Understanding crypto market cycles is key for cryptocurrency investors to navigate the volatile crypto markets. Cryptocurrencies like Bitcoin and Ethereum go through boom and bust cycles, with periods of exponential growth followed by steep declines. Learning about these cycles can help investors make more informed decisions and better time their entry and exit points.
Crypto market cycles overview
The cryptocurrency market tends to move in cycles that resemble the classic phases of a financial bubble:
- Stealth phase – The first adopters enter the market, prices are relatively flat and volatility is low. This phase can last for months or even years as cryptocurrencies build their user base.
- Awareness phase – Prices start climbing more rapidly as more investors learn about crypto and buy in. Media coverage increases and “FOMO” (fear of missing out) kicks in.
- Mania phase – Prices skyrocket as mainstream adoption hits. Speculation and hype reach a peak. ICOs (initial coin offerings) proliferate as everyone tries to launch their own cryptocurrency.
- Blow-off top – Prices hit an all-time high then start to tumble quickly. The bubble “pops” and the mania comes to an abrupt end.
- Capitulation – Price decline accelerates into a crash. Investors panic sell their holdings. Bearish sentiment dominates.
- Despair – Prices bottom out after falling 80% or more from the peak. Volatility declines and trading volume dries up as investors give up hope.
- Return to “mean” – Prices trade sideways for an extended period, finding a new equilibrium level after the bubble pops. Investor interest gradually returns.
- Stealth phase – The cycle starts again as prices bottom out and begin to build upward momentum for the next cycle.
What drives these cycles?
There are several key factors that contribute to the boom and bust nature of crypto market cycles:
- Supply shocks – Changing availability of crypto coins, such as the Bitcoin halving which cuts mining rewards in half. This reduces sell pressure from miners.
- Adoption and awareness – Crypto gains more mainstream traction and media hype, pulling in new investors. But hype can build into speculation as prices skyrocket.
- Regulation – Tighter regulation can negatively impact prices, while loosening regulation fuels investor demand. Uncertainty around regulation also causes volatility.
- Economic conditions – During recessions and periods of inflation/uncertainty, investors may flock to crypto as an alternative asset. But economic strength leads more back into traditional assets.
- Market manipulation – Large holders (“whales”) can manipulate crypto prices through practices like wash trading and spoofing. This exaggerates price movements in both directions.
- Security issues – Hacks, theft and scandals undermine investor confidence and cause panic selling and volatility.
The role of psychology
In addition to fundamental drivers, human psychology plays a huge role in the ups and downs of crypto market cycles:
- Herding – Investors tend to chase trends and follow the crowd, amplifying both bull and bear trends.
- Anchoring – People tend to attach and “anchor” to certain price levels, like round numbers ($10k, $20k), which act as psychological barriers.
- Loss aversion – Investors hate realizing losses, so will hold assets that have fallen in value hopes of a comeback.
- Confirmation bias – People seek information that validates their investment decisions and ignore contrary facts. Groupthink mentality takes over.
- Overconfidence – Following market gains, investors tend to get complacent and overestimate their ability to time the market.
Historical crypto cycles
Looking at historical price charts, we can identify several distinct crypto market cycles since Bitcoin’s inception:
|1||Stealth||2009 – Mid 2010||$0 – $0.30||First adopters buy Bitcoin for pennies|
|Mania||Nov 2010 – Feb 2011||$0.30 – $1||Mainstream media coverage of Bitcoin starts|
|Blow-off top||Jun 2011||$32||Bubble pops after rapid price spike|
|Capitulation||Nov 2011||$2||Price crashes, -93% drawdown from peak|
|2||Stealth||Late 2011 – Mid 2015||$2 – $300||Long bottoming out period|
|Awareness||Early 2016 – Early 2017||$300 – $1,200||Wider adoption and use cases for blockchain|
|Mania||May 2017 – Dec 2017||$1,200 – $19,500||Launch of crypto futures markets|
|Blow-off top||Dec 2017||$19,500||BTC hits record high, hype peaks|
|Capitulation||2018||$3,200||Prices fall 84% in brutal bear market|
|3||Stealth||2019||$3,500 – $12,000||Price finds new equilibrium level|
|Awareness||2020 – Oct 2020||$10,000 – $14,000||Increasing corporate and institutional investment|
|Mania||Nov 2020 – Apr 2021||$14,000 – $64,800||Major companies add BTC to balance sheets|
|Blow-off top||Apr 2021||$64,800||BTC market cap hits $1 trillion|
|Capitulation||Jun 2022||$17,600||Crash accelerates with failure of stablecoins|
|4||Despair||Jul 2022 – ?||$20,000 – ?||Prices bottom out after -70% drawdown|
Ethereum, Litecoin and other major altcoins followed similar boom and bust cycles after they were launched, but often amplified in both directions compared to Bitcoin’s price swings.
How to trade crypto cycles
Savvy crypto traders aim to time market cycles in order to maximize profits. Some best practices include:
- Buy early – Enter during the stealth or awareness phase to benefit from the entire run up. Getting good projects at low prices can pay off hugely in profit potential.
- Take profits – Sell portions of holdings into market strength. Scaling out protects profits while keeping upside exposure.
- Cut losses – Set stop losses to exit positions if prices start breaking down. Don’t try to predict exact cycle tops and bottoms.
- Buy the dip – Add to positions during capitulation or despair phases when assets are severely discounted.
- Hedge – Hedge against volatility and downturns by trading derivatives or holding stablecoin positions.
- Zoom out – Keep long-term perspective during bear markets. Crypto adoption and technology continue advancing despite price declines.
Conclusion – Understanding crypto market cycles
Understanding crypto market cycles and their various phases can give investors better insight into market psychology and price action. Although the cycles are unpredictable, spotting emerging trends across stealth, mania and capitulation stages can help inform smarter investment decisions and portfolio management. With proper risk management, long-term crypto investors can aim to ride out the market’s ups and downs while capitalizing on boom and bust cycles.
- Hayes, A. (2021). Cryptocurrency value formation: An empirical study leading to a cost of production model for valuing bitcoin. Telematics and Informatics, 56, 101519.
- Corbet, S., Lucey, B., Urquhart, A., & Yarovaya, L. (2019). Cryptocurrencies as a financial asset: A systematic analysis. International Review of Financial Analysis, 62, 182-199.
- Baur, D. G., Hong, K., & Lee, A. D. (2018). Bitcoin: Medium of exchange or speculative assets?. Journal of International Financial Markets, Institutions and Money, 54, 177-189.
- Fry, J., & Cheah, E. T. (2016). Negative bubbles and shocks in cryptocurrency markets. International Review of Financial Analysis, 47, 343-352.
- Phillip, A., Chan, J. S., & Peiris, S. (2018). A new look at Cryptocurrencies. Economics Letters, 163, 6-9.