Understanding Crypto Market Cycles: The Ultimate Guide

Money markets are exciting, unpredictable, and seemingly mysterious places. But, contrary to popular belief, there is some method to the madness.

Checking the market each day might not yield much wisdom – but observing the patterns over time certainly will. We’re talking about market cycles.

Markets are Only Human

Trends and patterns of behavior occur in all financial markets, from stocks and shares to commodities, and more. No matter what type of marketplace we are dealing with, similar drivers will be in play; supply, demand, news events, and human emotions. 

The crypto market is no different. 

While market movements may seem random and unpredictable, over time, they tend to follow a fairly predictable pattern. Understanding that pattern enables one to make smarter and more informed decisions — even in the most tumultuous times.

In this article, Ledger Academy aims to demystify these market cycles, so you can handle your crypto better.

Crypto Market Cycles Phase 1: The Accumulation Phase

There are four key phases to a market cycle, and technically it is possible to consider any of them could as the starting point. But for the sake of this article, let’s begin with the accumulation phase. 

Two things define each stage in any cycle: the activity of the market itself, and the sentiment driving that behaviour. So let’s look at each “phase” through the spectrum of these two things.

Accumulation Phase Sentiment: The Worst is Behind Us

Another title for the accumulation phase might be “the worst is behind us”. Normally it follows a significant market crash, and is generally the moment when the market starts turning. This is when a key group of big traders are confident that prices have hit their absolute bottom, and can only get better.

Characteristics of the Accumulation Page

Trading activity during the accumulation phase is moderate. Prices may even be subtly increasing in line with the first green shoots of 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, feeling they’ve lost faith in the market, are looking to sell their positions – and probably offering a low price on their assets to match.

Meanwhile, market pioneers and whales with a vision (those who see the slump as just one phase of the game) take advantage of these low prices and start buying, confident the market will soon recover. The consequence of this is a huge transfer of assets. With a significant portion of the market ending up in the hands of just a few first movers – hence the name “accumulation”.

So, the accumulation phase is marked by a recent crash, negative but gradually changing sentiment, and moderate trading volume. The market value overall stays the same. But a small group of big traders accumulates much of the asset.

Crypto Market Cycles Phase 2: The Markup Phase

After the accumulation phase comes the markup phase in regular market life cycles. 

In this phase, price action moves into a long-term, consistent up trend. Sentiment becomes decidedly positive. Therefore, interest in the market (and therefore its overall value, since people are willing to pay more) grows. 

Sentiment: Greed Trumps Caution

Not surprisingly, this is also called the bull market period. If you were to measure this phase on the Bitcoin Greed and Fear index, you’d see a score nearing 100. Reflecting significant market greed for the asset in question, and low levels of caution.

Heated Market, Rising Prices

Positive market sentiment peaks during this time; the majority of traders are optimistic about the future and are, therefore, more likely to take risks. When we talk about FOMO, this phase is generally when it happens. The excitement means buyers are willing to pay higher than normal prices for assets.

Consequently, prices frequently hit new all-time highs (ATHs) during this phase.  

So where does the excitement end?  The answer lies with the whales. Just as the broader market is getting pumped up, big holders looking to sell for maximum profit start to dump. This is when the market takes a turn.

Crypto Market Cycles Phase 3: The Distribution Phase

The distribution phase marks the end of a bull run in the market, and it can be characterized by a “best is behind us” attitude. This is especially significant among the first movers, whose selling activities help to catalyze a shift throughout the market.

Sentiment: Mixed, and Declining Overall

This moment is when the first signs of doubt creep into a heated market, with sentiment becoming inconsistent between different groups.

Some participants, believing the current surge to have peaked, may start liquidating their positions in preparation for an upcoming bear market. This is due to fear of missing out on potential profits.

However, simultaneously, there are more optimistic market participants who believe that the bull market (and overall price uptick) is still in full swing, and are looking to keep buying, or at least HODL. 

Trading Activity: Stable

This creates tension between the bulls and bears: price fluctuations will occur, but within a fairly constant range, since sentiment is split across fear and greed in different groups.

As the stage advances – if it is truly a distribution phase and not another accumulation – sentiment will become more negative. Unfavorable news reports, coupled with ambiguity among traders, might eventually be enough to impact prices and cause a sell-off. At a minimum, fear increases over time, as doubt starts to creep in that the bull market might be over, and people make contingency plans.

Crypto Market Cycles Phase 4: The Markdown Phase

The Markdown Phase is the final part of any market cycle. It can be seen as the bubble bursting on prior heated activity.

Sentiment: Fear Over Greed

In terms of sentiment, this phase is typically characterized by high levels of fear and low levels of greed. Leading to a lack of buying interest or new capital entering the market. 

Steady Decline in Prices

As doubt and caution start to prevail across the market, large swathes of traders begin to sell their holdings to mitigate their exposure. The sell-off can lead to a sharp decline in prices, hence the name Markdown Phase.

This phase is not necessarily negative for everyone: it’s potentially good news for the short sellers. For example, because shorting the market means they can profit from its decline.

The Markdown Phase will continue until the market as a whole decides the worst is over, and prices cannot decrease any further. At this point, prices stabilize in the long-term, optimistic new buyers (and yes, those well-informed whales) step in to accumulate assets all over again, at favourable prices.

You might recognize this transition – it’s the beginning of the Accumulation Phase we described at the very beginning – when the whole life cycle starts again.

Observing Crypto Market Phases

Now you know how to recognize classic market cycle patterns, you might be wondering where you can find the tools that would allow you to observe them for yourself. In other words: where can you find data relating to crypto trading activity, price action, and sentiment so you can run your own analysis?

On-Chain Market Data

There are plenty of online resources where you can find historical data relating to different aspects of crypto. On-chain data sites like Glassnode, CoinMetrics, CoinMarketCap, and CoinGecko are all great examples that allow you to view market and price activity over time.

Here, you can track the movements of coins and tokens via on-chain data, as well as observing the overall activity of the market.

Sentiment Monitoring

And what about the more subjective element of markets: sentiment? 

One popular indicator used to gauge sentiment in the cryptocurrency market is the Fear and Greed index.

The index ranges from 0 to 100, with a reading of 0 indicating extreme fear and a reading of 100 indicating extreme greed. It is calculates based on several factors, including volatility, market momentum, and social media activity. 

If you’re looking to get an edge on the market, spot patterns for yourself. Or simply understand the ecosystem better, these tools can be a valuable resource 

Conclusion: It Pays to Understand the Bigger Picture

While there is no surefire way to predict the future. We can better understand the bigger picture, and the game itself, by knowing how crypto market cycles work. This, in turn, can help us make more informed decisions about handling our personal crypto portfolio.

So know your resources, make learning your main investment, and stay secure as you navigate crypto and Web3. Knowledge is power, and you are the master of your own experience in this exciting ecosystem. To better understand the crypto market, it’s important to delve deeper into the Bear vs Bull markets.

Knowledge is Power