Bitcoin and other cryptocurrencies are volatile assets. Their values drastically increase and decrease daily, so it is essential to identify market cycles. If an investor knows which phase of a particular cryptocurrency’s market cycle, they can make a suitable investment decision.
Investors and traders must look at historical data about the traditional stock market and recent crypto market trends to identify patterns.
Investment mechanisms and investor emotions drive crypto market cycles.
What Are Market Cycles?
Market cycles are the periods between the highs and lows of markets. Traditional stock markets had cycles that typically lasted years. Crypto markets are more volatile; cycles could be months or weeks.
They depend on the psychology of investors and traders. Investors go through various phases of emotion during these cycles, which can be analysed to predict bullish and bearish trends in a market.
There are also four main phases in traditional market cycles. These are the accumulation, run-up, distribution, and rundown phases. Each of them represents investor behaviour in the market.
This phase follows a downward trend in the market. Investors begin accumulating stock hoping that the market will see an upturn soon. It can last anywhere from a few weeks to a few months. Stock prices remain below a certain threshold, and there is not much demand for more stocks from new traders.
The accumulation phase breaks when stock prices cross the previous threshold. The market then enters the run-up phase.
The Run-Up Phase
With prices increasing, investors begin purchasing scores of stocks. As more investors and traders buy stock, trends emerge in the stock prices. These trends attract more investors to the market. Furthermore, it leads to an upward trend.
Finally, the market moves on to the next phase.
The Distribution Phase
Traders who buy stocks during the accumulation phase begin selling their stocks. There is an increase in the volume of shares but no price changes. Also, the demand for stocks is not more than the supply. Moreover, investors selling stocks do not create a downward market trend.
The Rundown Phase
Traders attempt to offload their stocks during this phase. Alas, there is a low demand for stocks. The lower demand lowers the stock price.
The market will move to the accumulation phase if there are consistent lows in the market.
Market Cycles In Crypto
The traditional market phases can be expanded to include investor emotions in phases. There are various useful emotional phases when investing and trading in crypto.
They begin with disbelief, which is the beginning of the accumulation phase. Investors are not confident that an upturn in crypto values will lead to a sustained rally.
Next, investors feel hope as the price of crypto continues to increase. They feel there is a possibility that a sustained rally will begin. Accordingly, more investors buy crypto, and prices quickly increase as demand increases.
Investors are then optimistic. They believe the rally is real and the value of their crypto will earn them huge returns. Optimism becomes a belief as investors now have confidence in the market. As they earn more on the market, they feel a sense of euphoria, which compels investors to double down on their crypto purchases. Euphoria is the height of the market.
Eventually, the euphoria subsides as traders and investors see fewer returns from their crypto. They become complacent. There are dips in crypto prices, and investors start to feel anxiety. Investors begin selling off their high-value crypto but still have confidence in the market.
They remain confident in the crypto. They brush off the dips in the market as only temporary, and they believe the value will increase again. Anxiety is either met with denial or panic. The latter results in most investors’ panic selling their crypto because everyone else is exiting the market.
This continues until the market reaches new lows, and no new investors have confidence in the market. The cycle starts again.
These phases are similar to the stock market cycles, and the emotions can be summed up as accumulation, greed, distribution, and fear.
Altcoins are all cryptocurrencies other than Bitcoin. There are three main types of altcoins: mining-based coins, stablecoins, and security tokens.
Mining-based cryptocurrencies are like Bitcoin. Blocks are solved in the blockchain, and users receive coins in exchange for solving these blocks. The most popular coins of this type are Ethereum and Litecoin.
Stablecoins attempt to remove volatility from cryptocurrencies. They attach the value of their coins to a fiat currency like the dollar. The most popular stablecoin is Libra.
Security tokens function similarly to traditional stocks. Companies make these tokens available during an Initial Coin Offering (ICO). Security token holders could receive dividends from companies, as it amounts to owning a piece of a company.
Comparing Altcoins To Bitcoin
Bitcoin value affects the price of altcoins. If Bitcoin’s value drops, the altcoin price drops too. Investors refrain from investing in crypto and move to more stable exchanges like stocks.
If Bitcoin value increases sharply, altcoin values increase. Many investors enter the market through Bitcoin, but some purchase altcoins during a Bitcoin rally. Traders should purchase altcoins because they tend to rise higher in value than Bitcoin. Altcoins might also depreciate in trading pair value (altcoin to Bitcoin) but might retain their dollar value.
When Bitcoin stagnates with no clear value increases or decreases, it is an opportunity for investors to seek returns in altcoins.
Therefore, it is best to invest in altcoins when Bitcoin is stagnant or if the price fluctuates. During this fluctuation, investors could gain returns when altcoins receive a significant value bump.
What Triggers The Different Phases?
The dominant cryptocurrency (coin) is Bitcoin. It has the largest crypto market share, and most investors enter the market by buying it. Altcoins surge in value. If the value of Bitcoin increases, altcoins tend to enter corrections. If the value of Bitcoin decreases, the opposite is true.
There are various reasons why the value of Bitcoin rises or falls. It could be down to a certain news story, an increase in Bitcoin liquidity or a particular altcoin exchange losing value due to a cyberattack.
Certain events could see Bitcoin prices increase. Blockchain, the technology that Bitcoin is based on, could be adopted by more companies and industries. Nigeria announced they would be using blockchain for their financial institutions. They aim to use Bitcoin and altcoins as methods of payment.
With more countries recognising and adopting Bitcoin, it could become an attractive reserve asset and an alternative to gold in an investor’s portfolio.
Finally, millennials are a large proportion of Bitcoin investors. Their distrust of traditional institutions compels them to find a decentralised solution to banks. And with millennials having more money to spend, they could drive the value of Bitcoin towards the $20,000 mark.
Trading During Each Market Phase
Investors need to look at two big trends during crypto market cycles. These are the entry of liquidity and Bitcoin dominance. The former is when new investors enter the crypto market and purchase Bitcoin. The latter is the overall proportion of the crypto market Bitcoin owns. The currency currently dominates the market at over 80%.
Investors can analyse these trends and identify phases to choose the correct investment strategy. During the accumulation phase, when coin prices are low, new investors could buy up coins due to a drop in Bitcoin dominance or a rise. Purchasing coins is best during this phase.
During the run-up phase, price movements see an upward trend. Investors buy coins during the short dips in the market, and coin volatility decreases as more and more investors purchase coins. This phase is best for day traders because they can profit from the dips and rips in the market.
After the highs of the run-up phase, investors begin to exit the market. This triggers anxiety, denial, and panic from other investors. With more coins becoming available for purchase, coin values fall. Volatility increases in the early stages but decreases as the market declines. Short-selling coins during this phase are best because the market might see a bounce after it bottoms out.
Finally, investors should not sell their coins during the rundown phase. Many investors see the market bottoming out and sell off their coins before the price reaches new lows. It is best to buy coins, employ an investment strategy, and wait out the phase. The rundown phase does end.
Investors need to identify the different phases in a crypto market cycle, from the accumulation to the rundown phase, to determine best when to buy or sell coins.
They must also look at their emotions and avoid panic and anxiety when making investment decisions.
Lastly, they must look for new money entering the market and Bitcoin dominance. This can indicate which cryptocurrency to invest in.