Recently, Bitcoin prices have plunged by 24%, hitting a new low in the last one and half year. This is due to a combination of factors such as tightening regulations, BCH hard forks, and plunging mining machine concept stocks such as NVidia. Digital Currency investors are lamenting and wondering if the price of the digital currency will ever rebound. To comprehend this puzzle , we must first understand the inherent cyclicality of financial investment products market.
Market cycle refers to the cyclicity of the capital market. No matter which market, be it stocks, debts, real estates or even derivatives, they all possess the same characteristics and life stages, going through the process from growth to peak and then to recession. As one cycle ends, another begins. Understanding the division of the market cycle and the characteristics of each stage can help investors to seize the opportunity and accumulate their wealth. The digital currency market represented by bitcoin has taken shape and shows the cyclical rise and fall of financial investment products. In addition, the cyclical halving output of bitcoin highlights the cyclicity of the digital currency market .
1, Market Cycle
Generally speaking, the market cycle can be divided into accumulation period, rising period, selling period and falling period.
- Accumulation period
This stage occurs after the market recession. Investors have already experienced the bearish market for a long period of time and have become pessimistic. Shrewd investors will secretly purchase digital currencies because they expect the worst to be over soon and that would mean prices will rebound upwards. Although these professional investors have their reasons for entering the market, market sentiment is still negative. On top of that, the media continues to comment on the consistency of investors who have been in the bearish market for a long period of time. This group of investors will eventually give up by closing their position . Factually, during accumulation period, the price of digital currency is stabilising and the overall market sentiment is shifting from negative to neutral.
Starting from the price of US$1160 in December 2013, bitcoin price had continuously dropped to US$150 in January 2015 representing 87% loss in value. The last wave of the bear market was coming to an end. Since early 2018, there have been signs of a bullish market approaching. After nearly a year of sideways volatility, some investors who had lost faith in digital currencies(lost hope in one-night success) began to sell their bitcoins. However, the negative news surrounding the market had been digested by investors, causing the massive sell-out to come to a halt and thus minimizing the possibility of future fall. Some experienced investors began to enter the market to open positions.
- Rising period
At this stage, the market has already been stabilizing for a period of time and many investors gradually realize that conditions are improving and prices will soon rise. Many people (including technical analyst) began to follow suit at an early stage. They saw that market conditions becoming bullish and recognized that market tendency and sentiment are about to change. In the same period, the media began to predict that the worst period should be over.
At the end of this stage, many people began to jump into the market after knowing early investors made profits and price level hitting new highs. Initially, the majority of them were not sensitive to this. Therefore, the capacity of the market began to expand on a large scale. While at the same time, comments like “new stage of economic booming comes” or “ endless prosperity” became popular, which was very likely to result in blind confidence and wrongly estimated high price. Many investments during this period show incredibly greediness on the part of investors. However, shrewd investors believed that all good things will come to an end , including the current rising prices of the digital currencies. Thus, as people became optimistic, they started to sell off their digital currencies in batches. During this period, prices began to stabilize and the upward trend began to slow down. However, a number of investors still thought this was a good time to buy and they bought in large amount.
- Selling Period
In the third phase of the market cycle, the sellers began to dominate. This part of the cycle is thought to be the stage of sentiment of market shifting from the bullish mood of the previous phase to the mixed mood. Prices are often locked into certain ranges and can last for weeks or even months. It is worth noticing that once this phase is over, the market trend will be reversed. The typical examples are like traditional dual crown, triple crown model and head-shoulder crown model.
The selling period is a very emotional time for the market because investors are easily caught up in complete fear whilst still believing prices would rise out of greed. Therefore, they will be rather extreme when evaluating prices that are affected by different events and their moods can be easily influenced by factors such as passive regulation or any news that can crash the confidence of the market. Investors who cannot sell at the best moment are very likely to suffer a loss in the future.
The market value of the constantly expanding digital currency market is showing signs of fatigue at this stage. The higher the market price, the more money is needed to maintain this upward trend. With the existing size of the digital currency market, it is difficult to maintain the current upward trend when the highest price point is formed, The first sharp drop will soon appear. However, new investors who have just entered the market still have illusions about bitcoin, buying bitcoin at the lowest price, causing the price to have a V-shaped rebound. The second high fall occurs because some of the head investors is convinced that the bullish trend is over, the price level is unable to break past record highs and their funds are flowing out of the market while new investors continues to enter the market to take over their positions, that is when ‘M top model’ and “head and shoulder model” appear. Once the downtrend pattern is formed, it will be difficult to reverse it in a short period of time and the bear will officially takeover. Investors will use short-term positive events ( ETF approval, distribution main chain, mainstream exchanges) as a life-saving straw, forming a small rebound, but it will soon return to the downward trend.
- Fall Period
In the last cycle, the economic fundamentals have deteriorated significantly and the outlook is bleak. This stage is the most painful for those who are still holding their positions. The fact that they have choose to hold on is because they are already making losses. In fact, when the price is falling, these investors who are already losing money will rarely sell out. These people who bought in during the issuance period or decline period will only sell out once market prices plunge by more than 50%. Unfortunately, some shrewd investors will buy this depreciated currencies during the next accumulation period and then look forward to gains when the price increases in the future.
This stage is a stage where we are currently in, where a large number of investors choose to sell their digital currency. Some small mine owners choose to abandon mining and they suffer a loss from selling their mining machine. Now, the downturn in market condition cannot be attributed to the negative news . This downturn seems to be caused by the unstable factors brought about by the hard folk of BCH and this leads investors to sell off. In fact, there are inevitable rules behind such incidents. Even if it is not due to the negative news arising from BCH, there are also other negative news that can cause the price to plummet and investors to pull out from the market. The phenomenon that bullish market is full of favorable news while bearish markets filled with depressing news is partly caused by magnified human emotions. Even if there is little favorable news during the bullish period, investors are still optimistic. However, if there are favorable news during the bearish period, investors will not be convinced that the situation will reverse in the short-term. The bearish sentiment will continue to persists.
So what can we understand by going through the cyclicity?
- The market may be stable in a few months before the bullish cycle kicks in which makes this the best time to open a position. At present, bitcoin is still in the stage of falling and reaching lows. Maybe the current situation is just a sign of things to come and the worst is looming.
- The complete release of negative emotions during the accumulation period is a good time for investors to open positions. And it is a good time to gradually increase position when the bull market is rising steadily.
- In the final surge of the bull market, when people around you are discussing about bitcoin, they will see bitcoin surging to record highs and rise like a parabola. Now, this is a good time to consider closing the position gradually.
- Every bearish market does not signal the end of the digital currency market. The cyclical character of the regular transition from bullish to bearish and vice versa is the rule of tendency of digital currency market.
So what will happen when the next bull cycle occurs?
- There will be breakthrough in technology for implementing blockchain technology on large scale commercial scenarios, and ‘new value coins’ will continue to be born. The premise of the capital bull market is the bull market of technological innovation. The entire digital currency and blockchain industry will focus on bringing products and services of practical value to users.
- Due to the increased efficiency of the mining machine, mining is beneficial now. New miners began to enter and this helps to push up bitcoin price gradually.
- The price of Bitcoin increased 100 times, dozens of times and 4 times respectively in the last three bullish markets. Currently, the price of bitcoin is comparatively high, leaving little room to increase in the next bullish market. And the price of coins which are more innovative and valuable will increase dramatically.
- The digital currency market is gradually accepted by the mainstream financial market and digital currency financial derivatives will be legally invested.
Note: The chart used in this article is from Coinmarketcap, and the content described in this article does not constitute investment advice.