Learn all about the crypto market cycle - including the performance of Bitcoin, fear & greed index, and the effect of stock markets on crypto!
The crypto market cycle describes the recurring pattern that can be witnessed in between the highs and lows of a market, and its different stages. While it is difficult to time the market and know exactly when something will happen - it does follow a predictable order of events. There are four main phases of the crypto market cycle:
- The accumulation phase occurs at the very bottom of a cycle, when prices could not go any lower. Sentiment is also at rock-bottom; the asset may just experienced a huge dump and shattered investors' beliefs. From an RSI perspective, this asset is in oversold conditions (0-30) and has a very attractive valuation - that is, this asset is typically worth much more than it is currently selling for. In the accumulation phase, the only people noticing and buying are what we've nicknamed "smart money"- institutional investors, experienced traders, and people with insider information. To the unsuspecting eye, the trendlines would make it appear like prices are stalling - and there is no heavy interest that would give a strong buy signal.
- In the markup phase, the negative sentiment about the asset has begun to disappear and evens out thanks to time and the buying actions of smart money. Technical analysis can be used to reveal the beginning of an uptrend, although there is still some selling skepticism that keeps the growth slow. Eventually, a majority of the skepticism disappears and many investors line up to buy the asset, leading to insane growth. Let's call this push #1. Just as push #1 starts to plateau, the most hardened skeptics decide it's time to change their stance and FOMO in on their buy - leading to another dramatic increase in the value of the asset that we'll call push #2. Little do they know that this marks the top of the cycle, and things can only go sideways or down from here. Most of "smart money" begins to exit their positions and takes profit well in advance.
- The distribution phase is where sellers slowly begin to dominate. Late buyers might be caught unaware by the price action and continue eagerly accumulating thinking that "this is just the calm before the next high." However, this phase is marked by many bull traps (false buying signals). The price can stall for several weeks or even months, before eventually dropping into a massive selloff. There might be price bounces that lead people to believe a false bottom has been reached. There may be new peaks and temporary uptrends. But, the height of the peaks will never reach the previous highs - and slowly continue to fall. This phase plays with so many mixed emotions and newer investors, who have already lost most of the value on their asset and refuse to let it go.
- Finally, the markdown phase kicks in - and this is the painful moment of truth when late buyers and newbie investors have lost more than 50% of the value of their asset at the time of buying. Most will give up and sell to cut their losses. At the same time, this phase will eventually cause the asset price to hit rock-bottom and signal the start of the markup phase. Smart money may be elated and start buying here, recognizing the opportunity. And thus, the cycle begins again.
All cryptocurrencies except stablecoins closely follow the market movement of Bitcoin, so perhaps it is more accurate to call this the Bitcoin market cycle.
What was the historical Bitcoin market cycle?
You might be familiar with an event called "the halvening," which describes a phenomenon where the price of Bitcoin gets cut in half every 4 years - only to recover and surge beyond previous all-time highs. This has held consistent for the past 2 cycles (8 years) since the bottom of 2013, and has been a reliable predictor of where we are in the market cycle.
Normally, this means an accumulation and markup phase that lasts about 2 years - reaching a peak and signaling the beginning of the distribution and markdown phase (another 2 years) that leads to the halvening event. Of course, the gains during the accumulation and markup phases have to be larger than the losses in the subsequent phases; otherwise Bitcoin would not have reached the price it is at today!
However, many analysts have reason to believe that Bitcoin will break away from its traditional halving cycle in 2022 and embark on a totally new trajectory. Increasing institutional adoption, legislative interference, and small investor recognition may combine to push it to unpredictable levels.
What is the fear and greed index?
The fear and greed index is just a measure of sentiment, and reflects how the general populace feels about Bitcoin on a scale of 0 to 1. Anything below 0.5 signifies fear (greater desire to sell Bitcoin), while anything above it signifies greed/optimism (greater desire to buy Bitcoin).
Why is this important? It helps investors gauge where they are in the market cycle, and to make wise trading decisions. A high fear index usually means that Bitcoin is in oversold territory, making it an excellent value buy. Prolonged periods of high fear may mark a bottom and signal the start of an accumulation or even markup phase!
In contrast, a high greed index usually means that Bitcoin is in overbought territory, making it extremely overvalued. Whenever an asset is overvalued, it is prone to a correction - or a natural decrease in its price that will bring it closer to its actual value. Prolonged periods of high greed can signal the start of a distribution/markdown phase and quickly lead to mass selloffs.
Still, Bitcoin can stay in the overbought or oversold territory for several weeks to even months. Don't necessarily assume that a reversal will happen right away!
Why do altcoins follow the price of Bitcoin?
There are two main reasons why altcoins follow the price movement of Bitcoin. The first reason is that Bitcoin makes up over half the total market cap for all cryptocurrencies. Therefore, any changes in the performance of Bitcoin would drastically affect the public perception of cryptocurrency as a whole - and drive marketwide investing behavior.
The second reason is that Bitcoin is one of the top currencies typically used to purchase altcoins - most which cannot be purchased directly with fiat money! Picture yourself in a room, with a door that is rapidly shrinking in size. You will want to get out of that room before the door becomes too small - otherwise you'll be trapped in there forever!
This same concept applies to Bitcoin's relationship with altcoins. When the value of Bitcoin starts decreasing, it suddenly becomes less and less attractive to trade the altcoin for Bitcoin. However, since Bitcoin is the "door" that connects that altcoin with fiat money - the investor doesn't really have another way to convert their altcoin into hard cash, and is concerned that their money might get trapped in the altcoin indefinitely. To protect themselves, the investor trades the altcoin for Bitcoin before the value of Bitcoin drops any lower.
Now imagine millions of investors selling this altcoin for the same reason! There would be a massive increase in supply and reduction in demand, resulting in the altcoin price dropping alongside Bitcoin's.
How do traditional stock markets affect crypto?
The easiest way to understand how the stock markets and crypto markets interact is in this statement: the amount of money flowing through an asset is determined by its market capitalization, while the direction it flows is determined by risk.
When people feel good about the stock market and are prosperous, they are more willing to take risks and consider alternative investments - because they believe they can afford to lose. Cryptocurrency is one of those riskier assets, and so you'll see money flowing (inflows) into the crypto market at these times.
When people feel worried about the stock market, the first thing that they will do is cut all of their riskier investments - so that they'll have enough funds to eat a loss just in case. Money will be taken out of the crypto market (outflows) and be re-invested in what are perceived to be more "stable" assets such as blue-chip stocks and gold.
So what order do investors follow when deciding which crypto assets to invest in first, and pull out of first? That is where market capitalization comes into play. If you recall, market capitalization is basically another measure of how much people trust an asset. When alot of people buy something, it is obviously more trusted!
Therefore, money flows from the stock market into Bitcoin, then to Ethereum (the largest altcoin by market cap), then to other large cap coins, medium cap coins, and finally - the small cap coins. Picture an ocean that is connected by a river to a house deep in the woods. The river must get narrower and narrower as it passes through the forest (large and medium cap coins) and loses more water (money) until it finally arrives at the house (small cap coins)!
And, if you were to reverse the direction of this flow - you would need to take all of the money out of small cap coins first to send the "water" back to the ocean. "Last to win, first to lose" aptly describes the behavior of small cap coins.
However - even after all of this has been said, you should note that there are always exceptions and contrarian movements of crypto vs. the stock market. Sometimes people pile their money into crypto during times of inflation when cash depreciates. Or, some altcoins will gain in value while the rest of the market loses!
The crypto market cycle is incredibly difficult to time, but follows a predictable pattern when it comes to the four main phases. Many beginner and even seasoned investors get wiped because they force themselves to make buying/selling decisions in such a short timeframe. But why the sense of urgency?
Since cycles will repeat eventually, it's actually more beneficial to hold your assets long-term and pull out once you've reached the next cycle (if you're satisfied with the profits!). This will give you a chance to observe the performance of the asset, and make selling decisions with a clear mind during a time that isn't influenced by market panic.
Meanwhile, you're still able to enjoy the appreciation of your asset while ignoring the stress of short term volatility! At Finblox, we've taken this a step further and created the perfect solution that allows you to earn competitive yields on your assets simply by holding them in our account! There are no minimums, no lock-ins, and no limits on when you can withdraw - and rewards are compounded and paid daily! This means you can enjoy the natural appreciation of an asset, while earning rewards on top of it for doing absolutely nothing!
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This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. Charts, graphs and references to any digital assets are for informational and illustrative purposes only.