A Psychosocial Field Guide to Cryptocurrency’s Most Important Pattern down the crypto educational rabbit hole, after seven years as a forex trader. 12 months ago I dove head-first It’s a steep learning curve. Dozens of market dynamics compete for relevance and attention. What follows is in 12 months of intense study. the single most important thing I learned One market dynamic stands above all others as most important for investors and traders to understand. It’s a pattern — a simple, profound pattern that’s been hiding in plain sight for years. Faces of Irrational Exuberance Understanding the pattern begins with this diagram of the lifecycle of financial bubbles. — overlay a chart of almost any famous bubble from the past century and it’ll fit, somewhat dead on, contour-for-contour. The red line’s path is not abstract That’s because the underlying pattern directly reflects global market psychology — the invisible hand of mass financial consciousness, at the largest possible scale. The diagram is useful to investors during speculative bubbles. But in crypto, it’s taken on a deeper layer of meaning. whole A Brief Financial History of Cryptocurrency To investors and traders, the history of Bitcoin is the history of four bull runs. (And four crashes). All four bull runs separately and individually rank among the most dramatic bull markets of the 21st century, across all asset classes. (By growth percentage). Here’s a bit of context, so you have something to compare it to. Although price growth percentage was mostly similar across all four bubbles, the price ranges those bull runs covered were very different. Each successive bull run went exponentially farther than the previous one. And each post-crash low has been a than the previous one. higher low (Much higher). Consecutive higher lows is the definition of an uptrend. It doesn’t look like an uptrend— it looks flat, until 2017. That’s because the scale of the most recent bubble is so extreme that you can barely see the first three. But the same could be said of each previous bubble. Each went exponentially farther than the one that came before it. A Special Setting Helps Us See The Pattern Shifting our charts to equalizes earlier (exponentially smaller) price trends with more recent (exponentially larger) ones. logarithmic scale We’re able to more clearly spot patterns in price movement that recur cyclically and fractally, independent of scale. Now we can see it — the four Bitcoin bubbles normalized to scale. We’ve seen a familiar sequence of events on repeat, ever since Bitcoin’s beginnings in 2010. Here are by the numbers: Bitcoin’s four bull runs, The Big Picture The pattern is straightforward. If anything, one might argue this is the most accurate Bitcoin chart of them all: The Market Cycle is the Pattern The pattern guiding Bitcoin’s path is none other than the mirror image of our collective psyche’s relationship with greed and fear. Since 2010, has played double-duty as . It is our asset class’s calendar of emotional seasons, and it’s the cryptocurrency market’s Rosetta Stone. the lifecycle of financial bubbles Bitcoin’s market cycle Unpacking the Cycle Knowing how to operate effectively as a crypto investor or trader is predicated on awareness of one’s position in the cycle. Currently (at the time of writing) we’re near the end of Bitcoin’s 4th overall cycle, near the bottom of the bear market stage. (This article was published in August 2018). But identifying one’s position in the cycle is only the first layer of the onion. Peeling Away the Layers Each cycle has well-defined seasons, or stages. Each stage has its own unique set of market dynamics, and poses a different set of emotional and psychological challenges to market participants. History doesn’t repeat itself, but it does echo and rhyme — like faces on a stack of Russian dolls, each instance of a season inevitably shares its DNA forward cross-cycle with its younger, larger sisters. Understanding each season’s external market dynamics and internal prevailing psychological terrain is critical to survival and success in this market. Bitcoin’s Market Cycle (The Market Cycle of Cryptocurrency as an Asset Class) The cycle can be classified into four stages: Stage 1: Accumulation lasts many months. This stage Low prices, low volume, low volatility, low expectations. Everything is low. is front of mind to retail investors and traders. The previous crash but retail investors are traumatized and fear further losses. The bottom may be in, who sold on the way up and shorted on the way down are buying back in before the cycle starts over. Institutional investors, whales and smart money , and ironically (and unsurprisingly) the period when financial media and the public pay the least attention. This is the period of greatest opportunity Stage 2: Bull Market acts as catalyst to push price to levels unseen since the early days of the bear market. A widely-anticipated regulatory fundamental news event turns bullish. The dominant emotions are confidence, excitement and a sense of great promise. Social media sentiment and then retraces, in cycles. Each cycle looks like , and lasts roughly 3–6 weeks. Price grows incrementally 3 steps forward, 1–2 steps back and eventually the old all-time-high is retaken. Several growth cycles pass, are freed of their burden, reducing sell pressure across the marketplace. People who bought the last top begins to compound. and financial media fans the flames. The enthusiasm of price discovery Retail FOMO builds on itself, Bitcoin nearly doubles its old all-time-high. In its first 100 days of price discovery, Not long afterwards, Bitcoin climbs out of its logarithmic channel. , 3 steps forward, 1–2 steps back. Bitcoin is still moving in cycles Stage 2, Part 2: Parabola 3 steps forward, 2 steps back is abandoned. Without notice, is 3 steps forward, no steps back. The new normal Retail FOMO becomes a global phenomenon. Bitcoin’s price grows at a parabolic rate from this point forward. endorse ICOs, gush over altcoins. Hip-hop artists K-pop bands are at an all-time-high. Crypto-related Google searches and temporarily halt registration. Binance accounts are being sold on craigslist for Monero. Exchanges are overwhelmed by new account signups are scaling out, but are still net long the futures & derivatives markets. Institutional investors and smart money in the cryptocurrency adoption curve, and that price might never again go down. Experts speculate that we’ve reached an inflection point who sold in frustration after the last crash are now buying back in as price approaches its top. Retail buyers has been amazingly consistent cross-parabola. Historically, . (Put that in your back pocket). The timeframe for this last parabolic wave of buying all four times it’s lasted 5–7 weeks Stage 3: Smart Money Takes Profit Price crashes violently, about 25%. It tries and fails to retake the all-time-high. The parabolic trend is over. it’s a healthy correction and aren’t selling. Most retail investors think The altcoin market goes on an exponential parabolic bull run. Profits taken out of Bitcoin are put into altcoins. have been scaling out of their positions for many weeks, and are now net short the futures & derivatives markets. Whales and institutional investors This period lasts roughly 6–8 weeks. during this period did a great job. Anyone who sells in profit Cryptotwitter is bullish. Stage 4: Bear Market are followed by weeks of sideways price action. Sharp violent drops who haven’t been through a full market cycle fail to take profit, and are rekt. Retail investors is now at risk of selling the bottom. Anyone who bought the top agonizes over a trendline for months. Cryptotwitter who offer historically accurate price projections are in the court of social opinion. Bearish analysts eviscerated With each new low, insist that that only fools don’t and that a chorus of social media influencers price has just bottomed, buy the dip, alt season is just around the corner. whales shorting the futures markets, regulatory FUD, high-volume institutional market selling, bagholders exiting at support-turned-resistance, exchange hacks, ICO scandals, last month’s FUD repackaged and rereleased as this month’s FUD, and poorly-explained liquidity dumps somehow loosely and improbably related to Mt. Gox. Bullish relief rallies are met by happens suddenly, on high volume, triggering an impulse wave of stoplosses and panic selling. It appears as a long wick on the daily chart. The final drop Many retail investors have just sold the bottom. are available for a handful of hours. Prices that technical analysts have been salivating over for months where you live. Anyone who didn’t place buy orders sleeps through the bottom. This happens in the middle of the night ( ). You can view my buy orders here In the end, Bitcoin touches bottom roughly 80% below all-time-highs. This brings its retrace to roughly the same levels as all previous Bitcoin bear markets. Accumulation of Capitulation Our tour of Bitcoin’s market cycle is complete. Post-capitulation, the retail market will be processing shock and awe. The low volume weeks and months that follow are a time of opportunity for savvy retail buyers with fiat available on the sidelines. Bear market buying must be done strategically — I recommend ’s excellent tweetstorm on this subject. ( ) @TheCryptoFam Read it here. Bitcoin’s Market Cycle is the Cryptocurrency Investor’s North Star Knowing how to operate effectively as a crypto investor is predicated on awareness of one’s position in the cycle. Though awareness of one’s position is not a guarantee of profitability. Far from it. Just like following the north star doesn’t mean you’ll find your way. But awareness of the star’s presence paints a frame of reference on top of the world, one that makes a life or death difference if you’re adrift at sea. The metaphor obviously extends to your portfolio in a bear market. The Fifth Parabola Whenever we think about the future, it’s important to remember the one and only thing about the future we know for sure. Which is: we don’t know what’s going to happen. This forces us to think in probabilities. Which brings me to a hypothetical question. Picture a financial instrument: from its inception, it has done one specific thing, and done it cyclically, four times in eight years, at ever-increasing rates of scale. The question: over the next few years, what’s the highest probability scenario for that asset’s future? Do you think Bitcoin will doing the thing it’s done four times in a row? stop It could. That could happen. We have to acknowledge that. But is that the highest probability scenario? Absent poor fundamentals, an object in motion tends to stay in motion. No. the New York Stock Exchange announced it will offer cryptocurrency custodial services and a Bitcoin futures contract; Goldman Sachs announced it’s opening an institutional crypto trading desk, and spent $300 million to acquire Poloniex, a top cryptocurrency exchange; Japan, South Korea, Singapore, Switzerland and the UK continue to lead their regions in crypto-friendly regulation; Mastercard just filed a patent for a cryptocurrency fractional reserve system (what could go wrong?); the SEC continues to deliberate on a Bitcoin exchange-traded fund; and the Lightning Network continues to grow, having already made Bitcoin transfers between institutions near-instantaneous. And Bitcoin’s fundamentals have literally never been stronger: The highest probability scenario is that the market cycle repeats itself a fifth time. And that Bitcoin and altcoins go on another exponential parabolic bull run. (And crash afterwards.) So Position Yourself For It Now Now, and in the months that follow. As best you can. While prices are still low. The two most important skills to learn in preparation for the next cycle: Success can’t happen without it. Risk management. . Become a devoted student of this arcane, insanely relevant skill. Learn how to take profits during (and after) a parabolic advance (I am not a financial advisor, and this is not financial advice.) Follow me on Twitter: @ColeGarnerBTC
