In the first few months of 2021, the crypto industry has attracted more than 800 billion in market capitalization, stemming from institutions, retail buyers, as well as funds. All of them buy Bitcoin in hopes of its future growth, and the trend seems to be stabilizing towards the upside.
And while Bitcoin and other cryptocurrencies have grown massively, we are also seeing some temporary large drops in value, some of which rank up to 10% or more in a single day. Is this market manipulation, buyer exhaustion, or something more sinister? In this article, we discuss what causes the value of the market to drop in the midst of its “golden” era. Read further to find out more.
Market cycles “rhyme”
It is important to understand that the current charts we observe in Bitcoin pose many similarities to the patterns of previous years. More specifically, we are seeing a more aggressive run-up compared to the first quarter of 2017, with some indications that we could see similar growth as that observed in 2013.
Market cycles in the crypto sphere tend to repeat and are primarily identified when looking at the 4-year halving cycles that Bitcoin has to go through. The halving of mining rewards often acts as the “kickstart” to market recovery, a process that takes 1-2 years to play out and becomes steeper in the later stages.
Markets do not repeat but often rhyme. This is the quote heard by many traders and one that explains the price action we are witnessing every time the market seems to consolidate without a sentiment change. Experienced traders watch certain points of growth in the market and exchange their crypto according to previous patterns, in expectation of the majority of other traders doing the same. This works in two ways:
- First off, the market does not continue growing indefinitely and gives the opportunity to institutions to acquire more. The growth remains more manageable and is thus able to continue for a longer duration of time.
- Secondly, derivatives traders either win or lose a lot of money based on their calls, and eventually, more money flows towards big players (whales and institutions) who then take the funds off exchanges.
In both cases, the patterns of consolidation never exceed 30% in downwards pressure and are often limited to 18%-20%. These predictable waves also offer more opportunities for those who wish to buy more during a dip, to do so in a more organized manner.
Monthly growth is still stable
In the previous bull market, we saw a relatively stable growth of Bitcoin’s value at 10-12% per month for several months in a row. These numbers may seem extraordinarily high for stock market traders, but the truth is that Bitcoin’s value does not go “parabolic” until growth exceeds a 30% growth on a month over month basis. Since we are now better able to track this discrepancy and organize our trades accordingly, we also know when to expect the dips to occur.
At this moment, it is clear that value depreciation is only temporary and does not reflect the overall market sentiment. However, should we fall below 30% there is a high chance that we may see long-term sideways action, something which up to this point doesn’t seem to be the case.
Where are we headed?
As mentioned above, as long as the market does not grow at a rate of 30% on a month over month basis, and there is no bad news that disrupts the general direction of the market, we can estimate that the drops we currently see are just temporary.
Hence, it may not be in your best interest to sell your coins awaiting for a larger drop to occur. As soon as the market starts going parabolic, it may be a good idea to start cashing out portions of your funds on different price points to ensure that you take profit and prepare a good amount of money to re-enter at a lower price point. Of course, for this to happen you would need to keep a level-headed approach and train your emotional intelligence to go through with the action when the time comes.
What about other cryptocurrencies?
While the price of Bitcoin may follow a long-term uptrend, altcoins are not the same. A coin that might have performed well over the past bull market is not guaranteed to perform well this time around, and we can see this primarily with Bitcoin spinoffs, like Bitcoin Cash or Litecoin. That being said, not every price drop is dangerous. Very often, large price drops in crypto occur from a fearful sentiment around industry developments. Therefore, if you manage to track those well, you will be able to make better trades, and potentially benefit from the dips along the way.