Cryptocurrency market cycle and how to use it

Market cycles in crypto can tell you when to buy or sell if you can learn to read them. Cryptocurrencies are known for their volatility, and you should try to stay on their side.

Even though they know the pitfalls, many investors are still caught off guard when the market falls. To avoid falling into a cryptocurrency market failure, you need to understand how market cycles work. We show you how to interpret market cycles, equipping you with the knowledge you need to make strategic investments.

What is the cryptocurrency market cycle?

The cryptocurrency market cycle is simply the period between the high and low of the market and its stages. Market cycles occur in all financial markets. It is a natural succession of cycles that are bound to appear and reappear over time. However, compared to the stock market, cycles in cryptocurrencies can be significantly shorter due to rapid price movements.

Interpreting market cycles

Cycles can be found in every market and they are made up of phases. Prices rise, peak, fall, and then bottom – and immediately another cycle begins.

Newbie traders may not be aware of the cyclical nature of the markets, often without being able to plan for the end of the current market cycle. Also, even if you are aware of market cycles, it can be difficult to pick the top or bottom of a given cycle. However, you must understand the cycle in order to maximize your trading profits. Let's take a look at the four main phases of a typical market cycle and how to identify them.

Cryptocurrency market cycle

Accumulation phase

This phase of the cycle signals a leveling off of prices as the market bottoms out after a dizzying high. At this stage, market innovators - corporate insiders, high-value investors and experienced traders - start buying again. The general consensus is that the worst is over and they have a good chance of success in any trade.

Here, the valuations are attractive, and for every seller who gives up and sells their position, a savvy buyer is waiting to pick it up at a discount. The accumulation phase usually begins with some loss of interest, a little frustration, boredom, and a lack of faith in any positive growth—hardening of capital investment and increased risk aversion.

However, the sentiment of market participants is beginning to shift from negative to encouraging neutrality.

Layout phase

The mark-up phase begins when the cryptocurrency market reaches a stable point and begins to grow steadily in value. Pioneers recognize changes in the market using their technical analysis skills. Growth is a bit slow as sellers are still holding back prices.

The media attention is starting to attract interest in cryptocurrency, while most of its early adopters are reeling. Experienced traders will recognize an increasing number of higher lows and higher highs. As FOMO and natural interest fuel trading, trade volumes and prices begin to rise significantly.

At this point, the “big fool theory” kicks in, and the scores start skyrocketing. Greed prevails, and common sense and reason have faded into the background. Also, at this point—when the latecomers arrive—savvy money managers and investors begin to unburden themselves.

Soon, prices begin to level out or slow down. Those undecided see this as a great opportunity to buy, jumping en masse. Then comes the selling climax, when prices make their last exponential leap, making significant gains. Prices peaked and market sentiment shifted from neutral and boring to euphoric.

Propagation phase

The third phase of the market cycle is characterized by the dominance of sellers. Bullish sentiments at the previous stage are replaced by mixed ones. Prices usually fluctuate within a single 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 that indicate a peak price, such as double and triple top or head and shoulders, are more likely to appear in the distribution phase.

This phase of the cycle is primarily driven by the combination of the emotions of fear, greed and hope. Early investors were undecided to sell and take profits. Sentiment is starting to turn negative, and an adverse geopolitical event or bad economic news can accelerate this change.

For the first time, more and more investors are beginning to question bullish sentiment. A sharp sell-off is followed by a rebound as market participants agree that a correction is needed before the bullish move resumes. But prices never rise to previous highs, and when they fall a second time, panic sets in.

Those who came relatively late and had significant bets fear losing everything and at the same time hope to regain lost ground as the market seems to take off again. The ratio of up and down days during the distribution phase can be somewhat evenly split with high volatility due to the attention of traders during this period.

This phase can take anywhere from weeks to months, and in some cases years, as the fundamentals take root. As a rule, the higher the extreme highs, the faster prices fall. Investors who previously didn't sell for a profit are now settling for breakeven—or taking a small loss.

Markdown phase

The fourth and final phase of the cycle is the most painful for those who still hold their ground. Investors who find themselves at this stage are usually newbies and inexperienced. They cling to their investments because they have fallen way below what they paid for them. This group of investors, who typically buy during the distribution phase or early in the markdown phase, can only give up when the market drops 50% or more. When this happens, late cycle traders lose hope and finally cut their losses.

At this stage, early investors who previously made good returns buy the depreciated assets. These new investors predict a market bottom is imminent and are likely to continue to benefit from subsequent markups.

Understanding market cycle trends

Basically, the market cycle goes from greed to fear and then again from fear to greed. Every cryptocurrency market starts at a point of relative initial value that starts to rise and fall cyclically. The greed and euphoria that accompanies the launch of a new crypto-asset drive prices up until there is uncertainty about the value, growth, or actual practical application of the blockchain. At this point, the market becomes questionable, causing more and more traders to sell their assets, triggering a downtrend. Once the price drops to the point where potential profit becomes possible, greed takes over again, starting a new cycle again.

Having covered the major market cycles, here is a more detailed explanation of understanding and identifying market cycle trends in crypto using BTC as an example.

  1. At the beginning of the accumulation phase, smart money, institutional investors and early adopters buy assets at a low price. During this period, there is an accumulation of lows as those holding off the last high experience some anger and depression.
  2. BTC price starts to rise. There are elements of hope and disbelief. However, smart HODL investors buy on support failures. This happens at the beginning of the striping phase.
  3. As the mark-up phase progresses, investors buzz with excitement, accelerating the market up. Some greed comes in as FOMO buyers jump in, buying from those who entered earlier (who are now selling at a premium). Market sentiment is excitement, faith and euphoria. It would be wise to sell or HODL at this stage.
  4. Bitcoin is now entering the distribution phase of the cycle where it is distributed high. This is the best time to sell.
  5. Bitcoin declines during the markdown phase. It's a mixture of worry and denial. This is your last chance to sell if you haven't already. You can also make short shorts and play bounces when the bitcoin price falls.
  6. Bitcoin is falling faster and faster as sentiment shifts from worry to panic. When people start to panic, you can keep selling in the market. Play bounces and from now on start covering your shorts.
  7. At the end of the markdown phase, Bitcoin hits the bottom. A lot of anger and depression. It is also a signal for a new cycle. Smart money and early investors are starting to pile up again.

The best investment strategy based on the market cycle

Recognizing the cycles of the cryptocurrency market helps you make the right investment decisions. The best strategy to leverage your understanding of the phases of the market cycle is simple: buy or accumulate at the bottom when the market is scary, HODL is on its way up, sell during distribution when everyone is happy and greedy, and exit or close before the market drops.

The challenge here is to learn to let go of emotional attachment to positions and not give in to FOMO pressure or greed that can make you buy high or sell low.

Where are we now in the Bitcoin market cycle?

The phase of the market cycle that we are in now is the subject of some speculation. However, we can use observable factors and analyze them to make objective and informed investment decisions.

Apparently, we are in the accumulation phase in the BTC market. Some experts expect this to start a bullish trend.

Bitcoin traded lower in mid-July than it has since January, dropping below the $ 30 mark. Thanks to positive tweets from Elon Musk and reports of Amazon's increasing interest in cryptocurrency, buyers seem to have regained their lead, with the price jumping nearly 000% in 30 weeks. This indicates that the markdown phase and the bearish trend (bear market) may end with a return to the accumulation phase.

Since May, Bitcoin has been showing trends consistent with the trends seen in the accumulation phase market cycle model. A strong decline follows an alternating rally, and a decline to a new low is followed by a rally above the starting price.

Is the altcoin market cycle related to bitcoin?

Altcoin markets, especially the leading ones like Ethereum (ETH), Litecoin (LTC) and Ripple (XRP), are closely related to bitcoin. However, this connection has not been recorded. Altcoins can grow with bitcoins depending on the phase of the Bitcoin market cycle, or their prices can remain largely unchanged. During market turbulence, the speed of altcoins can drop several times faster than that of BTC.

Therefore, for successful trading, you can follow the numerical relationship between the prices of bitcoins and altcoins in order to evaluate their relationship. For example, ETH and LTC are two altcoins that follow bitcoin, and the latest bull market cycle in bitcoin has shown a corresponding increase in their value.

Other coins can also match Bitcoin's movements. Their relationship can be more complicated, however, as many of them have a "pump and dump" reputation where big investors manipulate prices.

Ethereum, Litecoin, and other altcoins often drop after Bitcoin hits new highs. Investors sometimes return to bitcoin from altcoins due to FOMO, actively buying and hoping to capitalize on the rapid growth. The problem with this approach is that Bitcoin is notoriously volatile and the FOMO-based transition doesn't always end well.

Final thoughts

Being able to identify the phases of the cryptocurrency market cycles and knowing when a full market cycle occurs is vital to profitable trading. The best time to buy is during the accumulation phase because prices have stopped falling and investors are still afraid. When the market gains momentum during the mark-up phase, the smart HODL investor waits for anxious investors to push the price up. In the distribution phase, which signals the end of the mark-up stage (when sentiment is at its most optimistic), the smart money begins to sell its position.

Armed with a good understanding of the different stages of the cryptocurrency market cycle, you can better use these stages to generate profits. Tracking market cycles helps reduce the likelihood that you will buy high or sell low.

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