The Four Phases of the Crypto Market Cycle Explained

Over a cycle, certain asset classes perform better than others because the business models of the former are better adapted to the conditions of growth and development. Cryptocurrency markets tend to be cyclical as they have a pattern of ups and downs throughout their existence. When demand is greater than total supply, a coin’s price often rises. But after some time has passed, interest begins to wane and the price begins to fall.

The term “market cycles” is used to describe the general recurring characteristics of various market phases. Some assets outperform others over a cycle because large economic changes or the actions of influential market participants can trigger these types of market events.

Because most cryptocurrencies (with the exception of stablecoins) go through the same phases of a market cycle, it can be difficult to determine whether the cycle has just begun or is nearing its end. Understanding how the market cycle progresses from phase to phase gives you additional advantages and can help you decide whether to participate in the market or stay on the sidelines.

Take a look at the four phases that the cryptocurrency market goes through:

Considering the different markets and the time over which they are studied, the length of a market cycle can vary from a few minutes to several years.

Wyckoff method

The Wyckoff Market Cycle is a result of Richard Wyckoff’s insight into price action. It is a theory that describes crucial components of the growth of price trends that differ in intervals of accumulation and distribution. The cycle consists of four separate phases: accumulation, markup, distribution and markdown. Wykoff also provided guidelines that can be used for these phases. These guidelines can also help locate and interpret price within the wide range of ups, downs and flats in the market.

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Richard Wyckoff experienced a lot of regular rip-offs from retail investors. He then worked to educate the public about the “true rules of the game” played by powerful interest groups or “smart money”.

The Wyckoff method, which he developed in the early 20th century, is still used today. She continues to advise investors and traders on how to choose profitable investments, when is the best time to buy them and risk management strategies to employ.

And now for the 4 phases of the crypto market cycle:

1. Accumulation

Each cycle begins with the accumulation phase. It occurs when sellers have left the market and prices appear to be stabilizing. Because investors are not overly optimistic about the market at this time, volume is often lower than expected. Since there is no clear trend, the assets often fluctuate in a narrow range.

Fear, uncertainty and doubt dominate this phase, preventing market participants from engaging heavily and resulting in low price volatility and trading volume.

A bear market is usually followed by an accumulation phase, also known as consolidation. Although it appears that the asset’s price has stopped falling, investors may be hesitant to buy during this period. However, long-term position holders may see the accumulation phase as the beginning of an upcoming positive market environment.

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Consolidation is a phase where the price of an asset trades within a range. The trend is called a sideways trend and can vary depending on the circumstances. When this range is violated, larger movements can occur, but unless the range is intact, movement cannot be predicted with certainty.

The accumulation or consolidation phase is an excellent time for long-term holders to stock up and acquire the cryptocurrencies they have wanted to buy for a long time. Short-term traders hoping for a quick profit may have to wait patiently for the market to enter the next cycle, as the accumulation phase can drag on for weeks, months or even years.

2nd increase

In the markup phase, commonly referred to as a bull market, prices rise rapidly. Trading volume usually increases significantly during this period due to the arrival of new buyers and sellers. Investors may still be cautious, although the increase in trading volume suggests a hopeful and optimistic mood in the markets. The value of cryptocurrencies will also increase as trading volume increases.

If the uptrend strengthens and investors are bullish as the bulls take control of the market, the charts will show more green candles. This could be a good time for new players to enter the market as the price increase is more noticeable in the bullish phase.

Investors also view market corrections during the run-up as buying opportunities rather than warning signs. However, if unfavorable information about an asset comes to light, it can still lose value even though its price typically increases.

3. Distribution

Some investors start repositioning and selling after a significant rally. This heralds the market’s payoff phase, where supply and demand begin to balance.

The market expects a longer period of downward trend, which is why this period is characterized by widespread panic. However, there may be groups of market participants who are hopeful and want to continue buying in anticipation that the current bull market will continue.

On the other hand, there are sellers who are already in the green and trying to lock in some of their profits. Because of these conflicting emotions, bulls and bears are currently at odds with each other. In this phase, despite the high trading volume, prices tend to stay within a very small range until either the bulls or the bears give way.

There is a chance that the market attitude will change during this period, from optimism to greed to uncertainty. Many people will wonder if the current upheaval will last or if there will soon be a bear market. The Fear and Freed Index is a common indicator that financial professionals use to monitor this change in market sentiment.

Index of fear and greed

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The Fear and Greed Index gives investors a sense of market sentiment. Source: www.cnn.com

The price weakness that heralds the cash-out phase signals the end of a bull market. When weakness occurs, new investors may start selling to protect their capital, leading to further weakness and a downtrend.

4. Reject (Markdown)

Investors fear the depreciation phase the most as it marks the beginning of a bear market. When supply exceeds demand in the previous market phase, this phase begins.

As traders and investors become more pessimistic about the future, selling pressure increases. This could trigger a domino effect that brings asset prices down to levels not seen since the boom.

From a psychological point of view, the market enters the markdown phase when negative terms such as “recession”, “market crash” and “collapse” appear in the headlines, creating concern and panic in the market due to the poor economic situation.

However, short sellers could take advantage of the decline during a downturn by selling an asset at a low price and then buying it back at a lower price in the future. Even good news may not be enough to pull an asset out of a slump in these trying times as consumers take extra precautions to protect themselves from losses.

Although sales periods are difficult, there is hope because they don’t last forever. When this cryptocurrency market cycle ends, a new one usually begins. Maybe there will be another phase of the service soon.

Conclusion

Markets often follow a cycle, and while each cycle has an average length, political and economic decisions can either lengthen or shorten certain phases. Short-term mini-cycles are common in financial markets, but long-term major market cycles typically last several months or years.

The natural ups and downs of the cryptocurrency market will continue through this phase. Investors must at all times keep their emotions in check, educate themselves and stick to the basics.

If you liked this article, you might also like our article on the best crypto tools to help you invest.

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