Market cycles in crypto can tell you when to buy or sell if you learn to read them. Cryptocurrencies are notoriously volatile, and you’ll want to try to stay on the right side of them.
Despite knowing about the pitfalls, many investors still get caught off guard when the market belly flops. To avoid being sucked into a crypto market sinkhole, you must understand how market cycles work. We’ll show you how to interpret market cycles while arming you with the knowledge necessary to invest strategically.
What Is the Crypto Market Cycle?
A crypto market cycle is simply the period between the peak and low of a market and its stages. Market cycles happen in all financial markets. It is a natural procession of cycles that are bound to appear and reappear as time progresses. However, compared to the stock market, cycles in crypto can be significantly shorter due to the rapid price movements.
Interpreting the Market Cycles
Cycles can be found in every market, and they consist of phases. Prices rise, peak, fall and then bottom out — and another cycle begins right away.
Rookie traders might not recognize that markets are cyclical, often failing to plan for the end of the current market cycle. In addition, even if you’re aware of market cycles, it can be challenging to pick the top or bottom of a given cycle. However, you must understand the cycle to maximize your trading returns. Let’s look at the four main phases of a typical market cycle and how you can identify them.
This phase of the cycle signals a flattening of prices when the market has bottomed after a giddy high. At this point, market trailblazers — corporate insiders, value investors, and experienced traders — begin to buy again. The general sentiment is that the worst is over, and they stand a decent chance of making good on any trade.
Here, valuations are attractive, and for every seller that gives up and sells their position, a savvy buyer is waiting to pick it up at a discount. The accumulation phase typically starts with some loss of interest, a bit of disappointment, boredom, and lack of belief in any positive growth — tightening capital investment and increasing risk aversion.
However, market sentiment begins to transition from negativity to hopeful neutrality.
The Markup Phase
The markup phase starts when the cryptocurrency market has reached a stable point and is beginning to climb in value steadily. Early movers recognize the changes in the market, leveraging their technical analysis skills. The growth is a bit slow, as there are still sellers dampening prices.
Media attention begins to draw interest to the cryptocurrency while reeling in the majority of early adopters. Experienced traders recognize the increasing number of higher lows and higher highs. As FOMO and natural interest fuel trading, trade volumes and prices start to increase significantly.
The “greater fool theory” kicks in at this point, and valuations begin to skyrocket. Greed is predominant, with common sense and reason taking a back seat. Also, at this point — when the latecomers are steaming in — the savvy money managers and investors start to off-load.
Prices soon start to level off or slow down. The undecided see this as a golden opportunity to buy, jumping in en masse. Then comes a selling climax when prices take one last exponential leap, making strong gains. Prices are peaking, and market sentiment has gone from neutral and boring to euphoric.
The third phase of the market cycle is characterized by the dominance of sellers. The bullish sentiment of the previous stage mellows to a mixed sentiment. Prices typically hover within the same trading range, which in some cases can last for months.
At the end of this phase, the market will move in the opposite direction. Technical patterns indicating peak pricing — such as double and triple tops or head and shoulders — are likely to occur in the distribution phase.
This phase of the cycle is primarily driven by the combined emotions of fear, greed, and hope. Early investors are undecided as to whether or not to sell and take profits. Sentiment starts to turn negative, and an adverse geopolitical event or bad economic news can hasten this change.
For the first time, more investors start to question bullish sentiments. A sharp sell-off is closely followed by a rebound, as market players agree that a correction is due before the bull run resumes. But prices never rally to the previous highs, and as they drop for the second time, panic sets in.
Those who came in relatively late and had significant stakes are scared of losing everything while at the same time hoping to regain lost ground as the market seems to take off again. The ratio of up to down days during the distribution phase might be somewhat evenly split, with high volatility, thanks to the attention from traders during this period.
This phase can take weeks to several months and, in some cases, years, as fundamental factors take root. Typically, the higher the extreme highs, the quicker the prices fall. Investors who missed selling earlier at a profit now settle to break even — or take a slight loss.
The Markdown Phase
The fourth and final phase of the cycle is the most painful for those who still hold positions. The investors caught up in this phase are usually new and inexperienced. They cling to their investment because it has fallen well below what they paid for it. This set of investors, who typically bought during the distribution phase or at the start of the markdown phase, might only give up when the market falls by 50% or more. When this happens, late-cycle traders lose hope and finally cut their losses.
At this point, the early investors, who previously made good profits, buy the depreciated assets. These new investors project that a market bottom is imminent, and they most likely proceed to enjoy the subsequent markup.
Understanding the Market Cycle Trends
Essentially, a market cycle progresses from greed to fear and then back from fear to greed again. Every cryptocurrency market begins at a point of relative starting value that begins to cycle up and down. The greed and euphoria that follow a new crypto asset’s launch move prices upward until uncertainty arises concerning the blockchain’s value, growth, or tangible, practical applications. At this point, the market becomes doubtful, causing more and more traders to sell their assets, spurring a downtrend. Once the price falls to a point where potential profits become possible, greed once again takes over, starting a whole new cycle over again.
Having looked at the main market cycles, here’s a more detailed explanation of understanding and identifying the market cycle trends in crypto, using Bitcoin as an example.
- At the start of the accumulation phase, smart money, institutional investors and early adopters buy assets low. During this period, bottoming prices accumulate as those who held from the last high experience some anger and depression.
- The price of Bitcoin starts to climb. There are elements of hope and disbelief. However, smart investors HODL, buying the dip at support. This happens at the beginning of the markup phase.
- As the markup phase progresses, investors buzz with excitement, which drives up the market faster. A bit of greed enters in as FOMO buyers jump in, buying from those who got in earlier (who now sell at a markup). The market sentiments are thrill, belief and euphoria. It would be wise to sell or HODL at this point.
- Bitcoin now enters the distribution phase of the cycle where it’s distributed high. This is the best time to sell.
- Bitcoin lowers at the markdown phase. There’s a mixture of anxiety and denial. This is your last chance to sell if you haven’t already. You can also short, and play bounces as the Bitcoin price tumbles.
- Bitcoin plummets further and quicker as sentiments move from anxiety to panic. As people panic sell, you may continue to short the market. Play bounces and start closing shorts at this point.
- At the end of the markdown phase, Bitcoin bottoms out. There is a lot of anger and depression. It’s also the signal for another cycle. Smart money and early investors start to accumulate again.
Best Strategy for Investing with the Market Cycle
Recognizing cryptocurrency market cycles helps you make sound investment decisions. The best strategy for using your understanding of the market cycle phases is a simple one: buy or accumulate at the bottom when the market is fearful, HODL on the way up, sell during distribution when everyone is happy and greedy, and exit or short before the market plunges.
The challenge here is learning to cast away emotional attachment to positions and not bow to the pressure of FOMO or greed, which could make you buy high or sell low.
Where Are We in the Bitcoin Market Cycle Now?
The phase of the market cycle we’re in right now is subject to some speculation. However, we can use the observable factors at play and analyze them to form objective and sound investment decisions.
From all indications, it appears we’re at the accumulation phase of the Bitcoin market. Some experts expect this will kick off a bullish trend.
In mid-July, Bitcoin traded lower than it has since January, falling below the $30,000 mark. With positive tweets from Elon Musk and reports of Amazon’s increasing cryptocurrency interest, buyers seem to have retaken the lead, and the price has bounced nearly 30% higher in 2 weeks. This indicates that the markdown phase and the bearish trend (bear market) may be ending with a return to the accumulation stage.
Since May, Bitcoin has been showing trends compatible with those seen in the market cycle pattern of an accumulation phase. A strong descent is followed by alternating waves of ascent, and descent until a fall to a new low is followed by a rise above the starting price.
Is the Altcoin Market Cycle Correlated with Bitcoin?
Altcoin markets — especially the leading ones like Ethereum (ETH), Litecoin (LTC), and Ripple (XRP) — closely correlate with Bitcoin. However, this relationship is not fixed. Altcoins may appreciate alongside Bitcoind in value depending on the Bitcoin market cycle phase, or their prices may remain mostly unchanged. In times of market turbulence, altcoins can drop at several times the speed of Bitcoin.
Therefore, to trade successfully, you can follow the numerical ratio between Bitcoin and altcoin prices to gauge their relationship. For example, ETH and LTC are two altcoins that follow Bitcoin, and the latest bull market cycle for Bitcoin saw a corresponding increase in both their values.
Other coins can also match Bitcoin’s movements. However, their relationship can be more complex because many of them have reputations for pump-and-dumps, whereby large investors manipulate prices.
Ethereum, Litecoin, and other altcoins often drop after Bitcoin hits new highs. Investors sometimes pile back into Bitcoin from altcoins because of FOMO, buying heavily and hoping to benefit from the rapid rise. The problem with this approach is that Bitcoin is notoriously volatile, and jumping in based on FOMO doesn’t always end up well.
Learning to identify the phases of crypto market cycles and know when is a complete market cycle is vital for trading profitably. The best time to buy is the accumulation phase because prices have stopped falling, and investors are still afraid. When the market picks up steam during the markup phase, the smart investor HODLs and waits for excited investors to drive the price higher. In the distribution phase, which signals the end of the markup stage (when sentiments are most bullish), the smart money starts to sell its position.
Armed with a good understanding of the different stages of the crypto market cycle, you’ll be better positioned to take advantage of these stages to make a profit. Keeping tabs on market cycles helps decrease the chance that you’ll buy high or sell low.