Investment

The analysis of the market cycle shouted “earnings of profit” before the May 19 sale

Welcome to the weekly newsletter of Cointelegraph Market. This week, we are identifying emerging sector trends across the cryptocurrency to broaden your understanding of market cycles and better equip readers to take advantage of the microcycles that commonly occur in a larger market structure.

The cryptocurrency sector has an established reputation for being volatile and fast-moving, and these characteristics became fully apparent in May as a rapid decline in the price of bitcoins (BTC) from $ 60,000 to $ 33,000 led to a mass exodus that erased $ 1.2 trillion in total market capitalization.

While many across the ecosystem blame the decline on things as negative tweets from influencers and powerful characters like Elon Musk or yet another announcement by the government China has banned bitcoins, more experienced traders and analysts warned of the potential for significant take – back a few weeks before the sale.

The rapid rise in prices in 2021 showed some of the classic signs of bubble behavior, with alarm bells ringing, while Uber drivers and food vendors were delighted to offer their views on what the next big truck would be.

With that in mind, now seems to be a good time to review the different phases of the market cycle to help us better understand what the market has gone through so far and what can potentially be expected in the coming months and years.

The four phases of the market cycle

The four basic phases of the market cycle that all traders should have a basic knowledge of are: accumulation phase, surcharge phase, distribution phase and surcharge phase.

Market cycle phase. Source: Investopedia

The accumulation phase takes place after the market has bottomed out, and is characterized by innovators and early adopters buying the asset to its long-term potential before significant price movements occur.

This phase was seen in the cryptocurrency market starting around December 2018, when the price of BTC fell below $ 3,500 and lasted until October 2020, when its price began to rise significantly above $ 12,000.

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1-day BTC / USD chart. Source: Bitstamp

Indeed, the mark-up phase began to warm up in December 2020 and extended until January 2021 as BTC and the Decentralized Finance (DeFi) sector attracted worldwide attention, with total market capitalization climbing well above $ 2.5 trillion in May.

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Total market capitalization of cryptocurrency. Source: CoinMarketCap

During the distribution phases, retailers begin to dominate and earlier bullish sentiment changes, leading to prices reaching commercial levels. The phase ends when the market turns direction.

Some of the typical graph patterns observed during this time, as shown in Investopedia, are double and triple tops next to the well – known head and shoulder patterns, which were warning signals presented by BTC and seen by technical analysts before this last sale.

Like the 2017-2018 bull market, the price of BTC reached a new all-time high (ATH) and then began to decline, resulting in the rotation of bitcoin funds to the altcoin market, further driving the overall market capitalization to a record high of $ 2.53 trillion on May 12. .

For a smart cryptocurrency trader, this formula was a sign that the downsizing phase was approaching and that it would be wise to take profits as BTC fluctuated between $ 40,000 and $ 60,000 and altcoins rose to historic highs in preparation for off-the-counter sales and token with a discount during the next day.

Deployment of funds in the accumulation phase

Now that the market has experienced a significant slowdown and continues to search for a price cap, it is crucial time to monitor price movements with a view to finding good entry points into viable projects.

Perhaps the best known graphic describing a typical market cycle is “Market Cycle Psychology.” Cheat Sheet. This model has emerged in markets of all kinds, from stocks and commodities to cryptocurrencies and real estate.

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Market cycle phase. Source: Wall St. Cheat Sheet

Looking at the bitcoin chart, we see a similar pricing model that began in late 2020, with a possible phase of “distrust” since November. The initial January rise in January has a similar appearance to the “hope” phase in the chart above, followed by a multi-month rise to a euphoric all-time high in April.

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4-hour BTC / USDT chart. Source: TradingView

The price then dropped from $ 64,000 to $ 47,000 before returning to the $ 53,000-60,000 range as satisfaction began to show. The May sale propelled the market through phases of anxiety, denial, panic and surrender, and the ecosystem’s response to Musk’s tweets, in addition to other forces exerting pressure on the market, caused a great deal of anger in the community.

Now comes the challenge of dealing with the decline in the significantly lower value of the portfolio and try to decide whether the market has bottomed out, which signals that it is a good time to reinvent funds or, if the best thing you can do is sit on their hands and wait for further development.

Major price rallies at this time are often seen as distrust as a betting rally – so the cycle is complete and we are back to square one.

So does this mean that now is the right time to accumulate chips for your favorite projects?

Unfortunately, there is no guaranteed correct answer to this question and each investor can determine it for himself. With previously required tokens, which are now at significant discounts compared to just a month, this could be a good time to start averaging dollar costs back to the best long-term options in preparation for the next cycle higher.

Cryptocurrency sector cycles

The typical cycle presented here can be applied to the market as a whole and to individual tokens or token sectors.

A good example of this is the increase in decentralized funding over the past year, which has taken the cryptocurrency market, driven by the emergence of popular decentralized exchanges such as Uniswap and lending platforms such as Aave.

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Total market capitalization of the DeFi sector. Source: CoinGecko

As can be seen in the chart above, the DeFi sector as a whole has gone through its own pattern of the market cycle, which coincided with its growing popularity and use throughout the ecosystem.

A similar pattern was evident in the rise of non-functional tokens (NFTs) in 2021, but the timing was different, highlighting the idea that sectors move together and suggesting the potential benefits of a sectoral approach to investing in cryptocurrencies.

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ENJ / USDT vs. CHZ / USDT vs. AXS / USDT vs. MANA / USDT. Source: TradingView

In order to take advantage of these opportunities, traders are sometimes forced to take a conflicting approach. The accumulation phase is often marked by reduced sentiment, but the best time to sell is during the distribution phase, when sentiment is highest and most traders go all-in with the hope of great wealth.

As for the current market outlook, it is possible that the best course of action is to adopt a “wait and see” approach, while leaving some dry powder on the sidelines to take advantage of any “flash sales” that may come our way. Whatever you choose, be sure to do your own research and implement a risk management process, as the historically volatile nature of the cryptocurrency market shows no signs of decline in the near future.

Want more information on market cycles?

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and business move involves risk, you should do your own research when making a decision.


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