Cryptocurrency News

Market Cycle Analysis Shouted ‘Take Profit’ Before May 19 Sell-off


Welcome to Cointelegraph Markets’ weekly newsletter. This week we will identify emerging sector trends in the cryptocurrency landscape to broaden your understanding of market cycles and better equip readers to take advantage of the regularly occurring microcycles in the larger market structure.

The cryptocurrency sector has an established reputation for being volatile and bullish, and these characteristics were on full display as the bitcoin price fell sharply in MayB T c) there was a mass exodus from $60,000 to $33,000 that wiped out $1.2 trillion in value from the total market capitalization.

While many people across the ecosystem have blamed things like negatives for the slowdown Tweets from influential people and powerful figures like Elon Musk or yet another announcement that the government China has banned bitcoin, more experienced traders and analysts were warning about the possibility of a significant pullback for several weeks before the sell-off.

The rapid rise in prices in 2021 showed some classic signs of bubble-like behavior, with overbought alarm bells ringing, while Uber drivers and grocery clerks were delighted as punchers to voice their opinions about the next big mover .

With that said, now seems like a good time to review the different phases of the market cycle to help better understand what the market has done so far and what to expect potentially in the months and years to come. can be done.

four phases of the market cycle

The four basic phases of the market cycle, which all traders should have a basic understanding of, are: accumulation phase, mark-up stage, delivery stage and mark-down stage.

Stages of a market cycle. Source: Investopedia

The accumulation phase occurs when the market bottoms out and is characterized by innovators and early adopters buying the asset for its long-term potential before any significant price moves.

This phase was observed in the cryptocurrency market around December 2018 when the price of BTC was below $3,500 and extended all the way to October 2020 when its price began to rise above $12,000 in a meaningful way.

BTC/USD 1-Day Chart. Source: bitstamp

The mark-up phase actually began to heat up in December 2020 and expanded into January 2021 as the BTC and decentralized finance (DeFi) sectors were gaining global attention, with total market capitalization distributing as high as $2.5 trillion in May. climbed in. phase started.

Total cryptocurrency market capitalization. Source: CoinMarketCap

During the delivery phases, sellers tend to dominate and the earlier bullish sentiment gets mixed up, forcing prices to close in a trading range. The phase ends when the market reverses direction.

Some typical chart patterns observed during this time, as outlined by Investopedia, there are well-known head-and-shoulders patterns as well as double and triple tops, which were warning signals presented by BTC and observed by technical analysts prior to this most recent selloff.

Similar to the 2017-2018 bull market, the price of BTC reached a new all-time high (ATH) and then began a downward trend, resulting in funds moving out of bitcoin and into the altcoin market, pushing the total market capitalization further. on May 12 at a record high of $2.53 trillion.

For the astute crypto trader, this pattern was a sign that a mark-down phase was approaching and it would be wise to take profits as BTC fluctuates between $40,000 and $60,000 in preparation for a sell exit. Altcoins reach all time highs. -Off and scoop up tokens at a discount during the next bottom.

Deployment of funds in the accumulation phase

Now that the market has experienced a significant pullback and continues to explore the price floor, it is a crucial time to monitor price movements, along with looking for good entry points into viable projects.

Perhaps the most famous graphic detailing specific market cycles is Wall St. Cheat Sheet’s “The Psychology of Market Cycles”. The pattern has appeared in all kinds of markets, from stocks and commodities to cryptocurrencies and real estate.

Stages of a market cycle. Source: wall st cheat sheet

Looking at the charts for Bitcoin, we can see a similar price pattern that began in late 2020 with a possible “non-confidence” phase beginning in November. The initial run-up in January is similar to the “Hope” phase on the charts above and was followed by a multi-month run-up in April to an enthusiastic all-time high.

BTC/USDT 4-hours chart. Source: trading view

The price then dropped from $64,000 to $47,000 and then back back to the range of 53,000 – $60,000. Musk’s tweets, in addition to other forces exerting downward pressure on the market, generated a significant amount of anger within the community.

Now comes the challenge of dealing with the depression of a significantly lower portfolio value and trying to determine whether a market downtrend signals that it is a good time to redeploy funds, or if The best thing one can do is to sit on one’s hands and wait for further developments.

Major price rallies during this time are often viewed as a sucker’s rally with disbelief – thus, the cycle is complete, and we are back at the beginning.

So, does this mean now is a good time to deposit tokens of your favorite projects?

Unfortunately, there’s no guaranteed right answer to that question, and it’s something for each investor to determine for himself. With previously in-demand tokens now at a significant discount compared to just a month ago, it could be a good time to start pushing dollar-cost averaging back into top long-term options in preparation for the next cycle higher.

cryptocurrency sector cycle

The specific cycles presented here can be applied to the entire market as well as to individual tokens or tokenized sectors.

A good example of this is the rise of decentralized finance over the past year, which took the cryptocurrency market by storm, led by the emergence of popular decentralized exchanges like Uniswap and lending platforms like Away.

The total market capitalization of the DeFi sector. Source: coingeco

As seen in the chart above, the DeFi sector as a whole has gone through its own market cycle pattern that coincides with its increasing popularity and usage across the ecosystem.

A similar pattern was seen in the rise of non-fungible tokens (NFTs) in 2021, but the timing was different, highlighting the idea that sectors move together and the potential benefits of a sector-based approach to investing in cryptocurrencies. point to.

ENJ/USDT vs CHZ/USDT vs AXS/USDT vs MANA/USDT. Source: trading view

To take advantage of these opportunities, traders are at times forced to take a contrarian approach. The accumulation phase is often marked by decreased sentiment, but the best time to sell is during the distribution phase when sentiment is at its highest and most traders are going all in with the hope of great money.

As for the current market outlook, it’s likely that the best course of action is to take a wait-and-see approach while keeping some dry powder on the sidelines to take advantage of any “flash sales” that may come our way. Whatever you choose, just remember to do your own research and have a risk management process in place, as the historically volatile nature of the cryptocurrency market shows no sign of ending any time soon.

Want to know more about market cycles?

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