Market cycles are essentially distinct patterns that frequently result from both the psychology of market players and the larger economic environment. Every market experiences this as a natural occurrence, and the cryptocurrency market is no different.
Cycles in the cryptocurrency market begin with little to no market interest. However, asset prices often increase as interest and demand increase to keep up with the escalating demand. Prices eventually peak and begin to decline as supply exceeds demand and interest rates start to fall. Each cycle has an end and a beginning.
Even while it can be challenging to predict when a market cycle will begin or conclude, the majority of cryptocurrencies (apart from stablecoins) go through a similar progression. You may participate in the market more intelligently if you are aware of the traits of each stage and how a typical user might approach each of these stages.
1. The Accumulation Phase
Accumulation is the initial stage of every market cycle. It begins following the conclusion of the preceding cycle when sellers have left the market and it is thought that prices are starting to stabilize.
As interest in the market remains low, the market volume is often lower than average during this phase. As a result, no distinct trend emerges, and assets often trade within a narrow range.
The accumulation phase, also known as the consolidation phase, often indicates the end of the downtrend. Due to the difficulty in predicting whether the asset will continue to trend lower, some market participants may still view it as a risky moment to invest. But from a different perspective, long-term investors frequently see the phase of accumulation as the buildup to what they anticipate will be the beginning of a bull market.
As interest in the market remains low, the market volume is often lower than average during this phase. As a result, no distinct trend emerges, and assets often trade within a narrow range.
Long-term users who want to purchase and hold at this time find it particularly alluring. But since this stage might persist for weeks, months, or even years, patience is essential for short-term traders. Positive news about the state of the market as a whole at this stage has the potential to attract participants’ attention and move the market into the following phase, the markup phase.
2. The Markup Phase
The markup phase, also known as the bull market period, is when the market prices rise at an accelerating rate. New groups of market participants enter the market during the markup phase, and this typically results in a noticeable increase in volume at the beginning of this phase.
Despite remaining cautious, market participants begin to become more optimistic about the prospects as companies and the press begin to report encouraging headlines.
As supply and demand for an asset start to diverge, prices start to rise as a result.
The markup phase may be an excellent moment for new market participants to enter because the higher price movement is much easier to detect. Furthermore, dips or pullbacks during the markup phase are frequently viewed by many as a chance to purchase rather than a warning indication.
Despite the general optimism in the markup phase, assets won’t always go up in value. Not all assets follow the general trend; some may still be impacted by unfavorable information that is specific to them, which could lead their price against the trend.
3. The Distribution Phase
After a bull run, some buyers eventually turn into sellers. The market’s buyers and sellers are in equilibrium throughout this phase of distribution.
On the one hand, there are market players who continue to look to buy because they believe the bull market is still going strong. Sellers on the other side are attempting to lock in their profits. As a result, there is a conflict between the bulls and bears. Although there is still a lot of trade during this stage of the market, asset values often move within a specific range until one of the bulls or bears gives up.
Although there is still a lot of trade during this stage of the market, asset values often move within a specific range until one of the bulls or bears gives up.
As a result, this phase may cause the general market sentiment to shift from upbeat to divided between greed and fear, with the prevailing uncertainty of whether the upswing will continue or if a bear market is on the horizon. Analysts frequently employ the fear and greed index to measure this shift in market mood.
The distribution phase is also the initial indication of a bear market’s end. Consequently, some may draw the conclusion that a new downward trend may be on the horizon.
4. The Markdown Phase
For the majority of market participants, the bear market or markdown phase is the most terrifying. It begins as soon as the supply in the distribution phase outpaces the demand, and it is a time when the market is driven by anxiety as the outlook darkens.
The selling pressure increases as participants’ fears about the future state of the market grow. This cascade effect has the potential to drive asset prices to heights unseen since the markup period in some circumstances.
Technically speaking, a down trending chart and a steep price fall indicate the discount phase. From the standpoint of market sentiment, it starts when news items start to turn negative and use phrases like “recession” in their titles.
The markdown phase is a short seller’s dream, as it is the time when they can profit from the market’s decline. Even positive news can struggle to reverse a downward trend in an asset during this time since investors are taking precautions to limit losses in the challenging market environment.
Markdown stages do not continue forever, so there is hope at the end of the tunnel. The new crypto market cycle often begins at the conclusion of this period. There may be another markup phase waiting around the corner.
How long is a crypto market cycle?
Cryptocurrency has already experienced multiple market cycles despite its short history.
In one of the early market cycles for Bitcoin, which occurred in 2013, the asset moved from $150 in the accumulation phase to over US$1,150 at the peak of the markup phase in a few months. Eventually, during the markdown period in early 2015, it fell back to $250 USD.
The following cycle started in 2017, rising from a low of approximately US$3,700 to a high of about US$19,000 by the end of the year. However, by the time the markdown phase was complete, it had fallen back to a low of about US$3,700.
The conclusion that an average crypto market cycle lasts four years was reached since the asset in both cases took around four years to complete a market cycle. As this data is based on a relatively small sample size and there might be unexpected black swan events that the industry hasn’t experienced, it is important to exercise caution when making judgments based on it.
Cycles within Cycles
Additionally, it’s crucial to note that there are cycles within cycles. Smart money, for instance, can profit from a run-up in the price of a particular cryptocurrency while also leveraging the profit from a run-up cycle within the wider market.
Factors Influencing the Crypto Market Cycle
In traditional finance, the variables that influence a market cycle are the same as the variables that could lead to a bull or bear market.
Halving of Bitcoin
The start of a markup or markdown phase for an item can frequently be attributed to the technological developments that underpin it. Consider the halving of Bitcoin.
After every 210,000 blocks, the rewards for Bitcoin miners are reduced by half. In plain English, it limits the production of new Bitcoins by lowering the rewards for mining on the Bitcoin network.
As a result, if demand continues to be high, the price of bitcoin will often increase since there is a perceived shortage of supply on the market. A new markup phase has historically always been initiated by the halving of Bitcoin, making it a reliable signal.
Bitcoin Correlation
It is important to keep in mind that most crypto assets, with the exception of stablecoins, have a significant association with Bitcoin, which accounts for 54% of the market capitalization of all crypto assets (as of the writing of this). Therefore, the market cycles of smaller crypto assets are likely to follow the market cycle of Bitcoin if there are no powerful catalysts.
Influencers on social media
It’s noteworthy to note that while many tiny cryptocurrencies have a modest market size, influencers can have a big impact on their prices. Elon Musk is one of the key influencers.
Musk tweeted about the meme coin Dogecoin (DOGE) in February 2021, and it instantly had a growth of nearly 50%. Another time, when Musk was asked how many Shiba Inu coins (SHIB) he owned and said, “none,” the cryptocurrency’s market value dropped by 20%.
Cryptocurrency assets sometimes change based on tweets or other social media activity from influential persons, despite the fact that social metrics are challenging to measure or predict.
Cryptocurrency assets sometimes change based on tweets or other social media activity from influential persons, despite the fact that social metrics are challenging to measure or predict.
How Might Users Benefit from Market Cycles?
Crypto assets are still a novel asset class with new underlying technology even though market cycles are relatively easy to grasp. This can make it more difficult to determine where the market sits in relation to the crypto cycle at the moment. Furthermore, market participants frequently do not know until they reflect back on past events how market cycles have changed from the same patterns.
You may avoid being taken off guard by being aware of the cyclical nature of the markets and adjusting your portfolio to take markdown phases into consideration. Market cycles are ultimately unavoidable, as much as we’d all desire the value of our assets to always rise.
Future performance cannot be predicted or guaranteed based on past performance. The value of cryptocurrency assets can rise or fall, and you run the risk of losing all or a sizable portion of your purchase price. You must conduct a thorough study and due diligence before evaluating a crypto asset because any purchases you make are solely your responsibility.
