Trading The Market Cycle of Cryptocurrencies

Market cycles can be seen in cryptocurrencies, and it is challenging to identify which phase the market is in. Investors that can identify it, have more opportunities to profit, and with this guide, we hope that you are able to distinguish between the four market phases.

 

Key Takeaways

  • It is difficult to identify where the market is in the market cycle until after the patterns have emerged.

  • Market cycles are divided into four stages: accumulation phase, uptrend phase, distribution phase, and downtrend phase.

  • During a bear market, crypto influencers will pump the firm belief that the price will only rise on social media to keep the price pumping.

  • The latest trending phrases like "HODL" and "Diamond Hands" might significantly reduce investors' ROI and limit future investment opportunities.

Introduction

Market cycles can be seen in cryptocurrencies just as well as in the traditional market and are used to determine the trends or patterns of some securities or assets shown during different market conditions or business environments.


It is hard to pinpoint where the market is at until after the patterns have emerged. However, most veterans believe they exist, and investors and traders hope to profit from them by trading ahead of the cycle's directional shifts.

Trading the Market Cycle of Cryptocurrencies

Stages of Market Cycles

Market cycles are divided into four stages: accumulation phase, uptrend phase, distribution phase, and downtrend phase.


Accumulation Phase

The accumulation phase marks the beginning of a new cycle. There are two main reasons why the accumulation phase happens.

  • New project - The early adopters or insiders would buy into the new project.

  • End previous phase - The market has already bottomed out, and the weak hands had already sold while the smart money is buying in.

During this phase, the market sentiment would shift from negative to neutral.


Mark-up Phase (Bull Market)

The mark-up phase, commonly known as a bull market, is when the market starts to rise to higher highs at an accelerating rate. The technical analysts would buy into these projects, and the early majority would hear the news and enter the market. The market direction would become clear at this point, and the market sentiment would shift from neutral to optimistic.


As time progresses towards the end of this phase, investors would FOMO (fear of missing out) and tend to buy near the top. There would be a significant spike in market volume, and at this point, the market valuation of the asset would be overvalued, which would prompt the smart money and insiders to start selling.


Entering the distribution phase, the volatility decreases; this is when the final wave of investors jumps in, the market receives a lot of media coverage, and huge gains are seen in a short amount of time.


Distribution Phase

In the third phase, distribution, the price leveled out and would be in a narrow range that lasts for days or weeks, the volatility dies out, and the sellers begin to dominate. The classic reversal Technical Analysis (TA) patterns such as head and shoulders and the double or triple top can be seen clearly, indicating a shift in direction.


Due to the recent excessive gains, the market would be overrun with emotion, and greed would take over common sense. This is when the smart money has already exited, and the bullish sentiment would shift into a mixture of anticipation and fear.


Sell-off Phase (Bear Market)

The final phase of a market cycle, sell-off, also known as a bear market, is when the price drops significantly over time and will be the most challenging and emotional period for most investors. As a last-ditch effort to keep the price pumping, the crypto influencers will pump the firm belief that the price will only rise on social media.


Investors who are unaware of the current market cycle phase or choose to ignore them will either sell too late or not sell at all. The latest trending phrases like "HODL" and "Diamond Hands" until the next mark-up phase might significantly reduce investors' ROI and limit future investment opportunities.


Here is a more detailed cycle that states the investors' psychology in a market cycle.

Psychology of a Market Cycle by wallstreetcheatsheet.com

Credit: www.wallstreetcheatsheet.com


Market Cycle Trading Strategy

With the knowledge of what a market cycle is, it is time to learn how you can utilize that knowledge and develop a trading strategy. A well-known cryptocurrency analyst, SecretsOfCrypto, outlined the flow of the crowd during a 4-year crypto cycle.

Good Trading strategy for Crypto cycle by SecretsOfCrypto

Credit: SecretsOfCrypto


1 - Accumulating BTC

After some time in the sell-off phase, when BTC seems heavily discounted, start accumulating BTC by dollar cost averaging. It may sound counter-intuitive to start buying during the sell-off phase, but as mentioned, it is tough to pinpoint where the current market cycle is or, as most hopeful investors wish but never could, to catch the bottom.


2 - Accumulating Altcoins

This would happen during the Bitcoin mark-up phase when its price went parabolic and crowds flooded into BTC. This is when you should swap some of your profit into accumulating some altcoins to prepare for the alt season.


3 - Alt Season

When BTC price slows down due to minor pullback, investors will buy altcoins, which triggers an altseason where altcoins price would go parabolic. This would be the best time to swap your profit from altcoins back to BTC.


3a - Looping Back to Accumulating Altcoins

Repeat the steps above multiple times as BTC price would make another leg up, and alt seasons come after when BTC pulls back.


3b - Getting Out Of The Loop

The key indicator to stop accumulating altcoins is when a lot of your "nocoiner" friends or your grandma starts to ask about Bitcoin. This is when media coverage is at its highest, and the last wave of investors is coming in, indicating that the distribution phase is kicking in.


4 - Selling your bags

When both the rate of new participants comes in, and the price of BTC is becoming stagnant, this would indicate that the market is currently in the distribution phase, and selling your coins is advisable so that you will have sufficient capital to accumulate during the next phase.


Where do you think we are currently at?

After a significant drop from the recent ATH (All-Time-High) in November 2021, $68,000, the crypto communities are in shambles. Disputing over which phase we are currently in with some people saying that the bottom is in and we are in the accumulation phase, some say we are still in the bear market, and this is a bull trap. Which stage do you think we are in at the moment? Let us know down below!