The cryptocurrency market, although thought of as independent from the traditional financial markets, is impacted by what happens in the traditional financial markets. All of the financial markets are down at the moment following the Covid-19 Pandemic.
With regards to the crypto markets, there are multiple factors that have put additional bearish pressure on the crypto markets.
Main Events That Impacted Crypto Prices
Many significant events happened in the crypto space as the world started returning back to normal for the first time since the Covid outbreak in 2020. These events impacted the traditional financial markets mainly, but the impact carried over to the crypto market as people relied on the crypto market as a secondary source of funds.
Post Covid Pandemic
The Covid Pandemic took everyone by surprise. Nobody knew that the early stages of the outbreak would have such a devastating effect on people’s daily lives. Initially, governments thought that imposing lockdowns for a couple of weeks at a time would tame the outbreak. Even though this helped slightly, it did not have the desired effect.
Instead, people worldwide had to just wait for the virus to play its course, which resulted in global lockdowns happening for a lot longer than just a few weeks. Fast forward just over two years later, the world is slowly returning to what it was prior to the Pandemic.
Now that the world is transitioning out of the Pandemic, the effects of locking down economies is starting to play out. During the Pandemic, there was decreased spending since people had to stay at home. This saw many people losing their jobs.
As the world returns to normalcy, shops and service providers have increased their prices to make up for the income they lost during the Pandemic. This increase in prices, or inflation, was not accompanied by wage increases for people since economies are slightly crippled – leaving people to scrape all of their finances together.
In the process of gathering all of their finance, people who had invested in crypto cashed out their profits from the 2020/2021 bull run. The mass cashing out of profits brought down crypto prices initially, but then fear of the markets falling further pushed the prices down even more. This is what started the crypto bear run.
Russia-Ukraine War
Just as the world came out of a Pandemic, Russia’s president declared war on Ukraine. Both economies were already crippled post the Pandemic, but the war just worsened the financial situation in both countries.
Once again, this resulted in a global cash out from the crypto markets as people were fearful and were uncertain as to whether or not the situation would escalate to a World War.
Crypto exchanges were also impacted by global sanctions imposed on Russia, which meant that the exchanges would lose their Russian market. Furthermore, there were rumors that Russia’s president was using cryptos as a means to get around the sanctions imposed on his nation. This led to a clamp down on cryptos which brought down prices even more.
Terra LUNA Crash
To add to the pressure on crypto prices, the crash of the Terra-based stablecoin, Terra USD, occurred. This saw the stablecoin de-peg from the U.S. dollar, which means that it lost its 1:1 relationship with the fiat currency. Following the de-peg, the ecosystem’s native token Terra LUNA also lost 99% of its value and the Terra stablecoin crashed completely.
There were a lot of investors that stored their profits in Terra USD as it was believed by many as an alternative to U.S. dollar-backed stablecoins. Additionally, the price of Terra LUNA had been on a consistent move up leading to the crash. After the crash, everyone lost a large portion of their finances, and the level of fear and uncertainty in the market grew higher.
Investigations were launched into the Terra LUNA and Terra USD crash and it was uncovered that Terra’s founder, Do Kwon, had been regularly transferring assets and funds outside of LUNA months before the crash – leaving many to believe that the founder orchestrated the crash or at least knew that it was coming.
Delayed Launches
The most anticipated launches in the crypto space are the Ethereum (ETH) Merge and Cardano’s (ADA) Vasil Hard Fork. The ETH Merge has been postponed multiple times given the scale of the task. These delays continued into this year as well.
Every time a date is announced for these launches or upgrades, the market is excited and prices pump. When the launches are delayed then the market immediately reacts by selling the coin related to the upgrade or launch. This is primarily the case for ETH, and people are speculating as to whether or not ETH will maintain its market dominance in the Web3 space.
In the case of Cardano, a date was given for the launch of the Vasil upgrade but a few weeks out from the announced date, the project’s co-founder, Charles Hoskinson, announced that the upgrade would be delayed as well.
As the initial date for the Vasil upgrade approached, ADA’s price was on the rise but declined as the delay announcement came out.
What is a Crypto Market Cycle?
Simply put, a crypto market cycle is simply the period between the peak and the low in a market and its stages. Every financial market experiences market cycles, and it is a natural procession of cycles that are bound to appear and reappear as time progresses.
However, compared to the stock market, cycles in crypto can be significantly shorter as price fluctuations and movements in the crypto market are more rapid than those in the traditional financial markets.
The 4 Phases of the Market
Cycles are prevalent in all aspects of life; they range from the very short-term, like the life cycle of a June bug, which lives only a few days, to the life cycle of a planet, which takes billions of years.
No matter what market you are referring to, all go through the same phases and are cyclical. They rise, peak, dip, and then bottom out. When one market cycle is finished, the next one begins.
The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase. Another significant challenge is that even when you accept the existence of cycles, it is nearly impossible to pick the top or bottom of one.
But an understanding of cycles is essential if you want to maximize investment or trading returns. Here are the four major components of a market cycle and how you can recognize them.
Accumulation Phase
This phase in the market occurs after the market has bottomed and the innovators and early adopters begin to purchase crypto again as they figure that the worst is over in the market. At this time, valuations are really attractive and the general market sentiment is still bearish.
Articles in the media at this point are pretty doom and gloom, and investors that were long through the majority of the crypto bear market have recently given up and closed their positions.
However, the accumulation phase is accompanied by flattened prices. Fortunately, for every seller throwing in the towel, there is an eager buyer that is there to purchase the crypto from them at a healthy discount. Slowly but surely, market sentiment begins to shift from negative to neutral at this point.
Mark-Up Phase
At this stage, the market has been stable for a while and is beginning to move higher. The early majority are getting on the bandwagon. This group includes technicians who, seeing the market is putting in higher lows and higher highs, recognize market direction and sentiment have changed.
Media stories begin to discuss the possibility that the worst is over, but unemployment continues to rise, as do reports of layoffs in many sectors. As this phase matures, more investors jump on the bandwagon as fear of being in the market is supplanted by greed and the fear of being left out.
As this phase begins to come to an end, the late majority jump in and market volumes begin to increase substantially. At this point, the greater fool theory prevails. Valuations climb well beyond historic norms, and logic and reason take a back seat to greed. While the late majority are getting in, the smart money and insiders are unloading.
But as prices begin to level off, or as the rise slows down, those laggards who have been sitting on the sidelines see this as a buying opportunity and jump in en masse. Prices make one last parabolic move, known in technical analysis as a selling climax when the largest gains in the shortest periods often happen. But the cycle is nearing the top. Sentiment moves from neutral to bullish to downright euphoric during this phase.
Distribution Phase
In the third phase of the market cycle, sellers begin to dominate. This part of the cycle is identified by a period in which the bullish sentiment of the previous phase turns into a mixed sentiment. Prices can often stay locked in a trading range that can last a few weeks or even months.
For example, when the Dow Jones Industrial Average (DJIA) peaked in Feb. 2020, it traded down to the vicinity of its prior peak and stayed there over a period of several months.
But the distribution phase can come and go quickly. For the Nasdaq Composite, the distribution phase was less than a month long, as it peaked in Feb. 2020 and moved higher shortly thereafter.When this phase is over, the market reverses direction. Classic patterns like double and triple tops, as well as head and shoulders patterns, are examples of movements that occur during the distribution phase.
The distribution phase is a very emotional time for the markets, as investors are gripped by periods of complete fear interspersed with hope and even greed as the market may at times appear to be taking off again.
Valuations are extreme in many issues and value investors have long been sitting on the sidelines. Usually, sentiment slowly but surely begins to change, but this transition can happen quickly if accelerated by a strongly negative geopolitical event or extremely bad economic news. Those who are unable to sell for a profit settle for a breakeven price or a small loss.
Mark-Down Phase
The fourth and final phase in the cycle is the most painful for those who still hold positions. Many hang on because their investment has fallen below what they paid for it, behaving like the pirate who falls overboard clutching a bar of gold, refusing to let go in the vain hope of being rescued. It is only when the market has plunged 50% or more than the laggards, many of whom bought during the distribution or early markdown phase, give up or capitulate.
Unfortunately, this is a buy signal for early innovators and a sign that a bottom is imminent. But alas, it is new investors who will buy the depreciated investment during the next accumulation phase and enjoy the next mark-up.
Market Cycle Timing
A cycle can last anywhere from a few weeks to a number of years, depending on the market in question and the time horizon at which you look. A day trader using five-minute bars may see four or more complete cycles per day while, for a real estate investor, a cycle may last 18 to 20 years.
Best Strategy for Investing in Market Cycles
Recognizing cryptocurrency market cycles helps you make sound investment decisions. The best strategy for using your understanding of the market cycle phases is a simple one: buy or accumulate at the bottom when the market is fearful, HODL on the way up, sell during distribution when everyone is happy and greedy, and exit or short before the market plunges.
The challenge here is learning to cast away emotional attachment to positions and not bow to the pressure of FOMO or greed, which could make you buy high or sell low.
How to Identify When The Market is Turning
One of the easiest ways to identify if the crypto market is turning is to look at the crypto market leader, Bitcoin (BTC), and its performance. This is because the rest of the crypto market tends to follow suit to what Bitcoin does, since it is the most established crypto in the market.
You can also look at technical indicators on Bitcoin’s chart. Technical indicators such as the Fear and Greed Index, Exponential Moving Averages, and Simple Moving Averages can help you gauge what the sentiment in the market is. This is especially true when looking at the longer term technical indicators.
Most investors with a long-term overview of the market tend to focus on the Exponential Moving Averages, such as the 100 and 200 Exponential Moving Averages. A cross with these two lines is normally a good indication of a change in tides in the market.
For instance, if the shorter Exponential Moving Average crosses above the longer one, then it is believed that the market is entering into a bullish period or cycle, and entering into a bearish period when the shorter Exponential Moving Average crosses below the long one.
Looking at Exponential Moving Averages may not yield the same accuracy looking at them on the daily chart as will be achieved looking at them on the weekly or monthly chart.
Look at What Happens On the Different Timeframes
Charts in the financial markets tend to have a cascading effect on the other charts in the market if the short-term trend continues long enough. Meaning, a move on the daily chart can influence the weekly chart, which can then influence the monthly chart.
Looking at the shorter-term charts to see their effect on the longer-term charts can help time an entrance into the market for longer-term and substantial gains.
Don’t Look at Just One Time Frame
New investors and traders sometimes only look at one time frame to analyze the situation in the market at that time. On the other hand, veteran investors and traders include all of the time frames in their analyses because they know that one time frame does not tell the whole story.
So when analyzing the markets, it is best to include some longer term time frames and a short-term time frame to identify a trade or investment opportunity.
To Recap
Many significant events happened in the crypto space as the world started returning back to normal for the first time since the Covid outbreak in 2020. These events impacted the traditional financial markets mainly, but the impact carried over to the crypto market as people relied on the crypto market as a secondary source of funds.
The crypto market has now entered into the accumulation market cycle, which is a period where savvy investors pounce into the market to purchase cryptocurrency at large discounts.
Technical indicators such as the Fear and Greed Index, Exponential Moving Averages, and Simple Moving Averages can help you gauge what the sentiment in the market is. This is especially true when looking at the longer term technical indicators.
