The cryptocurrency market is an extremely dynamic environment that is subject to cyclical changes in value. Investor behavior plays a key role in shaping these cycles. This article will look at the basic psychology of the cryptocurrency market cycle, analyzing the main phenomena and strategies that determine price movements in this market.
Phases of the cryptocurrency market cycle
Accumulation
In the Accumulation phase, cryptocurrency prices are low, and investors with a lot of capital start accumulating assets in anticipation of future price increases. This is a period with low trading activity and minimal media attention.
Rise (Markup)
The accumulation phase is followed by a surge in prices, often accompanied by intense investment activity and euphoria in the market. Investors then enter the market under the influence of FOMO (Fear Of Missing Out), fearing that they will miss the opportunity for large profits.
Distribution
In the distribution phase, characterized by intense trading activity, investors with a lot of capital gradually begin to sell their assets, causing prices to gradually fall. Seasoned investors, however, may continue to buy, ignoring signals that the trend may reverse.
Decline (Markdown)
In the decline phase, there is a gradual decline in prices, leading to panic selling by investors who fear losing their investments. At this point, FUD (Fear, Uncertainty, Doubt) is prevalent, exacerbating price declines.
Cryptocurrency market psychology
Market psychology is based on the premise that movements in the markets are the result of participants’ emotions. Behavioural economics studies these factors, and market sentiment reflects investors’ general opinions about the direction of price movements. Positive sentiment leads to rising prices (bull market), while negative sentiment leads to falling prices (bear market). The theory suggests that asset prices adjust to investor sentiment: price increases result from improved sentiment, which increases demand and decreases supply, while price declines result from negative sentiment, which decreases demand and increases supply.
How do investors use market psychology?
Investors use market psychology to make investment decisions by analysing the prevailing mood of the markets. Understanding market psychology helps traders identify optimal times to enter and exit investment positions. Typically, the greatest financial opportunity for investors occurs when the market panics, when asset prices reach local lows. On the other hand, the greatest financial risk occurs when traders become overconfident in their positions, which usually coincides with a moment of euphoria in the market.
Therefore, experienced traders follow the market mood, trying to recognize the different stages of the psychological cycle of the market. The optimal strategy is to buy at the moment of market panic, when asset prices are low, and close positions at the moment of euphoria, when prices reach high levels. However, finding the ideal entry and exit points is typically difficult, as what may appear to be a local bottom can be quickly broken, leading to further price declines.
The main psychological plays in the cryptocurrency market
Hodl (Hold On for Dear Life)
A strategy of holding cryptocurrencies in a portfolio despite short-term price fluctuations. Investors who believe in the long-term potential of the cryptocurrency market often use this strategy, ignoring short-term price movements.
FOMO (Fear Of Missing Out)
A strong impulse that causes investors to enter the market, fearing to miss out on the chance for big profits. This is frequently caused by sudden price spikes that cause panic among investors who fear they will miss out.
FUD (Fear, Uncertainty, Doubt)
A phenomenon accompanying the cryptocurrency market that aims to spread fear and doubt among investors, leading to negative sentiment and increased selling.
Summary
Most experienced traders and investors agree that market psychology has a significant impact on prices and market cycles. Although the theory of market cycle psychology is widely known, its practical application can be a challenge. Regardless of investment preferences, every investor should try to understand the psychology of the market and be aware of their own emotional reactions. That’s why professional investors always try to keep their distance from the general mood of the market, whether we’re talking about the tulipomania of the 17th century or the dot-com bubble of the 1990s.
