What are market cycles? Which mistakes to avoid during each cryptocurrency market cycle?
A popular saying by an anonymous figure goes: the boom cycle makes us learn how to keep up with the market, pivot, and scale, while the bear market reminds us to remain frugal, strategic, and careful.
To be on the right side of assets investment and, more particularly, the volatile crypto market, we should be ready ahead of time. If not, we will be swept away by situations that are out of control and risk being overwhelmed by hyper-emotional reactions. Knowing where to be in any market cycle enables one to adapt and take appropriate actions. This is because all four market cycles have associated risks, returns, losses, and swift decision-making. And these decisions might not be right at all times. In all four, you could win or lose.
How Market Cycles Work?
The market cycle moves in 4 distinct phases. These phases are accumulation, mark-up, distribution, and mark-down. Each stage has its own distinct emotions.
Such emotions could be thrill, fear, denial, optimism, caution, panic, or even disgust.
Besides such emotions, the market is also saturated with lots of information, both socio-political dynamics and the need for disciplined investment strategies. Whatever takes place in any market situation is purely a result of the emotions of individual market participants. However, according to Economist Daniel Kahneman, investors and traders are unlikely to make emotional/rational market decisions on the basis of market information.
Kahneman asserts most investors make most of their decisions based on recency bias, loss aversion, and anchoring. A strategy that is characterized by systematic errors and could probably result in failure. The works of Kahneman have inspired a generation of trading, investment, portfolio, and risk management strategies.
Bull and Bear Markets
A market primarily undergoes bearish or bullish market cycles.
A bull market cycle has an overall positive sentiment. Demand for a given asset is high, and its supply is low. High demand and asset scarcity will drive a surge in prices, and hence more interest for early investors.
A bear market cycle has an overall negative sentiment. Sellers are in excess, and the demand for an asset is low. No one wants security or cryptocurrency. This causes plummeting asset prices and steers investors into caution.
The Four Phases of the Cryptocurrency Market
Phase 1: Accumulation, Optimism, and Euphoria
All markets begin with optimism. An investor opens new positions, holds on to them, hopeful that they will get returns. These investors believe the worst scenario is over, and the current phase holds a lot of promise.
The overall market valuation is positive, and the market anticipates all their positions will generate interest. This leads to overwhelm investors, and they have a firm belief they've already won the market. The market psychology heightens into euphoria and one of the most dangerous peak cycles.
An investor thinks the only way to remain afloat is to get excessive returns. They are not afraid of taking high risks, and they believe they are beyond making trading mistakes. However, at this stage, investors are more likely to make mistakes believing that excessive returns are inevitable. It is necessary to not let emotions of greed overpower our logical side.
Phase 2: Mark-up, Fear, Neutrality, Arrogance, and Denial
For quite a while, the market has experienced sound stability. Then it begins playing downright against the expectations of the participants. There are both higher lows and higher highs. The direction of overall market sentiment is changing and could change in any direction, positive or negative.
Different participants have different emotional states, from confidence, complacency to arrogance. Some hope the market situation will return to euphoria, while others remain in denial.
Asset valuations begin dropping, and the market sentiment turns to fear and anxiety. Therefore some confident investors might hold on to their positions for the long term hoping the market will return. At the same time, the majority will resort to defensive mechanisms associated with loss aversion, such as selling their losing positions due to fear.
This market situation is driven mainly by fear and greed. It remains neutral because some bystander investors were hoping for asset prices to fall and then buy-in. However, most of these bystander traders are driven by the fear of missing out.
Phase 3: Distribution, Panic, Selling
The neutrality of the market has come to an end. Investors are on a selling spree. No one wants to hold on to their positions for long as they have entirely switched their trading strategy to risk/loss aversion. The market is fully bearish.
Some positions are entirely liquidated. The majority of investors are left wondering whether market fundamentals will ever recover.
Phase 4: Mark-down, Caution, and Vigilant
This is the final phase of the market. However, the overall market sentiment during this stage is painful and more cautious. The majority of investors who held on to their positions for better, for worse - still hold on because it's their straw for a drowning man. They have already made losses, and asset prices are lowest from what they had been bought at. The aching question is whether this market will return to a growth trajectory.
More traders become vigilant and watch market fundamentals hoping the market will recover and give them some interest in their investment.
Bitcoin Market Cycle
In 2017, Bitcoin started the year at $800, and the asset traded around this range for almost the entire year. Approaching Q4 of that year, the price skyrocketed from this range to $20,000. The bull run caused a lot of excitement among traders and bitcoin proponents. More investors hoped to anticipate the inevitability of reaping significant returns. However, most investors were driven by the fear of missing out (or FOMO), high optimism, and euphoria.
However, the price didn't last for long, and those that opened their positions in that year of 2017 might have only recovered their profits; if they held on until 2021's bull run, where the price of BTC spiked to an all time high of $65K.
Remember market cycles are constantly changing. The best thing is avoiding irrational judgment from taking the best of you while making investment decisions. Be rational, remain informed and understand the prevailing market psychology before entering or exiting any market position. Do not hope to get rich quickly.