The Crypto J-Curve By Felipe Olmo Fernandez
Out of all the theories above the crypto j-curve by Chris Burniske is by far the theory that describes and explains very well how these cryptoassets grow and gain value. Many cryptoassets show similar growth patterns. They are so recognizable that many people have found these patterns independently from each other. I chose to develop this theory because it is the only theory that offers some explanation to why and how cryptoassets grow. I firmly believe that cryptoassets are a completely new asset class that cannot be compared with other asset classes. This is why I prefer theories and models that are not based upon existing valuation methods.
The value of a cryptoasset can be separated into two different kind of values. There is the utility value and the expected future utility value, which in common language is referred to as the speculative value. The expectations may be very high for some cryptoassets leading to huge spikes in dollar value followed by huge dumps.
The distinction between these two values helps understand why cryptoasset prices move like they do. The utility value is the base value of the cryptoasset and it is consists of active users of the platform. The hodlers keep their assets locked up and by doing so they reduce the coin supply which in turn pushes the value up. Whenever there are improvements, new partnerships, new features or any big news a lot of speculation takes place. These speculators drive the price up until the price crashes. Successful cryptoassets will form new base values at higher prices than in previous cycles. This is because the user activity on the platform has grown and the number of hodlers keeping coins out of circulation have grown too. At this point, a full cycle is completed.
By analysing the charts of many cryptoassets, similar growth patterns can be observed. This is why I have drawn a chart of a full growth cycle. Figure 1 shows a full growth cycle of NEO. At that time NEO deployed successfully their blockchain using a new monetary system called delegated byzantine fault tolerance. Essentially NEO is a two-coin model in which hodlers of NEO receive passive payments in GAS (the second coin). The success was so immense that NEO has completed two full growth cycles in under a year. In this period NEO started at under 1$ and has grown to as high as 200$.
A full growth cycle can be divided in 12 different phases. Knowing in which phase a cryptoasset is in at the moment can be a very powerful tool.
Phase 1: the growth cycle starts with a steep increase in price. It is in the nature of cryptoassets to repeat these cycles, so this steep increase in price is usually the parabolic increase of the previous growth cycle. The growth accelerates as the top gets nearer, hence the term parabolic increase
Phase 2: the parabolic increase in price ends with a short and abrupt price crash. Usually this mini-crash lasts a day and the price can lose up to 50% of its value. The reason that the price can drop so low in such a short period has to do with low liquidity. There are not enough buy orders on the exchanges to buy all the cryptoassets at that price. Therefore, when a few whales start to dump their cryptoassets causing the price to drop, it forms a catalyst of panic where many people panic sell their cryptoassets by fear of losing all their value.
Phase 3: Almost instantly, after the mini crash the price starts to surge again. This phase is also a short phase that can last a day or two maximum. The reason of this price reaction is again due to the illiquidity of these markets. It is the opposite of phase two. Due to the sudden drop, the price starts to be attractive again and people start panic buying. The sell orders have not have the time to be placed causing the price to surge rapidly.
Phase 4: After the first rebound comes the actual crash. This phase lasts longer. In general a week or two. In this phase, a lot of negative press pushes the price down at a rapid pace. All the confidence and excitement from the previous parabolic rise are now transformed into doubt and deception.
Phase 5: at some point, the price will have dropped so much that all indicators are screaming oversold. This leads to the second rebound. During the crash, a lot of experienced traders and investors are waiting to see the bottom of the price. When the price stops dropping, all these traders jump in causing the price to rebound.
Phase 6: There is still some speculative value left in the cryptoasset and without significant news, this second rebound will not be enough to sustain further growth. The price enters a consolidation phase. This is the longest phase and in this phase, the price drops slowly. The extreme volatility is completely gone and the volume is at its lowest. In this phase, the price will slowly try to find a solid support line. This price level at this point contains mainly utility value. Almost all the speculation is gone.
Phase 7: The first break out happens when the solid support line has been tested several times. Smart investors invest in this period. The first break out is usually accompanied by big volume. This gives back some confidence in the cryptoasset.
Phase 8: The first break-out is often based on rumours. This is why the price does not continue to rise but instead forms a flag or triangle formation.
Phase 9: When the rumours are confirmed or some big new hits the markets the lift-off can begin. A huge spike in price signals the beginning of a new bull-run.
Phase 10: Many bull-runs happen in waves. Elliot-waves is a theory which describes such growth waves. Essentially the growth happens in three waves and the correction in two waves (phase 4&6).
Phase 11: Second stop of the bull-run
Phase 12: The top of the J-curve. This top usually lasts a couple of hours at the most. This is why it is almost impossible to sell at the very top, even for the most experienced traders. At this moment, a full growth cycle is complete and a new cycle can begin. Previous growth cycles will pale in comparison to next growth cycles, resulting in a never ending J-curve.
This repeating cycle is recognizable in many cryptoassets. Figures 2 and 3 show these growth cycles for Monero and Litecoin with each phase highlighted.
Sometimes they may repeat some previous cycles before continuing with their main cycle. A good example is the chart of Ethereum in Figure 4. After what appeared to have been a lift-off (phase 9) the cycle ended abruptly and phases 4 till 9 repeated themselves before continuing with the main cycle.
Bitcoin has these cycles on a longer time horizon. The chart of Bitcoin in Figure 5 has a 1-week interval, meaning each candle is equal to 1 week instead of 1 day. The different phases are very recognizable in this chart. I have excluded the last two growth waves because it would have distorted the chart.
I would love to hear your comments about how you guys think about about cryptoasset growth cycles. It is still early days for cryptoassets but more and more people are producing valuable content regarding cryptoassets every day. I hope that you’ve learned something by reading this.