Understanding Cryptocurrency Market Cycles for Better Investments
Why Ethereum, Litecoin, and other altcoins drop when Bitcoin sets new highs, and how to take advantage of that
Don’t panic when your holdings in Ethereum, Litecoin, and other altcoins drop as Bitcoin goes on explosive runs.
When Bitcoin goes parabolic these coins tend to get left in the dust (more on that later).
There are several coins that correlate with Bitcoin, there are also several coins that conversely correlate with Bitcoin.
Which of the two they are depends on what market cycle Bitcoin is in. Therefore the key to a (relatively) safe trading strategy is understanding which coins fall into which category, and being able to identify when a new market cycle is starting.
Coins that are usually tied with BTC are Ethereum ($ETH), and Litecoin($LTC). You’ll notice that ETH and LTC have both seen some growth recently, as Bitcoin has climbed, so have they. This relationship tends to change when Bitcoin sets new all time highs.
The key to bringing in consistent profits is understanding how different coins relate to each other during different market cycles.
Then there are Altcoins
Altcoins are paired with BTC as well and when BTC is healthy, they can be healthy too. Altcoins and their relationships with BTC are much more complicated however because not all of them have proven themselves. Many of them have earned reputations as “Pump n’ Dump” coins.
Cryptocurrencies react in several different ways to Bitcoins price movement. When bitcoin finishes a meteoric rise like this for example: that’s the time I buy as many altcoins as I can. They’re typically at great prices due to money flowing out of them and into Bitcoin.
Let’s take a look at how different coins react to each others price movements, and figure out how to identify what part of Bitcoins market cycle we’re in — to maximize potential return.
Why Ethereum, Litecoin, and other Altcoins drop when Bitcoin hits new highs
FOMO (Fear of Missing Out)
I personally see it as sort of a rookie move but when Bitcoin starts to explode as it has (and seems to be continuing to do so), money floods out of other currencies.
Investors get FOMO and move all their money into BTC hoping to catch some of its meteoric rise.
The problem with that being that Bitcoin is erratic at best. It moves with high volatility and FOMO’ing into a trade is often a recipe for disaster.
There is a great beginner guide for cryptocurrency on Reddit. This segment from the guide goes into FOMO and the benefits and drawbacks it may have.
This goes against one of the most famous trading mantras of all time.
“The time to buy is where there’s blood in the streets.” — Baron Rothschild
The world has never seen a market go on an uptrend like this in the history of financial markets.
Veteran Trader Peter Brandt recently took to Twitter to discuss how historic Bitcoins trajectory really is.
With that in mind, you have to understand that seeing a financial asset that defies rationality, might make you make some irrational decisions. Like taking a loan out to go all in on some altcoin that a Twitter personality told you would double in value.
Regardless what your opinion is on BTC vs all the other cryptocurrencies out there, you can’t deny that BTC is by far the most popular and well-known coin.
Hell, I can use the words “Bitcoin” and “Cryptocurrency” with most people and they think it’s the same thing.
This means that when new money floods into the market, which there has been a HUGE influx of in the past few weeks, it’s more than likely to put their money into the coin they’ve heard of the most.
Similarly, Ethereum and Litecoin also benefit from brand recognition, although
How to take advantage of that — Using market cycles in your Investment strategy
We’ve discussed a few different scenarios, let’s recap. It should be noted that all of these market scenarios are only apply to bull markets.
Scenario 1: Steady Bitcoin Growth — Steady Altcoin Growth
When Bitcoin sees steady growth (steady for Bitcoin is erratic compared to any other financial asset, it tends to be a rising tide for all cryptocurrencies.
We’re experiencing this right now. Bitcoin recently surpassed $10,000 and Ethereum and Litecoin are slowly creeping their way up as well.
When the market is seeing steady growth in the top market cap coins, look for coins that are lagging behind. See where Litecoin and Ethereum were in relation to Bitcoin the last time Bitcoin was at this price point — which has more upside?
Scenario 2: Parabolic Bitcoin Growth — Altcoins Decline
Whenever Bitcoin goes parabolic, it leaves everything else in the dust. Parabolic growth is when Bitcoin rises along a Parabolic Curve.
“The Parabolic Curve is probably one of the most highly prized and sought after pattern. This pattern can yield you the biggest and quickest return in the shortest possible time. Generally you will find a few of these patterns at or near the end of a major market advance. The pattern is the end result of multiple base formation breaks.” — Chart Patterns
Parabolic curves are great when you’re in the asset that goes Parabolic. They’re absolutely terrible for other assets in the market. When Bitcoin goes parabolic, people get a strong dose of FOMO and pretty soon they start selling their altcoins and investing that capital into Bitcoin: in hopes that they can catch the remainder of the parabolic curve.
This means that altcoins lose a ridiculous amount of value.
Scenario 3: Bitcoin Stagnates — Altcoins Grow: “Alt Szn”
After a parabolic curve, Bitcoin tends to stagnate. This phase is called “accumulation”. There isn’t enough upward or downward pressure to create volatility, investors get bored, and altcoins start to rise.
When investors get anxious about leaving their capital in Bitcoin, or even when they’re just bored from the lack of volatility, altcoins see a rise in value.
This is due to Bitcoins stagnation and the fact that after the last parabolic curve, Altcoins have been beaten to hell. At this point, they’re probably extremely low in price, and possibly extremely undervalued.
If you can train yourself to identify what part of the market cycle we’re in, you’ll be able to identify consistent trading setups to lock in relatively consistent returns.