Market cycle analysis screamed “profit taking” before the sell-off on May 19

Welcome to the weekly newsletter from Cointelegraph Market. This week, we will identify emerging industry trends in the entire cryptocurrency field to broaden your understanding of market cycles and allow readers to make better use of microcycles that often occur in larger market structures.

The cryptocurrency industry is known for its volatility and rapid changes. With the rapid decline in the price of Bitcoin, these characteristics were fully reflected in May (Bitcoin) From US$60,000 to US$33,000 resulted in massive outflows, erasing the value of US$1.2 trillion from the total market value.

Although many people in the entire ecosystem attribute the economic downturn to negative factors Tweets from influencers and powerful figures such as Elon Musk Or another announcement, the government China has banned Bitcoin, More experienced traders and analysts warned that there could be a sharp correction in the weeks leading up to the sell-off.

The rapid price increase in 2021 shows some typical signs of bubble behavior, overbought alarm bells sounded, and Uber drivers and grocery store employees are happy to comment on the next big mover.

That being said, now seems to be a good time to review the various stages of the market cycle to help better understand what the market has experienced so far and what may happen in the coming months and years.

The four phases of the market cycle

The four basic stages of the market cycle that all traders should basically understand are Accumulation phase, Marking phase, distribution phase and marking phase.

The stage of the market cycle. source: Investment Encyclopedia

The accumulation phase occurs after the market bottoms out and is characterized by innovators and early adopters buying assets to obtain their long-term potential before any major price fluctuations occur.

This phase began in the cryptocurrency market that began around December 2018, when the price of BTC fell below US$3,500 and continued until October 2020, when its price began to meaningfully rise above US$12,000.

BTC/USD 1-day chart. source: bitmap

As the BTC and decentralized finance (DeFi) fields have attracted global attention, the markup phase really began to heat up in December 2020 and lasted until January 2021, when the total market value in May climbed to a high of over US$2.5 trillion. The stage begins.

The total market value of cryptocurrencies. source: CoinMarketCap

In the distribution stage, sellers began to dominate, and the previous bullish sentiment became mixed, causing prices to lock in the trading range. When the market reverses direction, the phase ends.

Some typical chart patterns seen during this period, such as Investment Encyclopedia, Is the double top and triple top and the well-known head and shoulders patterns, which are warning signs raised by BTC, which technical analysts saw before the recent sell-off.

Similar to the bull market in 2017-2018, the price of BTC hit an all-time high (ATH) and then began to fall, causing funds to shift from Bitcoin to the altcoin market, further pushing the total market value to a record high of US$2.53 trillion on May 12.

For savvy cryptocurrency traders, this pattern indicates that the price cut phase is coming, and as BTC fluctuates between $40,000 and $60,000, altcoins soar to historical highs to prepare for the sell-off, it is wise to take profits. Lift-close and buy tokens at a discounted price at the next bottom.

Deploy funds during the accumulation phase

Now that the market has experienced a sharp correction and continues to look for the lower price limit, it is now a critical moment to monitor price movements, focusing on finding a good entry point for feasible projects.

Perhaps the most famous chart detailing a typical market cycle is the “market cycle psychology” of the Wall Street cheat sheet. This model appears in all types of markets, from stocks and commodities to cryptocurrencies and real estate.

The stage of the market cycle. source: Wall Street Cheat Sheet

Looking at the Bitcoin chart, we can see that a similar price pattern started at the end of 2020, and an “unbelievable” phase may begin in November. The rise in early January was similar in appearance to the “hope” phase in the above chart, and then rose to a new all-time high in April within a few months.

BTC/USDT 4-hour chart. source: Transaction view

Then the price fell from $64,000 to $47,000, and then began to rebound to the range of $53,000 to $60,000 with complacency. The May sell-off pushed the market through the stages of anxiety, denial, panic, and surrender, and the ecosystem’s response to other forces other than downward pressure on the market, Musk’s tweets caused great outrage in the community.

The challenge now is to deal with the depression caused by the significant decline in the value of the portfolio and try to determine whether the market has bottomed out, indicating that now is a good time to redeploy funds, or the best thing people can do is to stand by and wait for further development of.

The major price increase during this period is usually considered a sucker bounce-therefore, the cycle has been completed and we are back to the starting point.

So, does this mean that now is a good time to accumulate tokens for your favorite projects?

Unfortunately, there is no guaranteed correct answer to this question. It is up to each investor to decide. Compared to a month ago, tokens that used to be in high demand are now heavily discounted. This may be the best time to start averaging dollar costs back to long-term options to prepare for the next higher cycle.

Cryptocurrency industry cycle

The typical cycle described here can be applied to the entire market as well as to a single token or token industry.

A good example is the rise of decentralized finance in the past year. Driven by the emergence of popular decentralized exchanges such as Uniswap and lending platforms such as Aave, it has swept the cryptocurrency market.

The total market capitalization of the DeFi sector. source: Coin Tiger

As shown in the figure above, the DeFi industry as a whole has experienced its own market cycle pattern, which is consistent with its growing popularity and use in the entire ecosystem.

A similar pattern appeared in the rise of non-fungible tokens (NFT) in 2021, but the timing was different, highlighting the idea of ​​joint development of the industry and hinting at the possible benefits of industry-based cryptocurrency investment methods.

ENJ/USDT vs. CHZ/USDT vs. AXS/USDT vs. MANA/USDT. source: Transaction view

In order to take advantage of these opportunities, traders are sometimes forced to trade against the trend. The accumulation phase is usually marked by a decline in sentiment, but the best time to sell is during the distribution phase of the highest sentiment, and most traders hope to obtain huge wealth.

As for the current market outlook, the best approach may be to take a wait-and-see attitude while keeping some dry powder on the sidelines to take advantage of any “flash sales” that may arise. Whatever you choose, just remember to conduct your own research and develop a risk management process, because the historical volatility of the cryptocurrency market does not show signs of abating in the short term.

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The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Every investment and trading action involves risk, and you should conduct your own research when making a decision.