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Published in · 9 min read · Dec 23, 2022
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Despite the constant changes in the world, human nature tends to remain constant over time. This is why studying history can be a valuable tool for investors. Markets are a reflection of human behavior and tend to follow patterns, often characterized by periods of euphoria followed by despondence. By examining the past, we can gain insight into current market cycles and make informed decisions about our investments.
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In the case of cryptocurrency, the market has experienced several cycles, including the current “crypto winter” that has lasted for an extended period of time. It is important to remove ourselves from strong emotions and gain a bird’s eye view of the situation in order to understand where we stand and make strategic decisions. Examining the history of bitcoin, a cryptocurrency with a significant amount of data available, can serve as a proxy for understanding overall crypto market cycles.
To increase your chances of achieving significant returns in the next bull market, it is essential to familiarize yourself with the basics of past market cycles. This can be accomplished through reading and learning about the key trends and patterns of the last few cycles. As cryptocurrencies are relatively new, the one with the most data available for analysis is bitcoin. So let’s jump in and have a look.
Accumulation Phase → Run-Up Phase → Distribution Phase → Run-Down Phase → Accumulation Phase
The market for cryptocurrencies follows a predictable cycle of phases that includes the accumulation phase, the run-up phase (also known as the bull market), the distribution phase, and the run-down phase (also known as the bear market). Understanding these phases can help investors make informed decisions about their investments.
Accumulation Phase
The accumulation phase begins after the run-down phase, when the market has bottomed out and smart money starts buying in because they believe that the majority of the downside has already occurred. This phase is characterized by low hype and is often marked by the phrase “buying the dip.” It is rare for new investors, particularly retail investors, to enter the market during the accumulation phase, as cryptocurrencies tend to have a negative sentiment and are often criticized by mainstream media.
Run-Up Phase (Bull Market)
The run-up phase, or bull market, follows the accumulation phase and is characterized by a dramatic increase in price. During this phase, sentiment shifts to an optimistic outlook, and fear of missing out (FOMO) begins to affect many investors, particularly new ones. Trading volumes increase as more people enter the market, and prices continue to rise.
Distribution Phase
The distribution phase follows the run-up phase and is characterized by a shift in the balance of buyers and sellers, with sellers beginning to outweigh buyers. This leads to a slow decline in price and mixed sentiment, as some believe it is a temporary dip while others think it marks the beginning of the bear market. During the distribution phase, investors may become overtaken by emotion and make decisions based on a belief that the price is bound to go back up, rather than following logical analysis.
In the early parts of the distribution phase you often see prices at an all time high. During this phase, sellers begin to outweigh the buyers. When you see all time highs during the distribution phase, sometimes, it’s a single peak (Bitcoin in 2017) but you can see double or triple peaks as well (Bitcoin in 2021).
By this time, the smart money has cashed out of long positions and there are fewer buyers in the market than during the early part of the Bull Run.
Run-Down Phase (Bear Market)
The run-down phase, or bear market, follows the distribution phase, when smart money has sold and the crowds follow suit. This can be a difficult phase for inexperienced investors who believe that their assets are bound to go up in price, but instead, the price continues to fall. Investors who are unaware of market cycles or who believe that this time the cycle is different may sell late or hold onto their investments through rough market conditions, potentially reducing their long-term return on investment. The worry of not considering market cycles and HODLing at all costs, can hurt investment opportunities and reduce long term ROI. This is why proper diversification and risk management is key to long-term success.
It can be challenging to determine in real-time which phase the market is in, but it is likely that we are currently in the run-down phase, given the extended period of declining prices. It is also unlikely that we are still in the distribution phase, as sentiment has been low since around the $40,000 range. And if we’re talking black swan-type bottom events — look no further than FTX.
BTC 2012–2016 Market Cycle
BTC 2016–2020 Market Cycle
BTC 2020–2022 Market Cycle
Looking back at previous cycles of Bitcoin, the market has topped in late 2013 (high of $1,160), 2017 (high of $19,500), and 2021 (high of $69,000).
After the 2013 top, bitcoin dropped 86% to lows of $150 over a 413 day period.
Following the 2017 top, bitcoin dropped 83% to lows of $3,200 over a 371 Day period.
So far after the 2021 top, bitcoin has dropped about 76.5% and we are 385 days from the top.
Just for a comparison, if bitcoin were to drop the equivalent 2013–15, that would put us at a bottom price of $9,000. If bitcoin were to drop the equivalent of the 2017–18, the low would be $11,700.
Institutional Investors surveyed recently believe for the most part that we are either going to trend lower (continued Run-Down Phase) or we are going to stay relatively flat and range-bound (Accumulation Phase) for the next 12 months.
Even though 29% of Institutional Investors believe that the Cryptocurrency market will trend lower for the next 12 months, they aren’t getting out any time soon.
If institutions believed a massive drop in value for Cryptocurrencies was still to come and we weren’t at the very least approaching the end of the bear market, we would see more than 6% of them decreasing their Cryptocurrency allocation over the next 3 years.
Previous drops aren’t indicative of future dips, but if you want to time the markets in terms of attempting to buy high and sell low, keeping in mind the history of the market is important when deciding to put in funds.
BTC Accumulation & Bull Run Phases Early 2015 — Late 2017
BTC Accumulation & Bull Run Phases late 2018 — late 2021
- 3 Years Up → 1 Year Down
- Diminishing Returns
3 Years Up → 1 Year Down
Bitcoin’s price tends to experience 3 years of price accumulation with 1 year of rapid price depreciation.
This is why leverage in cryptocurrency can wipe out many investors (FTX and 3AC both examples) because of the rapid price decrease. In the case of 3AC, if they had only been spot trading the market, they would not have been liquidated because investors (such as Alameda) “hunted their positions.”
The reason why bitcoins cycle is a 4-year span is the halving. And since the industry is new and bitcoin has a 38% market dominance, the market as a whole and bitcoin move in tandem for the most part.
Diminishing Returns
After the low in Early 2015, bitcoin’s price went up 11,612% (116x) to reach highs of $19,500 in late 2017. In the next cycle’s low in late 2018, 2,193% (21x) to highs of $69,000 in late 2021.
Bitcoin’s runs over the years, like many assets as they gain more market value over time tends to have diminishing returns.
This is not unique to bitcoin and can be seen in many different assets. As the more value an asset has the more influx of money is needed to bring the price accumulation to the same levels seen before.
So when predicting how far bitcoin will go in the next bull run based on the history of previous cycles, an assumption one can make is that the price accumulation from the bottom of this cycle is likely to be less than a 21x.
To minimize the risk of making poor investment decisions based on market cycles, one reliable strategy is dollar-cost averaging, which involves investing a fixed amount at regular intervals regardless of market conditions. This approach can be a safe way to build wealth over the long term, especially if you are investing in quality assets.
However, if you are seeking to achieve higher returns, it is important to study the history of price action and gain a basic understanding of technical analysis to inform your investment decisions. While it is common for investors to make mistakes on their first try, it is possible to outperform long-term buy-and-hold returns by strategically buying and selling based on market phases.
During the accumulation phase, it can be beneficial to increase your investments in order to take advantage of lower prices. In the run-up and distribution phases, it may be advisable to take profits and reassess your investment strategy. By following a disciplined approach that is based on a thorough understanding of market trends, you can maximize your potential for success in the cryptocurrency market.
Crypto investing can be hard but doesn’t have to be! It is common for investors to enter or re-enter the market during the run-up phase, but by learning from the mistakes of others, you can avoid common pitfalls and make more informed investment decisions! Patience and discipline are key.
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Originally published at https://velvet.capital.
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