The Market Cycle

Pablo Lema
Nov 21, 2018 · 3 min read

There is a cycle to everything in life, and like most things, it is important to understand that these cycles create opportunities as well as risks. The market is no different. I would like to draw your attention to two interesting facts: First, that market cycles can only be identified after they have been active for a statistically significant period of time. You can not tell if you are in a Bull or Bear market, moment to moment. And second, that the market cycles endlessly, there is no such thing as a permanent Bull or Bear market.

This first characteristic has an interesting practical application, it suggests that you can not truly time the market. You can’t accurately say “We are in a bear market so I better sell some cryptocurrency before it goes down some more,” for all you know, you may actually be at the beginning of a bull market. It is impossible to tell, moment to moment, what type of market we are in. We have only say that for X period of time in the past, we experienced a Bull or Bear market.

Lets now discuss the market cycle. As I write this article, Bitcoin is down roughly 75% from peak and Dash is down over 90%. People are exiting at large losses, I personally know traders who have taken hits in the hundreds of thousands of dollars and they are selling their cryptocurrencies as fast as possible, they see a sinking ship. But as we have already outlined, it is damn near impossible to know whether the ship is still sinking or not, moment to moment. So these investors may be jumping off at precisely the wrong time.

There is often little connection between the change of market cycles from bull to bear or bear to bull, with any obvious or statistical catalyst. Cryptocurrency markets are especially fickle and resistant to traditional forms of analysis. The old statisticians inside joke that “A butterfly flapping its wings in New Mexico can cause a hurricane in China.” seems to be a fitting analogy, the most random of events can precipitate a crypto market shift, at any moment.

As the market begins to turn however (as it inevitably must), the ship will slowly drain and reach new heights. The point behind this little story is that, although we can not be sure where the market will end up, perhaps now is not the time to sell your crypto assets, but to acquire more. We are looking at a fire sale in cryptocurrencies, panicked sellers are screaming “everything must go!”. This is the right time for an enlightened operator, one who understands that bear markets don’t last forever, to start accumulating cheap assets.

Not any cheap asset of course, high-quality cheap assets. We have discussed crypto selection previously so I will not go into it here, suffice it to say that a quality asset at 20USD is a quality asset at 1USD and vice versa. Price does not generally make a low quality crypto asset a high quality one either. Look at it this way: what has changed from when you were salivating at buying Dash at 1500, or Bitcoin at 20,000? It is the same team? Is it the same roadmap? Is the underlying technology being actively developed just the same? If it is, it’s an assets you want, the lower price is a bonus. If the asset was bad to begin with, even a steep price decline should not lure you in, barring exceptional circumstances.

Always remember that the market cycles, up and down, forever. As markets mature, these cycles may become more entrenched, but they are always there. It is also important to understand that it is near impossible to tell which part of a market cycle we are currently in, so your investment decisions should be based on quality considerations, as opposed to bull versus bear considerations.

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Data Driven Investor

from confusion to clarity, not insanity

Pablo Lema

Written by Pablo has been working in and around virtual currency since early 2006

Data Driven Investor

from confusion to clarity, not insanity

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