Assets such as stocks are generally influenced by several factors, and many of these same factors also influence cryptocurrencies. Some analysts even believe crypto prices move in identifiable phases called “market cycles” where during the period asset prices follow a pattern. Crypto investors and traders spend a lot of time researching news, technical trendlines, and sentiment indicators to gauge the market cycle’s phase. Although analyzing the “crypto market cycle” isn’t an exact science and is exceptionally difficult to predict, many use cycles to determine whether timing is right to buy or sell an asset.
Not everyone agrees on the specifics of the crypto market cycle, but it has become an influential chart pattern for all market participants. Learning about the psychology of a market cycle can help explain what makes crypto prices fluctuate.
What is a market cycle?
A market cycle is an identifiable price chart pattern associated with a particular asset class within a specific time period. Most economists measure market cycles between the recent lows and highs in an asset’s price history. In other words, a market cycle is a standard rise and fall in an asset’s price chart.
Market cycles can occur in any tradable asset, including ETFs (exchange-traded funds), crypto, and commodities. Typically, analysts use a combination of fundamental and technical analysis to identify an asset’s market cycle “phase.” Countless macroeconomic and technical trends influence when a particular sector enters a bullish or bearish phase, whether there’s a specific period of prices increasing or decreasing.
For example, if the price of crude oil rises, it’ll likely cause stocks of oil companies to enter a bullish phase. However, if new statistics reveal that global electric vehicle sales are skyrocketing, it may trigger a bearish cycle for oil stocks and a bullish cycle for battery companies.
It’s always easier to identify past market cycles than spot current trends. If it was easy everyone would time their investments perfectly and be rich! Researchers use different analysis methods and timeframes to review chart data. Investors also have unique preconceptions about an asset class during analysis. These variables color each investor’s opinion on a current market cycle, often leading to contradictory predictions.
Remember that market cycles are never “out of the norm.” All market participants expect these cycles to occur from time to time in every asset class. However, an unpredictable event (aka “black swan event”) can invalidate a market cycle pattern at any time. For example, the COVID-19 outbreak triggered a sudden crash in many markets, such as stocks and crypto.
The four phases of a market cycle
Technical analysts often describe four significant phases of all market cycles. Based on Charles H. Dow’s theories in the 19th century, these four chart patterns help clearly define market cycles.
Everything is low during this phase, including prices, trading volume, and market sentiment. Very few people buy an asset when it’s at these levels. Although prices may be attractive, most potential investors fear they could drop even lower. The majority of people who buy during accumulation are long-term holders who believe in an asset class’s future.
Since the volume is low during accumulation, prices tend to trade in a tight range. Short-term traders looking for price volatility won’t be interested in the limited action during accumulation. Indeed, prices are so stable during accumulation that some refer to this stage as “consolidation.”
A markup describes a significant uptick in trading interest and activity. During this phase, an asset’s volume and price increase. It’s also common to see positive news stories and general optimism about an investment’s potential. More retail and institutional traders likely feel confident putting their money to work during a markup. Often, markups correlate with the start of a bull market.
Distribution is the inverse of the accumulation phase. While accumulation occurs at the low end of a price range, distribution happens at and near an asset’s peak. Prices tend to hover at these high levels as more sellers pressure buyers from the recent markup. Typically, the distribution phase has an equal number of buyers and sellers, and prices trade in a tight range. Since volume is low and price action is narrow, it’s common for investors to feel intense uncertainty.
During a markdown, the selling pressure of an asset outpaces buying activity. There’s a noticeable increase in sell volume and a sharp decrease in an asset’s market value. Sometimes, markdowns signal a bear market or relate to a standard market correction. Whatever the reason is, there’s always more supply than demand during this phase.
After the markdown, assets usually repeat the accumulation phase, creating an ongoing cycle. Many times assets don’t follow this pattern cleanly, but it can be used as a guide to think about while investing.
Crypto cycles explained
Crypto market cycles also follow these four phases, but they’re specific to the cryptocurrency space. Compared with other asset classes, crypto market cycles tend to be the most volatile. A “correction” in cryptocurrency may be a severe “panic” for traditional assets such as blue-chip stocks and ETFs. Technical analysts typically facilitate larger price swings before declaring an end to any of the four phases in a crypto market cycle.
Also, since crypto hasn’t been around as long as assets such as precious metals or stocks, there’s not as much historical data to confirm previous patterns. Although some analysts believe there are discernable patterns in the crypto market, this industry remains highly experimental.
What affects a crypto market cycle?
While major headlines and macroeconomic data can impact the crypto space, many sector-specific factors influence prices. These features may help explain why crypto prices move up, down, or sideways.
- New crypto laws and policies: Crypto regulations are nascent, and every country has a different opinion on whether to recognize this asset class. Restrictive policies like China’s 2021 Bitcoin (BTC) mining ban can lead to markdowns. However, positive news like El Salvador’s Bitcoin Law could increase crypto’s value.
- Bitcoin halvings: Every four years, the daily issuance of bitcoins gets cut in half. Since Bitcoin is the largest cryptocurrency, this event impacts the entire sector. If demand for BTC remains constant, the lower supply of Bitcoin could increase its value. When Bitcoin’s price rises, many altcoins (or non-Bitcoin cryptos) tend to perform well.
- Major crypto news: Most financial news outlets have a division dedicated to digital assets. Also, publications such as CoinDesk, Bitcoin.com, and CoinTelegraph have been covering the space for years. Any high-profile crypto-specific news could sway markets up or down.
- Social media sentiment: Social media sites such as Twitter, Telegram, and Discord have become major hubs in the crypto community. The overall sentiment on these websites indicates whether there’s a bull or bear market on the horizon.
How long does a crypto cycle last?
There’s no way to predict how long any market cycle will last, especially in the volatile crypto space. However, some crypto enthusiasts subscribe to the “four-year cycle theory.” According to this model, the crypto market enters a massive markup phase a few months after Bitcoin’s supply gets cut in half. Once crypto assets reach an unsustainable peak, prices begin to plunge until they settle near the highs of the previous four-year cycle. Cryptocurrencies remain in this extended accumulation phase until Bitcoin’s next halving event.
Although the crypto market has had significant “booms and busts” following prior Bitcoin halvings, there’s no guarantee BTC’s supply change will always result in a price increase. Events such as a hack, interest rate hike, or a crypto company bankruptcy can invalidate this model. Also, if the demand for a digital coin can’t outpace its circulating supply, the price will decrease. Experts suggest researching every aspect of a digital currency before investing.
What is the “crypto supercycle?”
The “crypto supercycle” is a speculative theory that posits crypto prices will exponentially rise once they reach mass adoption. Long-term crypto believers may argue “the supercycle” is inevitable as more governments, businesses, and citizens accept digital assets such as Bitcoin and Ethereum (ETH). During this theoretical supercycle, crypto prices skyrocket during a major bull run before finding an equilibrium. After the final bull run, some believe crypto prices remain relatively stable as more citizens and institutions use or invest in these coins.
While the “crypto supercycle” has become a buzzword among crypto enthusiasts, it’s even more speculative than the four-year cycle theory.
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