remains low. Thus, there is no clear trend emerging, and assets generally trade within a narrow range.
The accumulation phase is characterized by market sentiment dominated by disbelief and uncertainty, low price volatility, and low trading volume. It is also known as a consolidation phase, indicating the end of the downtrend.
An example of the accumulation phase in action is Bitcoin between 2014-2016, where prices were stable around $200-$300, following the previous bull run in 2013.
The markup phase is commonly known as the bull market, during which the market experiences a significant increase in price at an accelerating rate. As the markup phase begins, new market participants enter, leading to a noticeable increase in trading volume. Market sentiment shifts towards optimism as companies and the media publish positive headlines. The demand for assets exceeds supply, causing prices to rise. The markup phase is characterized by an uptrending price chart, high trading volume, and favorable economic conditions. A famous markup phase in crypto history occurred in late 2017, and early 2018, when the price of Bitcoin skyrocketed from around $1,000 to nearly $20,000 in just a few months.
The distribution phase marks a turning point in the market cycle where some buyers become sellers after a bull run, creating a balance between the two sides in the market. The phase sees buyers still confident of the market’s bullish trend, and sellers looking to cash out their profits, leading to tension between the bulls and bears. Although the trading volume is still high during this phase, asset prices generally fluctuate within a limited range until either the bulls or bears give up. The distribution phase is characterized by a shift in market sentiment from optimism to uncertainty, with the fear and greed index being a popular indicator for gauging this change. An example of the distribution phase for Bitcoin occurred in early 2018 as the price approached its all time high of $20,000, contributing to the subsequent bear market.
The markdown phase, also known as the bear market, commences when the supply exceeds the demand in the distribution phase. The more market participants become apprehensive about the state of the market, the more selling pressure builds up, causing the asset’s price to drop significantly. The markdown phase is recognizable from a technical viewpoint by a downtrending chart, and high volume price decline, and from a market sentiment perspective, it begins when news articles turn negative. For instance, the bear market for Bitcoin lasted from 2018 to late 2020, which saw a significant decline in price from its all-time high of $20,000 to around $3,000.
Factors That Influence the Crypto Market Cycle
- Political sentiment – It can impact the crypto market cycle through regulatory changes by introducing new regulations or changing existing ones. Political instability can affect investor sentiment and confidence in the market, and can also influence the adoption and integration of cryptocurrencies into the broader economy.
- Supply and demand – Low demand gives way to accumulation phase, high demand and relatively constant supply results in the markup phase, limited supply results in the distribution phase which builds up the selling pressure, and a decrease in demand with high supply results in the mark down phase.
- Fiscal and monetary central bank policies – Fiscal policies such as government spending and taxation can affect consumer and business behavior, while monetary policies such as interest rate changes and quantitative easing can impact the supply of money and credit, leading to changes in cryptocurrency prices. Additionally, central bank policies can impact investor sentiment and market expectations, leading to changes in market cycles.
- Corporate performance data – It can provide insights into the financial health of companies that are involved in the cryptocurrency industry.
- Technical indicators – It can provide insights into the sentiment of market participants. For example, when indicators such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) show that the market is overbought, it can lead to a shift in market sentiment from bullish to bearish.
- Bitcoin Halving – It can trigger the beginning of an upward or downward phase for the asset. Bitcoin halving process, which reduces the rewards for mining after approximately 210,000 blocks, results in a limited supply of new Bitcoins, which can drive up the price if demand remains high.
- Bitcoin Correlation – Most cryptocurrencies have a close connection with Bitcoin. Therefore, if there are no significant factors that influence the market, the market cycles of smaller cryptocurrencies are expected to follow the same pattern as that of Bitcoin.
- Social Media Influencers – Although it’s difficult to gauge or predict social metrics, cryptocurrencies tend to fluctuate based on tweets or other social media engagement from influential individuals. For instance, Elon Musk’s tweet on his newfound interest in AI caused Dogecoin to tank.
Why Analyzing the Crypto Market Cycle is Important
Analyzing the crypto market cycle is important for several reasons:
- Investment Strategy: By recognizing when the market is in a particular phase, investors can make informed decisions about when to buy, hold, or sell their crypto assets. For example, during the accumulation phase, investors may want to accumulate assets at a discount, while during the distribution phase, they may want to take profits and wait for prices to come back down.
- Risk Management: By analyzing the market cycle, investors can better understand when the market is likely to experience significant price movements, and adjust their risk management strategies accordingly. For example, during the bull run phase, investors may want to tighten their stop-loss orders to protect their profits.
- Market Awareness and Planning: By understanding the dynamics of the market, investors can identify new trends and emerging opportunities. Thus, investors can prepare themselves for the inevitable periods of market volatility, and make informed decisions about when to enter or exit the market.
Technical analysis involves using statistical and mathematical tools to predict market movements. Technical analysts use tools to identify the direction of the market, support, and resistance levels to identify areas of potential buying or selling pressure. Moreover, indicators to identify overbought or oversold conditions, volume analysis to identify trends in market participation, and Elliott Wave Theory to predict market movements, are other tools that tech savvy investors leverage.
It is important to note that technical analysis has its limitations. These limitations include historical bias due to limited data in the crypto market, external factors that can disrupt market cycles, unpredictability and volatility, vulnerability to market manipulation, limited scope of market data, and overreliance on technical analysis, which can lead to conflicting predictions.
Comprehending the four distinct stages of the cryptocurrency market cycles, namely accumulation, markup, distribution, and markdown, is pivotal to invest in this domain. With this understanding, investors can make informed decisions about when to purchase and sell cryptocurrencies, potentially increasing their gains and reducing their losses. However, it is essential to conduct thorough research and understand the associated risks before investing in cryptocurrencies.
We believe that the recent collapse of FTX played a significant role in starting a new bullish cycle in cryptocurrency markets. The shutdown of the crypto exchange helped eliminate unwanted crypto leverage. Furthermore, macro catalysts are now aligning for bitcoin due to continued weakness in US regional banks, and deposit outflows toward money-market funds and the big four US banks, reflecting concerns about the centralization of money. Thus, a range of favorable factors are aligning for the upcoming markup phase.
However, it’s crucial for anyone interested in investing in cryptocurrencies to conduct thorough research and stay up-to-date with the latest market developments. Whether you’re a seasoned investor or just starting, staying informed is key to successful investing in the crypto market.