The Four Phases of the Bitcoin Market Cycle
Much like other investment classes, Bitcoin’s changes in price can be understood by learning about its unique characteristics. We explore these and examine how learning about them can help you in your investing journey.
Investing successfully in cryptocurrency isn’t easy, but deciphering big swings in price and market volatility is easier once you know that every market has phases and that the price of an asset reflects where we are in that phase.
Cryptocurrency may not be as established as other assets, for example, precious metals and stocks, but in some ways it’s no different. As Bitcoin is the most established and original cryptocurrency and therefore has the most historical data, we’ll focus on Bitcoin in this article.
Today we’re going to explore the phases of the Bitcoin market cycle, why they’re important to know and how understanding the cycle can help you make better investing decisions.
What is the Bitcoin market cycle?
By definition, a market cycle is a trend that emerges within a market. The phases of a market cycle typically follow a pattern and shape similar to that of a ‘bell curve’ which is the name used to describe the mathematical function that’s also known as “normal distribution” in statistics.
This function has been used across disciplines and industries to map out the best time to invest. It’s often referred to when looking at the stock market but is equally applicable to Bitcoin.
The four phases of Bitcoin’s market cycle
1. Accumulation phase
This phase officially brings an end to the previous cycle and marks the beginning of a new one. It happens when the market has bottomed out and is characterized by investors spotting an opportunity to start buying in and accumulating as much bitcoin as possible.
At this point, the overall market sentiment remains bearish so investors are able to purchase bitcoin at a “discount” relative to its perceived value. Buying at this stage is referred to as “buying the dip”.
2. Bull market (Mark-up phase)
The bull market phase is the happiest period of the market cycle for the majority of investors. During this period, you’ll see a significant increase in market volume as people flock to take advantage of potential Bitcoin gains en masse.
As we near the end of this phase, we’ll reach the height of the market where late investors will buy at the top because of “FOMO” (Fear of Missing Out). There is then typically one final huge run up in price, referred to as a “selling climax” in technical analysis, which is where we’ll see inflated price predictions and investors realizing massive gains in short periods of time.
Euphoria in the market will be taken as a signal to some investors to start selling off their holdings.
3. Distribution phase
The third phase of the cycle can be summarized as the switch from a bull market to a market of mixed sentiment. At this stage, the euphoria of the previous phase begins to dissipate and the price momentum starts to slow down.
As the market will have just seen huge gains and excessive price predictions, most people will expect that those parabolic price hikes will continue. As a result, this is often an emotional phase.
4. Bear Market (Mark-down phase)
The final phase is the most difficult for most investors to go through, particularly if it’s their first cycle, and their first time asking themselves “why is crypto crashing?”
Many will panic sell their Bitcoin as “fear, uncertainty, and doubt”, AKA “FUD” spreads in news and on social media. This phase is hardest for those who purchased during the distribution phase when prices were at their peak, those who bought at the top and sell in the bear market can experience heavy losses, but those who hold on tight into the next cycle have historically seen significant long-term gains.
How do halving cycles affect Bitcoin’s price?
Since its inception in 2009, data suggests that Bitcoin’s market cycles last roughly 4 years. One of the most important things to note, based on historic price data, is that whenever a cycle ends, the price is higher than it was at the beginning.
This is largely because Bitcoin’s supply consistently reduces due to halving events, which happen every 4 years. This means that for every 210,000 new blocks that are generated on the network (which on average happens every four years), the algorithm reduces the miner’s block reward by half, meaning the number of new Bitcoin that’s created is always reducing.
The combination of how market cycles work in general and the supply impact of halving events has historically meant that, despite the volatility during the four-year stretch, Bitcoin’s price has ended significantly higher than it was at the beginning of the cycle. In 2017, the bull run took Bitcoin from ~$3,000 to ~$20,000. More recently, the huge 2021 bull run saw Bitcoin’s price go from ~$10,000 to ~$63,000.
You can also explore this by comparing the bottom of any cycle to the top of the previous one. For example, the lowest price of Bitcoin during the 2017 cycle was ~$3120, which was almost twice as much as the top of the 2013 cycle, which was ~$1150.
As a whole, this means that even if the market sentiment seems extremely bad, it’s likely that by the time it bottoms out and comes back around, the price will still be higher than it was during the previous cycle.
When should I buy or sell Bitcoin?
If you had a crystal ball that allowed you to perfectly time the market, the best time to buy would be during the accumulation phase. During this phase is when smart money starts to come into the market in droves because the rest of the investors are bearish. This enables them to accumulate more at a lower price and puts them in good stead for the mark-up phase.
Conversely, the best time to sell is usually towards the end of the bull market, prior to the start of the distribution phase. At this point in the cycle, the bull market is in full swing and prices are high, which is a good time for investors to realize gains – if they feel they have to.
That said, it’s impossible to know exactly when to start buying and when to sell. What’s most important is being aware that Bitcoin, just like other assets, has cycles and the price won’t keep steadily climbing forever. If you’re planning to sell some of your crypto, familiarizing yourself with this cycle can help you to make the best return on your investment. On the other hand, if you have made the decision to HODL long term, you’ll be better prepared for the price volatility, when it arrives.
Remember, this article is for informational purposes only and does not constitute financial advice. Always do your own research when investing and make your decisions based on your personal risk appetite and financial goals.