What is a Market Cycle?
According to history, the market is a cyclical beast that follows trends and patterns, meaning that Nobody, including experts, can correctly forecast how the market will behave. The high unpredictability in the financial market is one of its most frightening parts. On the other hand, the market moves in patterns known as cycles.
See also: 4 Things To Do in a Crypto Bear Market.
What does a market cycle entail?
The natural wave-like pattern that all assets generate as people speculate and react to related emotional news and chart patterns is known as a market cycle.
Like other market cycles, a crypto cycle can be described as the duration between a market’s all-time high and low — or, more precisely, the phases in between. Market cycles, in other words, are predictable movements that occur across the crypto market. They impact all cryptocurrencies, and every trader is affected to some level. Understanding these market patterns will help you develop the right investment strategy.
Market cycles depict the cryptocurrency’s supply and demand volatility and the general public’s perception of these currencies. Although cryptocurrencies are notoriously volatile, they have been shown to follow cyclical patterns over time. Understanding market cycles can be tremendously advantageous to all types of investors in this market.
Digital asset volatility frequently shakes weak hands out of the market, with skyrocketing all-time highs and depressive troughs occurring at an alarming rate. Even the most seasoned investors and traders might be caught off guard by the level of volatility in the crypto market, which is where understanding market cycles come in handy. Cutting through the hype, FOMO, and noise to see what’s going on is the mark of a savvy investor.
See also: Web 2/Web 3: A Comprehensive Overview.
Market Crash vs Market Corrections
Market crashes and corrections are unavoidable when discussing market cycles. When the value of asset prices falls by 20% or more, we are in a market crash or officially in a bear market. However, if the price decrease is less than 20%, it is safe to label it a market correction. Market corrections occur regularly to control or even out the market. As previously said, fundamental news usually informs or causes a market crash or correction.
See also: What Cryptocurrency Liquidity Means.
The stages of the cryptocurrency market cycle
The cryptocurrency market lifecycle comprises four main periods. Each phase has distinct characteristics that influence how you should manage your finances.
1. The Accumulation Phase
Early investors acquire significant amounts of a cryptocurrency during the accumulation phase, causing the price to climb slowly. Supply and demand drive accumulation, which is represented by an upward-moving price. The accumulation phase occurs after a coin’s first release or after the market has recovered from a large price decline. Early investors begin to recoup their initial deposits at rock-bottom costs when the currency value bottoms out.
As a trader, you should pay close attention to this area and carefully search for the optimum entry point for your investment. As an investor, you must exercise patience since long-term value is still being built, and there is no certainty that the current uptrend will continue indefinitely.
2. The Rallying Phase
Here, the market is confident that the coin will perform well in the near future during the rallying phase. While interest remains high, this optimism causes the price to rise even higher, resulting in more demand. As more investors become interested in a particular crypto asset, its price rises. During this time, coin holders or early investors in that asset can expect a healthy return on their investment.
You will learn which currencies are legitimate and which are overvalued during this phase, which will aid you in deciding on new investment opportunities. This is an exciting period with a lot of volatility. Prices are likely to fluctuate rapidly, making it difficult to forecast future movements. While short-term traders can profit during this period, swing traders will struggle until the cycle shifts to a new phase.
3. The Distribution period
The media’s excitement and attention wane as the distribution phase progress. Some investors cash out their gains, while others wait for the price to level out before selling. The value of a currency is likely to remain relatively stable, with minor fluctuations during this stage.
This phase comes and goes with little fanfare. It’s not the best time to invest, but it could be a great time to cash out some profits if you timed things correctly during the previous stages.
As the market enters the next stage, the downtrend phase, a coin’s price drops dramatically when the distribution phase ends. External factors usually drive the next phase, causing investors to become even more pessimistic and panic-sell.
4. The downward trend
This stage is marked by a steady decline in activity and price. Although the demand is lower than in previous stages, supply grows until investors believe the currency has a lot of potentials. It becomes neglected at this point and fails to attract new investors’ attention.
The downtrend phase occurs after the coin’s price has reached its peak. As it becomes clear that the coin’s price will continue to fall, people begin to sell their coins at a loss to reduce their losses. Before the cycle repeats, this phase can last weeks or months.
Warning Signs of a Coming Market Crash
To figure out if you’re about to enter a bear market, pay attention to the warning signs that the market practically yells at euphoric investors who frequently ignore them. The euphoria of large gains is frequently what leads investors down the wrong path, resulting in market crashes.
1. Dovish Monetary Policy
The Federal Reserve Bank of the United States, also known as the Fed, is the country’s central bank, which means it sets the country’s monetary policy. The Fed plays a significant role in market activity because the stock market is, at its core, a system that allows for the movement and balance of cash and value.
When the Fed determines that the US economy is in trouble, it implements one of two key policy adjustments or a combination of both: The fed interest rate is the rate at which banks charge each other for lending excess funds to the public. When this rate falls, interest rates on loans such as mortgages, auto loans, credit cards, and different types of loans fall, resulting in a flood of lending.
Of course, when consumers can borrow more money for less money, they do so, resulting in a flood of liquidity in the US economy. As a result, spending increases, resulting in higher corporate revenues and profits and ultimately a bull market.
Low-interest rates for an extended period of time, on the other hand, can be a bad sign because they can’t last forever. Eventually, rates will have to rise, causing consumer spending to tighten and if the contraction is significant, it leads inevitably to a financial market crash.
2. Bond Purchasing
The Fed also purchases bonds to stimulate economic growth. By purchasing large amounts of bonds, the market is flooded with spendable cash, encouraging the same reckless spending that low interest rates frequently encourage.
The party, like low rates, doesn’t last forever. The bonds purchased will eventually mature, but the Fed will likely reduce its bond purchases even before that. As a result, many businesses expect lower revenues due to consumers spending less, potentially leading to a market crash.
3. A Long-Term Bull Market
The market is thought to be a well-balanced system, but it is anything but balanced in reality. The crypto market struggles to keep valuations in check daily, month to month, and even year to year as bears and bulls argue their points. When the bulls have too much control for too long, the prices investors pay to own assets skyrocket, resulting in excessive overvaluation. On the other hand, too much bearish control causes stock prices to plummet, resulting in extreme undervaluation.
The average bull market lasts two years and seven months. A bullish streak that lasts much longer than usual could indicate that we’re due for a reversal.
4. A Drop in Corporate Profits
Profit is a strong determinant of trends in the global market, and for a good reason: no one wants to invest in a company that is losing money and shows no signs of turning in a profit. Investors are happy when profits increase and are willing to put more money into the financial assets.
The price-to-earnings (P/E) ratio, also known as the price-to-profits ratio, is used by value investors to determine whether an asset is undervalued or overvalued. In other words, a company’s profits aid in determining its stock’s fair value. When profits begin to flatten, it’s a sure sign that a market crash is on the way.
Investors are only satisfied when the companies in which they invest are profitable. If profits stagnate, it raises doubts about the company’s ability to grow in the future, causing many investors to abandon ship and asset prices to plummet.
5. Inflationary Pressures
Naturally, inflation occurs. A slow increase in prices for consumer goods and services is normal as the economy grows. When inflation occurs too quickly, it becomes a problem. The Federal Reserve of the United States has set a target of 2 percent inflation, which it believes is a reasonable rate of price increase.
Consumers become more fiscally conscious as prices rise, which often leads to increased saving activities and a reduction in overall spending, coupled with reduced corporate profitability, eventually leading to a market crash.
6. Extremely Positive Market Sentiment
Emotion is a major factor in stock market movement. When fear strikes, market prices fall as investors sell their holdings, and when exhilaration and greed strike, market prices soar as investors buy shares.
In some cases, emotions can run high, leading investors to disregard all fundamental analysis and make emotionally-driven decisions that drive prices to extreme undervaluations or overvaluations.
A crash is imminent when the market becomes overly enthusiastic, and overvaluations become rampant. The Fear & Greed Index is one of the best ways to determine this.
7. Political Uncertainty
Political uncertainty is a common factor that leads to market crashes. When investors are faced with news of political unrest,they don’t know what to expect, hence, they’re unwilling to risk their money, leading to less investor interest and declines in the value of financial asssets.
8. A Black Swan Event
Black swan events are rare and usually unpredictable. There’s no way to tell when a black swan event will, but when they do, they tend to lead to major market crashes.
• Russian/ Ukraine Crisis: The recent war between the two world power has affected the global economy in no small way.
- COVID-19. The most recent black swan incident occurred in early 2020 when COVID-19 swept the earth. The virus appeared out of nowhere, leading to lockdowns and sending the market down substantially in a short amount of time.
What To Do In a Market Crash
The main rule when investing in the crypto market is that you don’t lose any money unless you sell. Even if prices plummet, you haven’t technically lost anything as long as you continue to hold your investments.
Eventually, the market will recover. The crypto market has experienced several crashes and corrections over the decades, and it’s bounced back from them. It might take a long time but it will recover.
The key is to make sure you’re investing in quality long-term cryptos. The best investments have solid underlying fundamentals, as they’re the most likely to survive market volatility. Your assets will likely survive even the worst market crash by filling your portfolio with crypto from strong, healthy companies.