The Crypto Cycle: 4 Phases of the Cryptocurrency Market

What is a Crypto Cycle?

The crypto cycle is the market’s natural rhythm of bullish and bearish periods. It’s essential to understand this phenomenon in order to better time your investment decisions as well as when to build.

Just like any other market, the crypto market goes through cycles of expansion and contraction.

In general, these cycles can be divided into four phases:

1) Mark-down;

2) Accumulation;

3) Mark-up;

4) Distribution  

We'll talk about these a little later in the article.

However, what's important to note is that these crypto market cycles have now repeated themselves multiple times since Bitcoin was created. This means that we now have enough data to start making some predictions about the crypto market.

So why is this important?

Well, let's say you wanted to buy into a crypto project during its early stages. If you timed your investment correctly, then you would have made a lot of money. This is best seen with the Bitcoin price.

If you had bought Bitcoin at the start of 2013, you would have paid $13 per coin. By the end of that year, the price had risen to $1,000, giving you a return on investment (ROI) of 7,692%.

On the other hand, if you had waited until December 2017 to invest, you would have paid $19,783 per coin. The price has since dropped to around $3,700, meaning your ROI would be negative if you sold today. Timing is everything in the crypto market.

But it's not just investors that benefit from understanding these cycles. Those that want to launch a Web3 project need to know which of these cycles are best for building, pre-launch and launching. You can even save key upgrades (good news PR) for some of the downtimes to combat drops in demand and token price.

‍

Factors that affect a crypto market cycle

Before we go too deep into that, let's have a quick look into the crypto markets and understand using historical data what affects market sentiment and determines these market cycles.

In addition to the usual market cycles, cryptocurrency markets have additional features that might trigger bull or bear trends, namely: 

• Bitcoin Halving
• Regulations
• Taxes 
• Hacks
• Forks (hard/soft)
• Airdrops
• New crypto project announcements

Some of these are short term and some of them are long-term. But all of them have an effect on the crypto markets. And as we'll see later, some of these factors can have a significant impact on the market.

To go deeper and truly understand crypto market cycles, you need to know that many investors trade off the news or market sentiment. This is why you see well-hyped projects do extremely well, even when their utility might not compare to something smaller.

Plus, bullish sentiment is much easier to engineer when – you guessed it – we enter a bull market. You'll find that there really is a chicken and egg problem to working out what comes first and really we are just riding out repeating cycles.

Crypto Market Manipulation

There’s no doubt that crypto markets are manipulated. From wash trading to pump and dumps, there are all sorts of tactics used by those with an ulterior motive. The smart money (e.g. large institutional investors) will always want to get in at the bottom and sell at the top and often will enter into grey areas of manipulation to make this happen.

And while crypto manipulation isn’t unique to our industry (all financial markets suffer from it), it does have a bigger impact in crypto. This is because crypto markets are still relatively small and immature compared to traditional markets. Plus, as we noted above, it does seem as though market sentiment has more of an impact than in other markets. It's also worth noting that many crypto projects don’t have the same level of regulation as traditional companies. This makes it easier for bad actors to get away with illegal activity.

As crypto markets become more mature, we can expect the level of manipulation to decrease. But for now, it’s something that all crypto investors need to be aware of.

Pump and Dumps

A pump and dump is when a group of people artificially inflate the price of an asset by buying it in large quantities. This drives the price up, which attracts more buyers and causes the price to rise even further.

Once the price has reached a peak, the original buyers sell their holdings and “dump” them onto the market. This causes the price to crash, leaving late buyers with heavy losses.

Pump and dumps are illegal in traditional financial markets. But they’re still common in crypto. This is because crypto assets are much easier to manipulate than stocks or commodities.

In addition, there’s no central authority policing crypto markets. This makes it hard to track and prosecute those behind pump and dumps.

Wash Trading

Wash trading is a type of market manipulation where a trader buys and sells an asset simultaneously. This creates the illusion of high demand for the asset, which drives the price up.

Wash trading is difficult to detect and prosecute. But it’s still illegal in many jurisdictions.

Spoofing

Spoofing is similar to wash trading, but with one key difference. While wash trading involves buying and selling an asset at the same time, spoofing involves placing orders that are never meant to be executed.

The goal of spoofing is to create the illusion of demand for an asset. This drives the price up and attracts other buyers, who are then “spoofed” by the original trader.

Spoofing is illegal in traditional financial markets. But, like wash trading, it’s still common in crypto.

Insider trading

Insider trading is when a person uses inside information to profit from trading an asset. For example, imagine that you work for a company that’s about to launch a new product.

If you buy shares in the company before the product launch, you could make a lot of money if the product is successful. But if you use inside information to do this, it’s illegal.

Insider trading is also common in crypto. This is because many crypto projects are run by small teams of people. It’s easy for team members to have access to insider information that they can use to profit from trading.

‍

How long is a Crypto Market Cycle?

Although crypto is still young, it has already been through several market cycles. The first market cycle for Bitcoin occurred in 2013. The value of the asset increased rapidly, going from US$150 to over US$1,500 in just a few months. However, it eventually slumped back down to US$250 in early 2015.

The next cycle kicked off in 2017, climbing from US$1,000 to US$19,000 by year's end. However, it bottomed out at about US$3,700 by the end of its markdown phase.

Based on the data set, it appears that the average crypto market cycle takes four years to complete. This is the amount of time it takes for the market to go from peak to trough and back again. However, one should be cautious when basing decisions on this information as it comes from a very limited sample size and there is always the potential for unforeseen circumstances.

For example, the last crypto market cycle lasted just over two years. This was unusually short compared to previous cycles.

The Four phases of the Crypto Cycle

1. The Markdown Phase - a.k.a Crypto Winter

I want to start with what some deem the final phase. I do so because this is arguably the best time to jump in, whether you are investing or starting to build a solution.

The markdown phase is otherwise known as the bear market, and it frequently leaves market participants feeling scared. This negative atmosphere occurs once the supply starts to exceed the demand that was established during the distribution phase. Fear runs rampant throughout this period as individuals begin to think more negatively about what lies ahead.

When participants start to feel dread about the future of the market, selling pressure intensifies. In some cases, this domino effect can push asset prices down to levels not seen since before the markup phase. No one can truly predict the bottom but if you can come close then this is the best time to start (or restart) your journey.

The markdown phase, both technically and sentiment-wise, is denoted by a downtrending chart and high volume price decline. It starts when news headlines take a negative turn, involving words like 'recession.'

‍

2. The Accumulation Phase - a.k.a Crypto Spring

The Accumulation starts after the end of the previous cycle when sellers have exited the market and prices are perceived to begin stabilising. 

In this phase, the market volume is typically lower than average as interest in the market remains low. Therefore, no clear trend emerges and assets typically trade within a tight range.

The accumulation phase is also referred to as a consolidation phase, which typically signals the end of a downward trend. Some market participants might still hesitate to enter the market during this time because it can be challenging to predict whether the asset will keep going down in value. However, longer-term investors often see the accumulation phase as setting the stage for what they hope will become a bull market.

This is where you will see the Bitcoin price and that of Ethereum start to make a move but where most of the rest of the market (e.g. Altcoins) will pretty much stay flat.

If you are a project founder, this is the time when you want to be well into your product development and have started to accumulate your early adopters, typically by creating a loyal community and managing them in Discord or even Twitter.

‍

3. The Markup Phase - a.k.a Crypto Summer

The markup phase, also called the bull market phase, is when the market price starts moving upwards more quickly. More people enter the market during this time, and as a result volume begins to rise noticeably.

Although people are still cautious, there is a general market sentiment of optimism around the future of Web3 and the various cryptocurrency projects.

In technical terms, the demand for a large proportion of crypto assets begins to outweigh the supply, causing prices to appreciate in value as a result. 

The markup phase is an opportune time for novice investors to enter the market, as it is much easier to recognize when prices are increasing. Also, many experienced investors see dips or pullbacks during the markup phase as a buying opportunity instead of a warning sign.

It's towards the end of this third phase that you tend to see FOMO kicking in where people regret not buying BTC or ETH at those great prices seen in the previous stages of the market. As a result, you start to see mass adoption and some less-than-smart decisions being made.

As a project owner, this is the stage when you want to be out in the market. Whether your project has strong fundamentals or not, the general market hype should propel the price upward and give you a strong basis to survive the inevitable drop in the market.

4. The Distribution Phase - a.k.a Crypto Fall

This is the distribution phase, where there is an equal number of buyers and sellers in the market.

Standard market conditions have bulls (buyers with confidence in the future of the market) on one side, and bears (sellers hoping to cash-in on their current profits) on the other. With both sides showing no sign of backing down, this tension creates a state of limbo, where volume is high but prices only fluctuate within a limited range.

When optimism turns to uncertainty, it can cause the overall market sentiment to become more fearful. The fear and greed index is a common indicator used by analysts to gauge this change in overall market sentiment.

Some people who bought an asset before or at the beginning of the markup phase may start selling their positions to get ready for what they think will be an upcoming bear market, which is also called the markdown phase.

Unfortunately, it's also at this point that the laggards jump in, finally convinced that this is the time to get a piece of what is now a vastly larger market value across the board.

Due to the cyclical nature of the markets, it's literally the calm before the storm, just before people panic sell and the trends start all over again.

As a founder, there is little you can do to fight off the coming bear market but just like a bear, it's incredibly important that you have gathered your resources and are ready to enter another build phase.

When is the best time to be starting a crypto project?

The answer to this question is not straightforward, as it depends on your project's ambition and the stage of the crypto cycle.

As we hinted above, if your project has a very long-term view, then it might be best to wait until the market has bottomed out before starting development. This way, you can buy crypto assets at a much lower price and use them to finance your project. It also means that when we inevitably start to see those market uptrends that signal a bull run, you have everything you need to launch.

On the other hand, if you have a shorter-term view, or if your project requires active community involvement from day one, then it might be better to start during the markup phase when there is more interest in crypto projects. To do this you must have a lean and fast team ready to push our product at short notice.

Of course, timing is never perfect and there are always risks involved no matter when you start. The most important thing is to have a well-thought-out plan and to be aware of the various stages of the crypto cycle.

This is why Chainwiz was conceived. Chainwiz aims to help educate and use that knowledge to in turn boost clients' and community members' chances at successfully launching and profiting from a Web3 project, be it an NFT, DeFi platform or even a play-to-earn game.

Want to learn more? Check out the education content on our website and jump into our Discord and chat to like-minded individuals.

‍

Crypto Cycle FAQs

What is a crypto market cycle?

A crypto market cycle is the rise and fall of crypto asset prices in repeating patterns. There are four main phases to a crypto market cycle: accumulation, markup, distribution and markdown.

What causes crypto market cycles?

The main cause of crypto market cycles is investor sentiment. When investors are optimistic about the future of the crypto market, they are more likely to buy crypto assets, driving up prices. When investor sentiment turns negative, they are more likely to sell, leading to a fall in prices.

What is the difference between a bull market and a bear market?

A bull market is when crypto asset prices are rising and investors are confident about the future of the crypto market. A bear market is when crypto asset prices are falling and investors are worried about the future of the crypto market.

When is the best crypto cycle to buy?

The best crypto cycle to buy is during the end of the mark-down cycle when prices are nearing or at the bottom.

Most will look to the accumulation and markup phases, when crypto asset prices are still low but there is more potential for price growth.

When is the worst crypto cycle to buy?

The worst crypto cycle to buy is during the distribution phase when crypto assets are being sold off by large investors and prices are falling.

Why is crypto a 4 year cycle?

The crypto market seems to follow a 4 year cycle because that is the length of time it takes for each Bitcoin halving event to occur.

How long does crypto bull cycle last?

A crypto bull market usually lasts for around 1-2 years, although this can vary depending on the project.

‍