Market cycle analysis screamed ‘take profit’ ahead of May 19 sell-off


Related articles

Welcome to Cointelegraph Market’s weekly e-newsletter. This week we are going to establish emerging-sector tendencies throughout the cryptocurrency panorama as a way to broaden your understanding of market cycles and higher equip readers to make the most of the microcycles which are a daily incidence within the bigger market construction.

The cryptocurrency sector has a longtime popularity for being unstable and fast-moving, and these traits have been on full show in Could because the speedy decline within the worth of Bitcoin (BTC) from $60,000 to $33,000 led to a mass exodus that wiped off $1.2 trillion in worth from the overall market capitalization.

Whereas many throughout the ecosystem have positioned the blame for the downturn on issues like unfavourable tweets from influencers and powerful figures like Elon Musk or one more announcement that the federal government of China has banned Bitcoin, extra skilled merchants and analysts have been warning concerning the potential for a major pullback for a number of weeks previous to the sell-off.

The speedy rise in costs in 2021 confirmed a few of the traditional indicators of bubble-like habits, with overbought alarm bells ringing whereas Uber drivers and grocery clerks have been happy as punch to supply their opinion on what the subsequent huge mover could be.

With that mentioned, now looks like an excellent time to overview the varied phases of a market cycle to assist get a greater understanding of what the market has gone by means of to this point and what can probably be anticipated within the months and years forward.

4 phases of a market cycle

The 4 fundamental phases of a market cycle, which all merchants ought to have a fundamental understanding of, are the accumulation phase, the mark-up section, the distribution section and the mark-down section.

Phases of a market cycle. Supply: Investopedia

The buildup section takes place after a market has bottomed out and is characterised by the innovators and early adopters shopping for up the asset for its long-term potential earlier than any vital worth strikes.

This section was seen within the cryptocurrency market starting round December 2018 when the value of BTC bottomed beneath $3,500 and prolonged all the way in which till October 2020 when its worth started to meaningfully rise above $12,000.

BTC/USD 1-day chart. Supply: Bitstamp

The mark-up section actually started to warmth up in December 2020 and prolonged into January 2021 as BTC and the decentralized finance (DeFi) sector have been attracting international consideration, with the overall market capitalization climbing to a excessive above $2.5 trillion in Could because the distribution section started to provoke.

Complete cryptocurrency market capitalization. Supply: CoinMarketCap

Throughout distribution phases, sellers start to dominate and the beforehand bullish sentiment turns combined, resulting in costs getting locked in a buying and selling vary. The section ends when the market reverses route.

A few of the typical chart patterns seen throughout this time, as outlined by Investopedia, are double and triple tops alongside well-known head-and-shoulders patterns, which have been the warning indicators introduced by BTC and seen by technical analysts forward of this most up-to-date sell-off.

Just like the 2017–2018 bull market, the value of BTC reached a brand new all-time excessive (ATH) after which started to pattern down, which resulted in funds rotating out of Bitcoin and into the altcoin market, additional propelling the overall market capitalization to a document excessive of $2.53 trillion on Could 12.

For the astute crypto dealer, this sample was an indication {that a} mark-down section was approaching and that it will be smart to take earnings as BTC fluctuated between $40,000 and $60,000 and altcoins spiked to all-time highs in preparation to trip out the sell-off and scoop up tokens at a reduction through the subsequent backside.

Deploying funds within the accumulation section

Now that the market has skilled a major pullback and continues to seek for a worth ground, it’s a vital time to watch worth actions, with a watch on searching for good entry factors into viable tasks.

Maybe essentially the most well-known graphic detailing the everyday market cycle is Wall St. Cheat Sheet’s “Psychology of a Market Cycle.” The sample has appeared in markets of all sorts, from shares and commodities to cryptocurrencies and actual property.

Phases of a market cycle. Supply: Wall St. Cheat Sheet

Wanting on the chart for Bitcoin, we will see the same worth sample that started late in 2020 with a potential “disbelief” section beginning in November. The early run-up in January is comparable in look to the “hope” section on the chart above and was adopted by a multimonth run-up to a euphoric all-time excessive in April.

BTC/USDT 4-hour chart. Supply: TradingView

The value then dipped down from $64,000 to $47,000 earlier than bouncing again to the $53,000–$60,000 vary as complacency started to set in. The sell-off in Could propelled the market by means of the anxiousness, denial, panic and capitulation phases, and the ecosystem’s response to Musk’s tweets, along with different forces placing downward strain available on the market, elicited a major quantity of anger inside the neighborhood.

Now comes the problem of coping with the melancholy of a considerably decrease portfolio worth and making an attempt to resolve if the market has bottomed, signaling that it’s a good time to redeploy funds, or if the very best factor one can do is sit on their fingers and look forward to additional developments.

Main worth rallies throughout this time are sometimes considered with disbelief as a sucker’s rally — thus, the cycle is full, and we’re again at the start.

So, does that imply that now is an efficient time to build up your favourite tasks’ tokens?

Sadly, there is no such thing as a assured appropriate reply to that query, and it’s one thing for every investor to find out on their very own. With beforehand in-demand tokens now at vital reductions in contrast with only one month in the past, this could possibly be an excellent time to start dollar-cost averaging again into the highest long-term decisions in preparation for the subsequent cycle increased.

Cryptocurrency sector cycles

The standard cycle introduced right here might be utilized to the market as an entire in addition to to particular person tokens or token sectors.

A very good instance of that is the rise of decentralized finance over the previous yr, which took the cryptocurrency market by storm, led by the emergence of fashionable decentralized exchanges like Uniswap and lending platforms like Aave.

Complete market capitalization of the DeFi sector. Supply: CoinGecko

As seen within the chart above, the DeFi sector as an entire went by means of its personal market cycle sample that coincided with its rising recognition and use throughout the ecosystem.

An analogous sample was seen within the rise of nonfungible tokens (NFTs) in 2021, however the timing was completely different, highlighting the concept sectors transfer collectively and hinting on the potential advantages of a sector-based strategy to investing in cryptocurrencies.

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

To be able to make the most of these alternatives, merchants are at occasions compelled to undertake a contrarian strategy. The buildup section is usually marked by decreased sentiment, however the very best time to promote is through the distribution section when sentiment is at its highest and a majority of merchants are going all-in with hopes of nice riches.

As for the present market outlook, it’s potential that the very best plan of action is adopting a wait-and-see strategy whereas protecting some dry powder on the sidelines to make the most of any “flash gross sales” that will come our manner. No matter chances are you’ll select, simply keep in mind to do your personal analysis and have a threat administration course of in place, because the traditionally unstable nature of the cryptocurrency market exhibits no indicators of abating any time quickly.

Need extra details about market cycles?

The views and opinions expressed listed here are solely these of the writer and don’t essentially mirror the views of Each funding and buying and selling transfer includes threat, it is best to conduct your personal analysis when making a call.