Crypto market cycles provide a valuable bigger picture perspective for traders and investors on the price fluctuations of a specific crypto asset. This guide will explain what a market cycle pattern is, how to identify the stages, and detail some useful investment strategies to use in conjunction with market cycles.
What is a crypto market cycle?
A market cycle is a blueprint of all the stages between the peak and low of a market. They occur in all financial markets and repeat over time. They are a useful tool and are frequently used in the stock market and crypto to predict future price movement.
A market cycle is a lot like a mountain range, and the price of an asset is like a hiker traversing the mountain range. Imagine a hiker who walks over every hill and down through every valley, climbing ridges, scaling up to the peak of the tallest mountain, and then back down the other side, until they reach a similar altitude to where they started. This is very similar to the journey financial markets undertake.
Did You Know?
Cryptocurrency market cycles are often much shorter than in other financial markets because of the rapid price movements.
Interpreting crypto and Bitcoin market cycles
Understanding market cycles is an important skill that every trader and investor should have. Market cycles offer a macro perspective on market fluctuations, which provides a useful contrast to the daily volatility seen in the crypto market. If used correctly, it can provide you with the perspective you need to execute great trades and avoid making costly mistakes.
Some market cycles are separated into four phases: the accumulation phase, the mark-up phase, the distribution phase, and the mark-down phase. This is a very useful method, especially for quick reference, however, there is a lot more nuance in using the more traditional model, which contains 13 different stages (Figure 1).
The stages of a typical market cycle
The most widely used market cycle model includes 13 different stages that detail the key points between the low of the cycle to the peak and back down again. Each stage is characterised by a catchphrase that summarises the psychology of traders at that point in the current market cycle.
Stage 1: Disbelief
“This rally will fail like the others.”
The market is showing very early signs of movement, but because the previous rallies have failed to gain momentum, there is not yet bullish sentiment in the market as investors are reluctant to believe that this move will be different.
Stage 2: Hope
“A recovery is possible.”
Hope is the first sign of recovery after the serious disbelief. The market is showing positive signals for a new bull run but investors are still cautious.
Stage 3: Optimism
“This rally is real.”
The price has potentially broken above the previous failed rallies and investors are now optimistic that this rapid rise is the real deal.
Stage 4: Belief
“Time to get fully invested.”
The momentum is continuing to build. Investors are excited to invest a large portion of their money in promising projects.
Stage 5: Thrill
“I’m going to take out a loan and buy more. Time to tell everyone to buy!”
The price is now skyrocketing. Investors are excited because their portfolio value has drastically increased in value since they invested. Some investors are taking out loans in order to buy even more crypto.
Stage 6: Euphoria
“I am a genius! We are all going to be rich.”
The price of almost every market is through the roof. Investors have become euphoric because their portfolio value has never been higher. This stage represents the top of the bull market.
Stage 7: Complacency
“We just need to cool off and wait for the next rally.”
Soon after the euphoria has set in, there is a significant crash in price as whales begin to take profits and bears begin to short. Many investors hold onto their coins, or buy more, believing that this is just a dip. And indeed, the price does rally upwards again, but does not break the previous high.
Stage 8: Anxiety
“This dip is taking longer than expected.”
After the complacency rally fails to break the previous high, the price begins to fall again, this time lower than the previous support. Investors become anxious as they are now close to breaking even or losing money on most of their investments.
Stage 9: Denial
“My investments are with solid projects. They’ll come back. There will be a new all-time high soon.”
Investors have now lost money on their investments and are in denial that the market is in a downtrend.
Stage 10: Panic
“Oh no! Everybody is selling. I need to get out.”
The price continues to fall lower and lower, seemingly confirming a bear market. Investors now see the truth and understand that they need to get out, but they are hesitant to sell at such a big loss.
Stage 11: Capitulation
“I’m getting 100% out of the markets. I can’t afford to lose more.”
The market continues to fall to new lows. Investors begin to succumb to the reality of their situation.
Stage 12: Anger
“Who shorted the market? How the hell is this even possible?”
There is generally a short relief rally here, which some investors pray is the start of a trend reversal. But the rally can’t maintain momentum and the market falls again. Investors become angry that they didn’t take their chances to exit the market when they could.
Stage 13: Depression
“My retirement money is lost. I’m such an idiot.”
The most brutal and often longest stage. Most investors have lost all hope. They believe they have been scammed or that the bubble has burst, and the market will never recover. This is where the market drops to the lowest levels of the cycle and there is the most financial opportunity. Smart money begins slowly flowing back into the market, and after a long depression stage, the market will eventually re-enter disbelief once more and begin the cycle all over again.
Important to Remember
Each market (or coin) has its own market cycle. It is important to always know where your coin is within its market cycle. The market cycle often overrides other indicators or patterns. For instance, if you notice that there is a bullish pennant on your chart, but you know that your coin is currently in the “Euphoria” stage of the cycle, you would most likely avoid that trade.
Market cycle investment strategies
There are a number of different trading or investment strategies that can be used in combination with market cycles. We will outline a few popular strategies, but there are plenty of others, each with their benefits and drawbacks.
Dollar cost averaging
Dollar cost averaging (DCA) involves investing smaller amounts of money on a regular basis, regardless of market conditions. It is a particularly powerful strategy in volatile markets such as crypto. It can also be a good way to avoid making emotional trades.
The drawback of DCA is that often your profits would be higher if you bought early with a lump sum. But this is difficult to predict, particularly for people new to crypto or investing.
Buying the dip
Buying the dip is a strategy that should only be used on assets with solid fundamentals. It revolves around identifying and buying price dips in an uptrend. Traders will use different techniques or metrics to calculate “buyable dips”, but generally traders will buy the dip if the asset has fallen by 10-20%.
The disadvantage of this method is that you might keep buying an asset that’s in a downtrend, believing that it’s a dip every time you buy.
Follow moving averages
Follow moving averages
Moving averages (MAs), are one of many powerful technical analysis tools. MAs depict the average price of a market over longer time frames, such as days or weeks. If used correctly, they can function as reliable signals to buy or sell. Figure 2 shows the MA 100 on the daily chart. The blue line represents the average price over the last 100 days of trading, which is seen as one of the most reliable moving averages. Using the example above, almost every time the price touched the MA 100 the market held firm or rallied higher. Once the MA 100 was broken, that signalled a selling opportunity as the market fell much lower.
One of the downsides of using MAs is that they rely entirely on past data that may not be relevant in the present or into the future. Most investors won’t make a trade based purely on MAs, but will instead use them in conjunction with other indicators.
Did You Know?
Traders often combine multiple MAs in order to generate additional signals. For instance, the “golden cross” occurs when the MA 50 crosses the MA 200 on the daily chart from below. This is considered a very bullish indicator. The inverse is the “death cross” that occurs when the MA 50 cross the MA 200 from above. This is a large bearish indicator.
Bitcoin halving cycle and the effect on its price
Every 210,000 blocks, the block reward is cut in half. This is known as Bitcoin halving and occurs roughly every four years. There is a heavy correlation between the Bitcoin halving cycle and the Bitcoin market cycle. Historically, a huge Bitcoin price surge has occurred after each Bitcoin halving event, followed by a large pull back until the market establishes an equilibrium and prepares for the next price surge beginning with the next Bitcoin halving (see Figure 3). This cycle tends to match up fairly well with the highs and lows of the market cycle.
It’s important always to respect the market cycle. It is impossible for markets only to move upwards. Market cycles are not all-powerful, but they are tried and tested in every financial market, and operate over longer time frames, which makes them a very powerful tool for traders and investors.
It is important for traders and investors to understand that all crypto markets move in cycles. Market cycles can provide a useful macro perspective, which means that you can make more informed decisions before entering a trade. This piece has explained what a market cycle is, how to identify the stages, and has looked at some investment strategies that traders can use in combination with market cycles. If you want to learn more about trading strategies, technical analysis, or Bitcoin halving, there is plenty of great content on Swyftx Learn.