It is a well-known observation that history tends to repeat itself, giving rise to trends and cycles in many phenomena in the world. What’s useful, then, is understanding and using these trends to anticipate future circumstances and make well-informed decisions.
The same goes for the economics of the world – cryptocurrency is no exception. Experts who have been in the game long enough know how the trendlines work, and they use this to their advantage. The cryptocurrency market cycle is one essential pattern that traders should understand in order to decide when to enter or exit the market.
What is a market cycle?
Market cycles are ways to make sense of patterns and trends in asset prices. It is typically driven by the psychology of market participants as well as external factors like the economic environment and socio-political events.
The crypto market cycle is usually described as a 4-phase cycle, consisting of the Accumulation, Markup, Distribution, and Markdown phases. Most cryptocurrencies – except for stablecoins – can be said to go through the same four phases, although their lengths may vary. Taking a cue from the history of Bitcoin, the average length of a complete cycle is about four years.
The first phase, Accumulation, is characterised by low price volatility and low trading volume. Usually, this happens after a bear market, after sellers have left the market, and prices begin to stabilise. At this stage, the market sentiment is dominated by uncertainty and hesitance, as investors are unsure if the price will continue to fall.
This phase is also referred to as the consolidation phase. Long-term investors see the consolidation phase as an opportunity to grab cryptocurrencies at low prices. However, short-term investors will need to think twice about entering during the accumulation phase as it is often unclear how long the next phase will start. For the market to move onto the next phase, there is usually a trigger like some positive news that attracts attention, resulting in an increase in prices and demand.
The Markup phase occurs when the price of the asset rises sharply, propelled by an increase in trading volume. This bull market period welcomes a more optimistic sentiment as the price is on an uptick. New traders usually find this an excellent time to enter the market, as they can make profits relatively quickly.
Generally, there will be more demand and more buyers than sellers in the Markup phase. Positive news that gets out will attract even more buyers, further fuelling and prolonging the Markup phase. However, any bad press about the asset could break the momentum of the Markup phase and plunge the market into the next phase.
Once enough investors are selling rather than buying, the distribution phase begins. These are sellers who are trying to secure their profits from the market upswing; however, this will even out demand and supply. At the same time, some investors are still optimistic about a further price increase and will continue to buy. These opposing actions create tension between the bulls and bears, resulting in a large trading volume but low price volatility.
Overall, sentiments of uncertainty and panic will start to set in as market participants are unsure about how long the bullish market will last and when the bear market will come in. One measure that analysts use to predict the movement of the market in such situations is the fear and greed index.
Finally, the Markdown phase will occur as soon as supply outstrips demand, with more investors choosing to sell and exit the market before the dreaded bear market. This phase is dominated by a sense of pessimism, panic selling, and major price drops.
Negative headlines about the asset will further spread anxiety and panic, adding to the selling pressure. But the positive news is unlikely to be enough to turn the market around, as investors tend to be more wary at this time. However, not all is bleak for traders, as some will make use of this time to sell their assets and re-buy them later at an even lower price.
Making use of market cycles
Understanding market cycles is just one part of the story. While it is true that the prices of most assets – including cryptocurrencies – follow a market cycle, the progression is not always straightforward. Sometimes, markets may get stuck in one phase for months or even years, or external triggers like political news or a remark by an influential figure may cause the cycle to deviate, slow down, or propel forward.
Many times, the current market phase may not be apparent at present but only becomes evident in retrospect. That is why it is always a good idea to implement strategies to minimise your risks, especially by diversifying your portfolio. Riding out the volatility with long-term investments is also another way to make yourself less susceptible to unexpected turns in the market cycle.
Now that you have this valuable information at your fingertips, it is yours to use in your crypto trading journey! At Coinut, you can get access to real-time charts to analyse Bitcoin, Ethereum, and Litecoin prices in Singapore, amongst others. As a crypto exchange in Singapore and Toronto, we are regulated with the Money Services Business in Canada and are in the process of applying to be licensed in Singapore.
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