What Are Market Cycles?
Market cycles are recurring periods of growth and decline in which certain financial assets increase or decrease in value depending on various external economic and financial factors, and the compatibility of the assets with the current financial situation. Although there are certain recurring movements, they cannot be predicted precisely, and their duration depends on external factors. It is important to note that every year, whether it is the stocks or crypto, certain anomalies are observed that may prolong or end a certain period or current trend.
How Market Cycles Work
They are formed when a certain trend persists long enough due to certain innovations in the specific sector, legislative changes, or the emergence of new products or investments. Their beginning and end could hardly be indicated at the moment they occur because the change in the trend rarely happens immediately. During these periods, the profits or losses of companies in the same industry may experience similar increases or decreases. The cycles are different for almost every investor – for certain investors who trade in short time intervals, a certain cycle may be several days in length, while for other investors who trade in a longer timeframe, the interval of a certain trend may last for years.
Types of Market Cycles
There are three main phases which include:
- Bear market – this phase is characterized by severe asset selling, much less demand, and negative and pessimistic sentiment;
- Bull market – characterized by positive sentiment, a large flow of investment, and rising asset prices, new investors also enter;
- Correction – corrections happen when prices fall temporarily, but they don’t always signal the beginning of a bear period. They may be brought on by a number of things, including profit-taking, unfavorable news, or modifications in the financial conditions.
Four phases of crypto market cycles
The four types of cycles in crypto include:
- The accumulation phase – the accumulation phase is accompanied by a decrease in the selling of assets by investors and relatively volatile but moderate movements in the prices. During this period, most investors act relatively conservatively because the negative sentiments caused by the recent price declines still prevail. Long-term holders usually thrive in this phase, as it allows them to accumulate enough assets before the next cycle;
- The markup phase -during this phase, optimism begins to prevail and volume increases dramatically. The presence of new investors increases the price of various assets, and the so-called “bears” do not control sentiment, which leads to a significant decrease in selling volume. With the additional increase in asset prices, new investors increase and this leads to an additional inflow of funds, which leads to price pumps. During this timeframe, so-called corrections or momentary price decreases can also be observed, which lead to a temporary decrease in price and are usually used by investors as an area for further accumulation;
- The distribution phase – a sustained rise in price causes some investors to sell their holdings, resulting in a balance between supply and demand. Although some of the financial players are selling their assets, there are still some bullies who continue to buy and thus help to add additional buying volume For a certain period of time, the price moves in the same zone because most investors are unsure whether to hold their assets, and fears of new trends that will crash the price begin to emerge. Investors who expect a crash (so-called bears) compete with those who expect new rises (so-called bulls);
- The markdown phase -this is the most feared time for investors since it marks the beginning of a bear market. As supply outnumbers demand during the previous phase, this period starts. Selling pressure is gradually increasing because some players are not optimistic about the future of their assets and are starting to sell. Although there are certain signals about the beginning of this period, they are not unambiguous, and this surprises a large number of investors, who start panic selling only when their assets begin to suffer serious losses. This massive sell-off usually triggers even more dumps.
How long do the cycles last?
As we mentioned already, it’s pretty hard to find the news or sentiments which signal the beginning or the end of these periods. They tend to last 6-12 months on average, but that could change depending on the current state of the economy and the fiscal decisions made by large economic organizations such as the Federal Reserve in the U.S. for example.