Market cycles are widely considered to be one of the surest ways to predict the performance of a specific asset class, whether that be commodities, shares, real estate, or even cryptocurrencies.
While not all assets have a clearly defined market cycle, cryptocurrencies are unusual in that so far, they tend to repeat that same cycle approximately every four years. This presents an attractive opportunity for those that are familiar with the cycle while punishing those that are not.
The Concept of a Market Cycle
Generally speaking, a market cycle can be described as the series of events that occurs between successive price highs for any given asset.
Investors in a market can be considered as a composite — that is, the general sentiment and actions of sum total of all trades are what causes the price action we see on the charts. Oftentimes, this so-called “composite mind” moves in cyclical patterns, which come about periodically.
Savvy investors that are aware of these patterns are able to make informed decisions by using current and past data to predict the stage of the cycle that their chosen market is currently in. From here, they can then choose whether to enter the market or begin scaling out in anticipation of a crash.
Cryptocurrencies, like many assets, have clearly defined market cycles that have so far proven consistent since their inception. These cycles can be either short-term, e.g. daily swing trading patterns, or long-term — e.g. the macro-cycles that form across years or potentially even decades.
That being said, market cycles are rarely a copy and paste of a previous cycle — some inter-cycle variation is to be expected. Nonetheless, the broader structure is usually very similar, allowing investors to form evidence-based predictions about what is set to come in the months and years ahead.
The Cryptocurrency Market Cycle
In the case of cryptocurrencies, the consensus is that a cycle lasts approximately four years, with the Bitcoin halving event typically occurring shortly before or early in the first stage of the market cycle (during the accumulation phase).
Some argue that the Bitcoin halving is the catalyst for accumulation since the scarcity of new Bitcoin from that point is then doubled, reducing supply while demand remains constant or growing.
Since most cryptocurrencies will follow Bitcoin’s lead, this means altcoins and other digital assets have historically seen the most price appreciation after Bitcoin’s halving event.
Each cycle can be divided into four discrete stages:
Phase 1: Accumulation Phase
The first phase of the cryptocurrency market cycle starts with accumulation by early investors, potentially including well-informed speculators, tech-savvy hedge funds, early-stage builders, and pioneers.
It follows a period of market depression, whereby the market has either been trading on a downtrend or relatively flat for an extended period of time. The sentiment at large remains either bearish or neutral, but the price of the asset has now bottomed out and is beginning to show weak signs of recovery.
Investors during this period are able to secure investments in potentially promising assets at the lowest possible price, with very limited further downside risk.
Phase 2: Markup Phase
The markup phase comes next. This is the period of gradual growth that occurs as sentiment turns overtly bullish and more people begin to recognize the potential of the asset.
Media coverage begins to change its tone, shifting from bearish to bullish, with more positive news and less negative news being published.
The markup phase is characterized by bullish price action and a huge number of opportunities for investors. Moreover, it can be associated with extreme price volatility, as successful investors look to take profits while a large number of new participants enter the market.
In the cryptocurrency industry, the markup phase can be almost parabolic, with Bitcoin and other fundamentally strong assets seeing meteoric price growth within a relatively short period of time (typically weeks to months).
Because of this, it can be difficult to go wrong in the markup phase, and most fundamentally strong and/or popular assets can appreciate considerably. It should be noted that in the cryptocurrency industry, even fundamentally weak assets can oftentimes explode in value if they are sufficiently novel, have momentum, or garner significant hype.
Most profits are made in the markup phase, and the top of this phase represents the best exit point in most cases.
Phase 3: Distribution Phase
The third phase looks like a period of relative inactivity on the charts. Prices begin to flatten out and trading volume may begin to dwindle as there are fewer buys and sells.
During the distribution phase, the price of the cryptocurrency will likely fluctuate within a small range, which can make it suitable for day traders and swing traders who take the opportunity to buy low and sell high on multiple occasions within the distribution phase.
The length of the distribution phase can vary between markets but tends to range from weeks to months.
During this period new investors may struggle to make a profit and may exit their positions in a relatively small loss or net a small profit. Meanwhile, experienced investors often unload most of their holdings before or during this period in anticipation of the final phase of the cycle.
This phase can be very short in most cryptocurrency markets.
Phase 4: Markdown Phase
The fourth and final stage of the cryptocurrency market cycle is the markdown phase. This is a period of significant decline that will see most, if not all cryptocurrencies lose the bulk of their value — with fundamentally weak assets typically losing value the fastest.
The first stages of this phase usually include general market anxiety, with holders being uncertain whether the price depreciation is a simple dip or a change in the overall trend. This anxiety eventually turns to denial and panic, and most liquidate their positions in a loss.
Throughout the markdown phase, investors that bought at higher prices often sell at a heavy loss with the view of preserving their capital while experienced investors short the market and/or wait for the bottom to begin re-entering at favorable prices.
For the cryptocurrency market, in particular, this period is often characterized by masses of negative media coverage and sell pressure that strongly outweighs buy pressure. Assets with a high market cap and low trading volume, and those with a large number of in-profit holders tend to suffer the worst in the markdown phase.
It is widely thought that the markdown phase comes after Bitcoin falls below a crucial support, which begins a freefall that takes essentially the entire cryptocurrency market down with it.
Understanding the Trend
Recognizing which stage of the cycle we’re in can be an incredible advantage to traders and investors, who can invest for both value and growth at the most opportune times, and exit their positions when the warning signs begin to appear.
One of the simplest ways to see whether it’s a good time to buy is by simply looking at the Market Value to Realized Value (MV/RV) ratio of an asset. The market value is the current market capitalization of that asset, whereas the realized value is the value of all units of the asset at the time they were last moved/used.
Generally, if this number comes out at above 1, then the market is overextended and the asset may be overvalued. Whereas below 1 can indicate a good entry point since the market cap is lower than that of the total value of all units when they were purchased. As a result, you would expect a number above 1 close to the peak of the markup phase, whereas it would usually be below 1 near the bottom of the markdown phase.
Beyond this, many investors now follow the above wall street cheat sheet, which aptly defines the different emotions and investor rationale at each period of the market cycle. In general, you want to invest at the first signs of recovery following the bottom. Practically, this means you would be looking for signs that a rally is imminent, such as a shift in market sentiment, and improving relative strength index (RSI), increasing buy volumes, and indicators of growing adoption.
Fortunately, there are dozens of on-chain analytics tools that can be used to help you identify which stage of the cycle your chosen market is currently in. Some of the more popular platforms include TradingView, Nansen, Glassnode, and Messari. These will allow you to do things like performing technical analysis, track large on-chain movements, keep tabs on ‘smart money’ (more on this later), set alerts, and more to help you stay as informed as possible.
A Word on Smart vs Dumb Money
Broadly, investors can be separated into one of two categories:
- Smart money: early-movers, rational investors, well-informed speculators, and financial professionals including VCs and funds that typically enter and exit markets based on facts, trends, data analysis, fundamentals, and forward-thinking projections.
- Dumb money: newbies, irrational, and non-professional investors who tend to trade markets without a structured plan or strategy based on hype, baseless speculation, and incomplete or inaccurate data/preconceptions.
Notably, smart money tends to be less affected by Fear, Uncertainty, and Doubt (FUD) as well as Fear Of Missing Out (FOMO) — two powerful market phenomena that can cause investors to make rash decisions, such as investing in fundamentally worthless assets or exiting strong positions for no good reason.
Moreover, few investors have the mental fortitude to take advantage of weaknesses in a market and use it as an opportunity to load up on undervalued assets. Instead, the average trader is more content to buy close to the top of the cycle, simply because it visually represents a period of strength to the untrained eye. Smart money, on the other hand, buys for value whenever the opportunity arises.
For these reasons, smart money often fares better than dumb money, irrespective of the stage of the market cycle.
The Super Cycle Hypothesis
Though many market analysts and speculators agree that Bitcoin and most other cryptocurrencies broadly follow a 4-year cycle, there is a growing school of thought that argues that the game has now changed and that we may be in the midst of a so-called “super cycle”.
To put it briefly, a super cycle is a period where the demand for an asset dramatically outstrips supply for an extended period of time, leading to the long-term growth of that asset.
https://twitter.com/danheld/status/1389265680135036932
The rationale behind this viewpoint is complex and multi-faceted but boils down to the fact that Bitcoin is now seeing qualitative changes in its adoption, with major brands, organizations, corporations, and even governments now getting to grips with the technology.
If this is the case, then Bitcoin (and other cryptocurrencies) may instead experience multiple markup phases back-to-back — with only small periods of roughly horizontal or bearish price action in between. Alternatively, the markdown phase could be extended but relatively minor, e.g. a correction of ~50–60%, rather than the 70–80% many expect during a standard markdown period.
This super cycle could continue until supply outstrips demand, at which point the cycle will end and the asset would then move into uncharted territory.
Don’t Worry About the Current Stage of the Cycle
Market cycles are natural phenomena that simply represent the complex dynamics that form around speculative assets like cryptocurrencies and other commodities.
Though they have periods of both euphoric highs and gut-wrenching lows, all stages of the market cycle represent opportunities for savvy investors who have the grit to stick to a game plan and execute their strategy at the right time and cut their losses early when they’ve made a genuine mistake.
Briefly, accumulation phases represent an opportunity to buy assets at a low price right before a significant uptick at which point they can then be sold, whereas bearish phases represent an opportunity to short the market and prepare for a subsequent accumulation phase.
To quote Baron Rothschild, one of the United Kingdom’s most accomplished businessmen:
“Buy when there’s blood in the streets, even if that blood is your own.”
In essence, Rothschild is hinting that bear markets represent excellent opportunities for investment. Indeed, it is often argued that the decisions one makes during a bear market have more impact on their future success than those made during a bull one — doubly so in the cryptocurrency industry, where assets have been known to multiply more than tenfold from trough to peak.
But while this may be true, it should be noted that only genuinely attractive investments are good bets in a bear market, since they stand to witness striking price recovery when the market returns to more favorable conditions. This is an important consideration that often eludes investors, who get caught up in the mentality that you “simply can’t go wrong in a bull market”.
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About Master Ventures
Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.
Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.
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