Trends and behavior patterns exist in all financial markets, from stocks and shares to commodities and beyond. Regardless of the marketplace type, similar drivers come into play:
- Supply
- Demand
- News events
- Human emotions.
The crypto market follows the same principles.
Although market movements appear random and unpredictable, they often adhere to a fairly predictable pattern in the long term. Those who understand this pattern can make smarter and more informed decisions even during the most tumultuous periods.
Crypto market cycle 1: The accumulation phase
A market cycle consists of four key phases, and any of them could technically serve as the starting point. Here, we'll begin with the accumulation phase.
Two factors define each stage in any cycle: the market activity itself and the sentiment that drives that behavior. Let's examine each "phase" through the lens of these two aspects.
Accumulation phase sentiment: The worst is behind us
One could also title the accumulation phase "the worst is behind us". It typically follows a significant market crash and generally marks when the market starts to turn. At this point, a key group of big traders becomes confident that prices have reached their absolute bottom and can only improve.
Characteristics of the accumulation phase
Trading activity during the accumulation phase remains moderate. Prices may even subtly increase in line with the first signs of renewed confidence in the market. Big traders accumulate.
An interesting phenomenon occurs during accumulation. The market splits into two camps: the glass-half-full buyers and the glass-half-empty sellers.
Many long-term HODLers, who have lost faith in the market, seek to sell their positions – and likely offer a low price on their assets to match.
Meanwhile, market pioneers and whales with vision (those who view the slump as just one phase of the game) capitalize on these low prices and initiate buying. They are confident the market will soon recover. This results in a huge transfer of assets, with a significant portion of the market ultimately ending up in the hands of just a few first movers – hence the name "accumulation". The overall market value remains stable, but a small group of big traders amasses much of the asset.
Crypto market cycle 2: The markup phase
The markup phase follows the accumulation phase. This phase features a long-term, consistent upward trend in price action. Sentiment shifts to a decidedly positive outlook. As a result, interest in the market grows, along with its overall value, as people become willing to pay more.
Sentiment: greed trumps caution
This period also goes by the name "bull market." On the Bitcoin Greed and Fear index, this phase typically scores near 100, indicating significant market greed for the asset and low levels of caution.
Positive market sentiment reaches its peak during this time. Most traders express optimism about the future and show a greater inclination to take risks. This phase often coincides with what we call FOMO (Fear of Missing Out). The prevailing excitement leads buyers to accept higher-than-normal prices for assets.
As a result, prices often reach new all-time highs (ATHs) during this phase.
The end of this excitement phase relates to the actions of whales. As the broader market experiences a surge, big holders aiming to maximize profit begin to sell their holdings. This marks the point when the market starts to shift direction.
Crypto market cycle 3: The distribution phase
The distribution phase signals the end of a bull run in the market. It reflects a "best is behind us" attitude, especially among first movers. Their selling activities help catalyze a shift throughout the market.
Sentiment: Mixed and declining overall
This phase introduces the first signs of doubt into a heated market. Sentiment becomes inconsistent between different groups. Some participants believe the current surge has peaked and start to liquidate their positions in preparation for an upcoming bear market. Others remain optimistic, believing the bull market continues in full swing. They continue to buy or at least hold their assets.
Trading activity: stable
This split in sentiment creates tension between bulls and bears. Because of the division of fear and greed among different groups, price fluctuations occur within a fairly constant range.
As the stage progresses, if it truly represents a distribution phase and not another accumulation, sentiment becomes more negative. Unfavorable news reports and trader ambiguity might eventually impact prices and cause a sell-off. Fear increases as doubt emerges about the bull market's continuation, prompting people to make contingency plans.
Crypto market cycle 4: The markdown phase
The markdown phase concludes any market cycle. It resembles the bursting of a bubble on prior heated activity.
Sentiment: Fear over greed
This phase typically exhibits high levels of fear and low levels of greed. This leads to a lack of buying interest or new capital entering the market.
A steady decline in prices
As doubt and caution prevail across the market, large groups of traders sell their holdings to reduce their exposure. This sell-off can prompt a sharp decline in prices, hence the name "Markdown phase."
This phase doesn't necessarily negatively affect everyone. Short sellers potentially benefit, as they can profit from the market's decline.
The markdown phase continues until the market as a whole decides the worst has passed and prices cannot decrease further. At this point, prices stabilize long-term, and optimistic new buyers (including well-informed whales) step in to accumulate assets again at favorable prices.
This transition marks the beginning of the accumulation phase described earlier and restarts the entire life cycle.
Bottom line
While no surefire method exists to predict the future, understanding how crypto market cycles work helps us grasp the bigger picture and the game itself. This knowledge, in turn, can assist in making more informed decisions about managing personal crypto portfolios.