Market cycle analysis screamed before the sale on Jan.


Welcome to the Cointelegraph Market weekly newsletter. This week we will identify trends in emerging sectors in the cryptocurrency landscape to expand your understanding of market cycles and better equip readers to take advantage of the microcycles that regularly appear in the larger market structure.

The cryptocurrency sector has a reputation for being volatile and fast-paced, and these traits were fully visible in May when Bitcoin’s rapid drop in the price of Bitcoin (BTC) from $ 60,000 to $ 33,000 resulted in a mass exodus that wiped out $ 1.2 trillion in value of the total market capitalization.

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While many across the ecosystem have blamed the downturn on things like negative tweets from influencers and influential figures like Elon Musk or another announcement that the Chinese government has banned Bitcoin, more experienced traders and analysts warned of the potential for a a significant pullback several weeks before the sell-out.

The soaring price spike in 2021 showed some of the classic signs of bubble-like behavior, with overbought alarm bells ringing while Uber drivers and grocery workers were excited to share their opinion on the next big hit.

With that in mind, now seems like a good time to review the various stages of a market cycle to get a better understanding of what the market has been through so far and what can potentially be expected in the months and years to come.

Four phases of a market cycle

The four basic phases of a market cycle that all traders should have a basic understanding of are the accumulation phase, the premium phase, the distribution phase, and the discount phase.

Phases of a market cycle. Source: Investopedia

The accumulation phase occurs after a market has bottomed out and is characterized by the fact that innovators and early adopters buy the asset for its long-term potential before any significant price movement occurs.

This phase was observed in the cryptocurrency market from around December 2018 when the price of BTC fell below $ 3,500 and extended through October 2020 when the price rose well above $ 12,000.

BTC / USD 1-day chart. Source: Bit stamp

The markup phase really started to heat up in December 2020 and stretched through January 2021 when BTC and the decentralized finance (DeFi) sector gained global attention, with total market capitalization as a dividend peaking over $ 2.5 trillion in May. Dollar rose phase began to begin.

Total market capitalization of the cryptocurrency. Source: CoinMarketCap

During the distribution phases, sellers begin to dominate and the previously bullish sentiment is mixed, causing prices to be locked in a trading range. The phase ends when the market reverses direction.

Some of the typical chart patterns observed during this time, as outlined by Investopedia, are double and triple highs alongside well-known head-and-shoulders that were the red flags presented by BTC and seen by technical analysts prior to this recent sell-off.

Similar to the 2017-2018 bull market, the price of BTC hit a new all-time high (ATH) and then began to decline, causing funds to move from Bitcoin to the altcoin market, further boosting total market cap to a record high of May 2 . $ 53 trillion.

For the astute crypto trader, this pattern was a sign that a discount phase was approaching and that it would be wise to take profits as BTC hovered between $ 40,000 and $ 60,000 and altcoins climbed to all-time highs to break the sell-off and scoop up tokens with a discount during the next low.

Use funds in the accumulation phase

Now that the market has seen a significant pullback and continues to look for a price floor, it is a crucial time to monitor price movements in order to look for good entry points into viable projects.

Perhaps the best-known graphic describing the typical market cycle is Wall St. Cheat Sheets “Psychology of a Market Cycle”. The pattern has popped up in markets of all kinds, from stocks and commodities to cryptocurrencies and real estate.

Phases of a market cycle. Source: Wall St. Cheat Sheet

If we look at the chart for Bitcoin, we can see a similar price pattern that began in late 2020 with a possible “disbelief” phase starting in November. The early start in January is outwardly similar to the “phase of hope” on the chart above and was followed by a several-month run to a euphoric all-time high in April.

BTC / USDT 4-hour chart. Source: TradingView

The price then fell from $ 64,000 to $ 47,000 before bouncing back into the $ 53,000 to $ 60,000 range as complacency set in. The May sell-off propelled the market through periods of fear, denial, panic, and surrender, and the ecosystem’s response to Musk’s tweets sparked significant anger in the community, along with other forces pushing the market down.

Now comes the challenge of dealing with the depression of a significantly lower portfolio value and trying to decide whether the market has bottomed out, which signals that it is a good time to reallocate funds, or whether it’s best to sit on their hands as well waiting for further developments.

Big price rallies during this period are often viewed with disbelief as suction rallies – so the cycle is over and we are back at the beginning.

Does that mean now is a good time to start collecting the tokens of your favorite projects?

Unfortunately, there is no guaranteed correct answer to this question and it is up to each investor to decide for themselves. With previously sought-after tokens now significantly reduced compared to a month ago, this could be a good time to get back to key long-term options in preparation for the next higher cycle.

Cycles of the cryptocurrency sector

The typical cycle presented here can be applied both to the market as a whole and to individual tokens or token sectors.

A good example of this is the rise of decentralized finance over the past year, which took the cryptocurrency market by storm, led by the emergence of popular decentralized exchanges like Uniswap and lending platforms like Aave.

Total market capitalization of the DeFi sector. Source: Coin Gecko

As can be seen in the graph above, the DeFi sector as a whole went through its own market cycle pattern, which coincided with its increasing popularity and use across the ecosystem.

A similar pattern was seen with the rise in non-fungible tokens (NFTs) in 2021, but the timing was different, highlighting the idea that sectors are moving closer together and suggesting the potential benefits of a sector-based approach to investing in cryptocurrencies.

ENJ / USDT vs. CHZ / USDT vs. AXS / USDT vs. MANA / USDT. Source: TradingView

In order to take advantage of these opportunities, traders are sometimes forced to take a contrary approach. The accumulation phase is often characterized by decreased sentiment, but the best time to sell is during the distribution phase, when sentiment is highest and the majority of traders move all-in with the hope of big fortune.

As for the current market outlook, it is possible that the best course of action is to wait while leaving some dry powder on the sidelines to take advantage of any “flash sales” that might get in our way. Whatever you choose, just remember to do your own research and set up a risk management process as the historically volatile nature of the cryptocurrency market shows no signs of fading anytime soon.

Would you like to learn more about market cycles?

The views and opinions expressed are those of the author only and do not necessarily reflect the views of Every step of investing and trading involves risk, so you should do your own research when making a decision.