The crypto market may seem like a rollercoaster at times, with its extreme ups and downs. But did you know that, like traditional markets, it follows a predictable cycle? Understanding crypto market cycles is one of the keys to long-term success for any investor. By learning to anticipate these movements, you can maximise profits and protect yourself from severe losses.
So, how do you get ahead of the game? In this guide, I’ll break down the phases of the market, explain why these cycles are often so extreme, and show you how to use hedging strategies to navigate them successfully. Let’s dive in.
What Are Crypto Market Cycles?
A market cycle is a pattern that repeats itself in all financial markets, including cryptocurrency. The crypto market experiences phases of growth, peak, decline, and recovery—just like traditional stocks.
However, cryptocurrency cycles tend to be much more volatile and move faster. This is because crypto operates 24/7, isn’t tied to earnings reports, and is heavily influenced by things like global liquidity, investor sentiment, and regulatory changes.
Understanding this cycle can give you a roadmap to anticipate market changes, which is critical for both profit-taking and protection against downturns.
The Four Phases of a Crypto Market Cycle
Crypto market cycles can be broken down into four main stages:
- Accumulation Phase
- Run-Up (Bull Market)
- Distribution Phase
- Run-Down (Bear Market)
Let’s walk through each one.
1. Accumulation Phase
The accumulation phase happens after a major crash, when prices hit rock bottom. This is when “weak hands” (those who panic and sell during the crash) have exited the market.
Here, “smart money” (savvy investors) begin to accumulate assets at lower prices, expecting a future bull run. Sentiment is low, media coverage is minimal, and only long-term believers are buying.
A recent example: After Bitcoin fell from its 2021 peak of $64,000 to around $30,000, smart money started buying during early 2022, confident that a new cycle would emerge.
2. Run-Up (Bull Market)
During the bull market, prices rise steadily as more investors enter the market. Confidence grows, media hype kicks in, and eventually, even retail investors rush in to avoid missing out on profits (a phenomenon known as FOMO).
In the last bull run, Bitcoin soared past $60,000, followed by altcoins like Ethereum and Solana gaining massive value due to increased liquidity. It’s easy to feel invincible in this phase, but remember: markets don’t rise forever.
3. Distribution Phase
In the distribution phase, prices hit a peak as early investors start taking profits. Sentiment turns cautious, and the market becomes more volatile. Some still believe the bull market has room to run, while others brace for a downturn.
A perfect example was in late 2021, when Bitcoin peaked at $69,000. Savvy investors began selling, and though prices remained high for a while, sentiment shifted as fear about sustainability grew.
4. Run-Down (Bear Market)
This is the bear market phase, where the market corrects sharply. Prices plummet as early investors continue to sell off their holdings, often dropping by 80% or more from the highs.
After Bitcoin hit its peak, it tumbled to under $20,000 by mid-2022, dragged down by negative macroeconomic trends and panic selling. Many retail investors who bought in at the top suffer significant losses.
Why Are Crypto Market Cycles So Extreme?
There are several reasons why crypto market cycles are much more extreme than traditional markets:
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Volatility: Crypto assets can move 10-20% in a single day. Compare that to stocks, where a 2-3% move is significant.
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24/7 Trading: There’s no break in crypto trading. It’s always on, so cycles move faster.
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Speculation: Much of the crypto market is driven by speculation rather than fundamentals, which leads to rapid price swings.
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Liquidity Factors: Crypto is highly correlated with global liquidity trends. In periods of easy money, like after central banks print money, crypto thrives. When liquidity dries up, crypto crashes hard.
Why Hedging is Key During Crypto Market Cycles
Hedging is a risk management strategy that can help protect your portfolio during market downturns. Platforms like ChaiDEX offer advanced hedging tools such as liquid staking, perpetual contracts, and restaking, which allow investors to earn returns even in bear markets.
Nitesh Mishra, Co-Founder at ChaiDEX, says:
“In the last decade, BTC saw annual returns of 49-61% due to retail speculation. This decade, returns are expected to range from 10-15%, primarily driven by institutional efforts. Hedging your virtual asset class can offer better returns than mere speculative actions.”
Whether you’re in a bull market or a bear market, hedging strategies can protect your investments from drastic price fluctuations.
How to Hedge in Each Market Phase
Each phase of the market requires a different approach to hedging. Here’s how you can protect your investments at every stage.
Accumulation Phase
- Focus on staking strategies like Native Staking (Proof-of-Stake Protocol Staking) and liquid staking on platforms like ChaiDEX. This allows you to earn passive rewards while holding assets.
Run-Up Phase
- Keep using liquid staking to earn rewards while maintaining liquidity. This flexibility allows you to sell or reinvest if opportunities arise. You can also use Automated Market Makers (AMMs) to capitalise on high trading volumes.
Distribution Phase
- This is when you should consider hedging with perpetual contracts or short positions to profit from falling prices. Be cautious, as the market can turn quickly.
Run-Down Phase
- Keep staking and earning rewards even in the bear market. By using strategies like restaking or liquid staking, you can generate consistent returns that help offset your losses.
The Bottom Line
Understanding crypto market cycles can help you make informed decisions and navigate the extreme volatility of the cryptocurrency space.
By mastering the use of hedging tools, from liquid staking to perpetual contracts, you can protect your investments and thrive even during market downturns. Whether it’s a bull market or a bear market, having a strategy in place will keep you ahead of the curve.
Remember, crypto is a game of patience and preparation. With the right knowledge and tools, like those offered by ChaiDEX, you can weather any storm and continue to build your portfolio with confidence.
