Market cycles in crypto and how to navigate through the euphoric booms and downswing busts

The crypto market is like a roller coaster, if you have been following the space, you know that prices are very volatile and people’s sentiment changes a lot over time. One year, prices are soaring high, the industry is booming, and everyone is going to get rich. Another year, prices are depressed, no one wants to talk about it, and crypto sounds like the stupidest idea ever.

The principles I am about to share in this article helped me navigate well the ups and downs in the last 7 years. Thanks to them, I was able to time the market successfully, buying during 2018 and 2019 when the prices were low, selling during 2021 when the prices were high and buying again during 2022 and 2023 when the market was cheap again.

While each cycle in the crypto market is unique and difficult to predict, there are timeless principles that can help us better understand market behavior. Some of these principles not only apply to the cryptocurrency market but to all markets in general, as we have seen similar patterns repeated throughout history. By understanding these principles, we can gain insights into the psychology of market cycles, and use this knowledge to make better decisions about our investments.

My goal is to share these principles and lessons so that you can navigate the crypto market with greater confidence and achieve greater success. I hope that they prove to be as useful to you as they have been to me.

The anatomy of the crypto cycle

There are three distinct phases in the crypto cycle: 1) The boring low, which is preceded by 2) the boom and peak, which continues with 3) the bust. After the bust, we get into a new boring low and the cycle repeats itself again.

From a price point of view, each phase is characterized by:

1. The boring low is a period in which prices doesn’t seem to go anywhere, the market is not booming nor busting.
2. At the boom and peak, prices start going up gradually and then exponentially until reaching a top.
3. At the bust, prices go down until they reach a plateau where it sits the next boring low.

Within every new cycle:

• The prices at the boring low are an order of magnitude higher than the previous boring low.
• The highest price at the top of the boom and peak period is an order of magnitude higher than the previous top at the previous boom and peak period.

While it is not apparent in the chart, busts tend to occur over a longer time frame than booms and peaks. Similarly, boring lows typically develop over a longer time frame than busts.

Past market boom and busts in Bitcoin and Ethereum

If we take a look at the price chart of almost any crypto, we can quickly identify this pattern. To illustrate my point, I want to show you the price charts of bitcoin (from 2013 to now) and ether (from 2015 to now). You can observe how the price movements fit in the model I just described.

Bitcoin price chart (2013-2023)

Ether price chart (2015-2023)

The different phases of a crypto bubble

Now, let’s get into the details of the different phases of the cycle. To better understand why these blowing bubbles take place, I want to dive a little into the psychology of the masses, which is what drives this frenzy behavior. 

The boring low

The boring low is a period in which people are not excited. Crypto has little attention and some would even call it “dead” after being 80% off the high from the previous cycle. Most people who invested during the boom have lost faith in the space, their view which was first optimistic change to pessimistic, and they find arguments to rationalize their negative perspective like “the macroeconomic outlook is very bad”, “the CBCDs are coming” or “the government will ban crypto”.

While these arguments are valid and unfavorable outcomes are possible, the negative sentiment expressed by those who keep repeating them seems to be motivated more by price action than by objective analysis or logic. When the prices are soaring high, some of these arguments are equally valid but no one brings them up because everyone is excited. The positive points are augmented while the negative ones are ignored.

During this period, prices are moving sideways in a lateral range. Although when looking at a price chart the line may look flat, the market can be quite volatile. If you zoom in in this time interval you will notice several 50% drops and 100% gains. Compared to the big swings of the boom or bust periods these movements may seem tiny so you have to scale appropriately the graph to appreciate them.

While price rallies in the booming period were generally met with optimism and enthusiasm, the boring low tends to generate a more negative outlook, with many people viewing upward movements as temporary and likely to be followed by a decline. As a result, once the boring low ends and the booming period begins anew, many investors fail to recognize the potential for prices to rise significantly until it's too late to fully capitalize on the trend.

The boom and peak

The booming period begins when people start recognizing that the current price rally is different. It starts to become obvious when we surpass the top from the previous cycle. For example, in 2021, when bitcoin went beyond its all-time high of $19,000 set in 2017, the market began to experience a frenzy of activity and interest.

At that time, we enter into a self-reinforcing loop in which 1) prices go up, 2) people get richer, then 3) people become excited about crypto, so 4) they buy more tokens and that drives prices even higher.

The negative mindset from the boring low shifts into a positive one. Investors realize the potential of crypto, but they make projections that are not realistic. In the same way they were too pessimistic in the boring low, they get too optimistic during the boom.

Then people start to think “crypto is the financial system of the future”, “blockchain is a disruptive technology that will change everything”, “bitcoin is going to surpass gold as a store of value”. And again, there is nothing wrong with these ideas, I do think there is a high chance that they become true, the problem is that people start believing they are going to happen sooner than they probably will.

When we experience a rapid price increase in a short amount of time, people tend to think we could maintain that same rate of growth for longer than it is realistically possible. If from 2020 to 2021 the market cap of bitcoin went up from 100 billion to 1 trillion, that’s a 10X growth in one year. It is very unlikely that we are going to maintain that same rate of growth in the short term (compounded over time, with an annual growth rate of that magnitude, bitcoin would reach 100 trillion of market cap in just three years!).

However, on many occasions, people during the boom feel like we are going to continue on that trend forever, while it is more likely that it will stop at any moment soon. When we have a rapid upswing in anything, it will probably experience a downturn shortly. As the Law of Mean Reversion states, over time, prices tend to move back towards their long-term averages. This means that after experiencing a period of unusually high returns, in the next period, the price will likely move to a point where returns are closer to the long-term average.

The top of the boom

The market works with forward thinking. Especially in crypto, the price of a token reflects future expectations more than the current fundamental value. The top of the boom is a time when the expectations are the greatest. At that moment, by definition, everyone thinks that the price will go up more. Ironically, that's the worst time to invest because, as we know, the price will start going down from that point on.

At the peak, everyone is predicting that we will reach a higher top. In 2021, when bitcoin was at its highest point at $69,000, investors were projecting that it was going to touch 100K soon, so instead of selling at that point, they hold with everything because they thought the price was going higher.

The bust

At the beginning of the bust, people are still excited even though we may be 20-30% down from the high. People's emotions work with delay with respect to price. After the first drop, the sentiment is still positive, people’s take is that the downturn is temporary and that the bull market will resume. It is after some period of time that prices keep falling when they realize we may be in a bear market and that the boom has ended. As always, they notice when it is too late and prices

have already gone down a ton. They miss the opportunity to sell at the appropriate time when prices are high.

When the negative sentiment takes hold, the euphoria of the boom gives way to the fear of an impending bust, creating a downward spiral in which 1) the prices go down, as a result, 2) people realize losses in their investments, so 3) people get a pessimistic view about the market and then, 4) they either stop buying new tokens or sell the ones they have.

In the same way that during the boom everyone was thinking that the price was shooting higher, through the bust they think it will go lower. People start getting a sentiment of fear about the market. They think the situation is just about to get worse and they rationalize that mood with comments like “crypto is going to disappear”, “bitcoin will go to zero”, “All crypto exchanges will go bankrupt”.

It is true though, that during the crypto winter, only the projects of quality and strong fundamentals survive. Most of the tokens, and especially the smaller ones, don’t make it to the next bull. A lot of projects get financed during the boom thanks to the abundance of money flowing into market, but when the winter comes and there is a lack capital getting in, most of these projects fail.

Similarly, coins that were very popular in one cycle become less important in the next. You can easily see this by looking at the ranking of the top coins based on their market value in each cycle. Except for bitcoin and ether, the coins in the top positions are often replaced by different ones in the next cycle.

If you have been following the market since 2013, you would have noticed the emergence of new projects, as well as the decline of previously significant ones, with some of them becoming completely unknown. For newcomers to the market, many of the names of the top coins in 2013 and 2017 are unfamiliar to you.

Strategies for navigating the market cycle

Now that we know how the typical market cycle works, let’s get into how to navigate it successfully. There are two important things to keep in mind in order to make the best decisions:

• It's very difficult to know with accuracy at which stage of the cycle we are in right now. You can make a guess by looking at the price chart and considering the psychological factors I mentioned earlier, but predicting where the price is moving in the short term is a complex endeavor.
• Our goal is to estimate the current state of the market and allocate capital accordingly. We should have a portfolio that is prepared to handle the different possible scenarios that may play out, and that will do fine in case the market goes either up or down.

Manage risk by adjusting your portfolio accordingly

For managing risk effectively in our portfolio, we must have a portion of it in cash (US dollars):

• With crypto, we have exposure to the upside. If the market goes up, we are enjoying the gains.
• With cash, we are both 1) Protected from the downside and 2) Ready to take advantage of a market crash because 1) The value of cash is constant regarding of what the market does and 2) When the market goes down, we can use our cash to buy crypto at cheaper prices.

In every moment, we should aim to have the right balance between how much money we have invested in crypto and how much we have in cash. Ideally, before the boom, we should aim to have as much crypto as possible so we have the most exposure to the upside. In the same fashion, at the peak of the boom, we should aim to have a good quantity of cash to be protected from the coming bust and to be able to buy crypto at cheaper prices when the boring low begins.

When to buy and when to sell

In order to achieve this optimal allocation, we should sell crypto during the boom period and buy crypto again during the boring low.

Seeing it at the price chart, the trade should look like this:

As you can observe, I have marked four key different moments:

1. First, at the beginning of the boom, we should not buy crypto as prices are getting expensive.
2. Second, when we are at the parabolic rise, we should sell some, not all, of our crypto tokens.
3. When we are approaching the boring low, we should start buying crypto again and accumulate as much as possible for the next boom.
4. When the boom of the next cycle begins, we stop buying, just as we did in point 1.

Don’t try to spot the all-time high and the ultimate low

As you noticed at the previous chart, I haven’t marked a single point to buy and neither a single point to sell. Rather, I have bounded two areas that I have called “Accumulation time” and “Selling time”.

Like I said before, it is very difficult to predict price action in the short term. For this and other reasons I will explain later, it is better, instead of buying all at once, buy gradually smaller quantities through time. Equally, rather than selling your whole position at once, it is better to dollar cost average sell within a set timeframe.

Before moving on, to ensure you have the right perspective, I want to highlight of how unlikely is for anyone to sell at the all-time high and to buy at the ultimate low. People tend to measure the potential gains of an investment referencing the bottom and the top of the market. For example, they would say “Ether touched $80 at the low and then it went up to $4800, that’s a 60X return!”. In theory sounds nice, but in practice how many people put all their money at the rock bottom and then sell it all at the peak? Almost no one.

To give you a sense of scale, during the boom and bust of the last cycle:

• Ether’s price touched $4800 for only a few hours on November 9th, 2021.
• From November 3rd, 2021, to November 16th, Ether was above $4500. You had a 2-week window for selling it beyond that price.
• From the end of October 2021 to the end of December 2021, Ether was beyond $4000. You had approximately two months to sell above that price.
• From the beginning of August 2021 to the end of January 2022, Ether was beyond $3000. That would have given you a little less than six months to sell above that price.

With these time frames in mind, it is realistic to think that, if you were prepared for it (most people aren’t), you could sell Ether in the $3000s, some around $4000, if you were lucky, a bit near $4500. At $4800, it would have been very unlikely.

On the other hand, during the bust and boring low from the previous cycle:

• From August 2018 to August 2020, the price of Ether was fluctuating between $334 and $84.
• In that period, for a cumulative time of 14 months (summing up three separated time intervals), Ether was below $200.
• You had twelve consecutive days in which Ether’s price was under $100 (From December 6th to December 18th 2018)

When we compare, we can see that low prices tend to stay down for a longer time compared to the duration of high prices at the boom. This means you have more time to buy crypto at low prices compared to selling them during the market boom. While this might suggest that it's easier to buy at the bottom than sell at the top, the truth is that during the boring low, only a tiny group of people are paying attention to the market and are motivated to make purchases.

Do not sell all your position at once

At the boom, exiting the market at multiple points is preferable to making a single large sell in one go. This way, you are avoiding the risk of getting completely out of the market too early.

For this reason, it is a better approach to sell a portion of your holdings rather than selling everything. By doing so, if the market continues going up, you can still benefit because you have retained some crypto in your portfolio. This enables you to participate in further price increases and earn greater profits.

How to sell in stages during the boom

In order for you to execute correctly this gradual exit out of the market, you must, beforehand, have two things clear in your mind:

1. Decide what percentage of your portfolio you want to be in cash at the peak of the bull.
2. Estimate when might be a good time to start selling (We will discuss how to evaluate whether the market is getting expensive or not later in the article).

As we explained earlier, at every moment, you should reflect on how much you want to have in cash compared to crypto. You should determine what is the correct balance between these two depending on the market conditions.

At the top, you want to have a higher percentage in cash than at the boring low. For example, to me, 40% in cash at the top feels like the right quantity, but for you it could be a different number.

Crypto’s value doubles

To figure how much cash could be right for you, consider the following factors:

• Your investing horizon and for how long you plan to hold your crypto tokens. If you consider the tokens you have to be long term investments and you are sure that they will have a much higher value in the future, then you may want to sell less of them.
• Whether you may need to use your cash for your personal expenses or not. If you anticipate that you may need that cash for your living costs, then you should consider selling a bigger portion of your crypto.
• You have a high paying job or a substantial recurring income. If you have a prominent stream of income coming in every month, then you could consider not saving much cash because you may regain it shortly.

Sell in stages by rebalancing your portfolio periodically

Let’s imagine you are in the following situation:

• Your total portfolio value is $10,000.
• You are in the middle of the boom period.
• You decide that the right portfolio allocation, based on the market conditions and your personal situation, is 60% in crypto and 40% in cash.

In this case, if your portfolio is balanced accordingly, you will have $6,000 in crypto and $4,000 in cash.

Now, let’s suppose that the market goes up 100%. The crypto that initially was worth $6,000 is now worth $12,000.

As you can notice, the proportions got out of balance. Now, you have an allocation of 25% in cash and 75% in crypto. In order to get back to the original portfolio allocation, you have to sell some crypto for cash. To be exact, you need reallocate 15% of your portfolio’s value by extracting it from crypto and putting it in cash.

You do the math and the numbers are that you have to sell $2,400 worth of crypto in order to get back to the original ratio of 40% cash and 60% crypto.

Imagine that, later, the market goes up again. What do you do then? You repeat the same operation. Just rebalance your portfolio once more by selling some crypto and allocate it into cash.

If you reiterate this pattern while the market is trending upwards, you accomplish the two goals we initially set:

1. You are selling gradually your crypto at multiple points during the boom period.
2. You will end up with the right balance between crypto and cash at the peak of the boom.

One detail to keep in mind when implementing this strategy is to rebalance the portfolio only when the percentages have significantly deviated. Constantly making small adjustments to the portfolio is unnecessary. It's not necessary to maintain perfect alignment of the proportions at all times. For instance, if the target ratio is 40/60 and the current allocation is 37/63, just leave it as is and refrain from making changes until the deviation becomes more substantial.

Similarly, allow for a time gap between portfolio operations. If you have sold a portion of your crypto one day, avoid rushing into another sale the very next day. Give it some time and create a gap between these transactions.

How to dollar cost average buy during the bear market

Similar to how we sell in stages during the boom, during the bear market we want to spread out our purchases over a period of time.

We should start buying when things indicate that the bull market has probably ended. You can estimate that the boom period has finished when prices are down by a good amount from the all-time high. For example, anything below 50-70% from the top is considered a significant drop.

You should also pay attention to the psychological factors that drive people’s behavior at that time. Remember the typical emotions that take place during the bust: anxiety, fear and despair.

When we start buying, it is important to have two things clear in advance: 1) How much we want to buy, and, 2) over what period of time.

How much cash should we invest

You must decide how much cash you want to end up having by the conclusion of the boring low. This number, again, depends on your personal situation (your monthly income, living expenses, etc.), but you should strive to have as little as cash as possible and as much crypto as possible.

If, in the last example, the appropriate ratio of cash and crypto at the peak of the boom was 40/60, at the end of the boring low a suitable allocation could be 10/90 or even 0/100, having most of the cash or all of it invested intro crypto.

What is the right timeframe to be executing the purchases

The objective is to start buying crypto towards the end of the bust and continue purchasing throughout the mid-phase of the subsequent boring low period. We want this time interval to be early enough to get fully invested before the next boom begins but not too early that prices are still expensive from the last cycle.

The period for accumulation, drawing from historical cycles, I recommended to be around 10-12 months. This time frame is shorter compared to the typical length of previous boring low periods. Let's consider them:

• 1st Boring low: From November 2011 to February 2013 (15 months)
• 2nd Boring low: From January 2015 to May 2017 (28 months)
• 3rd Boring low: From July 2018 to September 2020 (26 months)

To mitigate the risk of insufficiently purchasing crypto before the start of the boom period, we opt for a shorter time interval for buying compared to the average duration of the boring low phase. Also, throughout the entire boring low phase, prices generally remain within a similar range. Therefore, extending the time frame for buying crypto wouldn't necessarily result in lower prices.

How to buy strategically within the accumulation time

Once we have determined the total cash amount we plan to invest in crypto and the duration over which we will make these purchases, we can calculate the monthly amount of crypto to buy. This is done by dividing the total amount by the number of months. For instance, if our total investment is $15,000 spread over 12 months, that would be $1,250 per month.

Rather than randomly selecting a day in the month to make our purchase, we can improve our average cost by buying when prices are considerably lower. For example, if we observe several consecutive days with a significant market decline, such as a 10-20% drop, that could be an opportune time to make our monthly purchase.

Additionally, we can increase our purchases during periods of unusual rapid downturns. If the price of crypto has dropped by 50% within a month, it’s a good idea to allocate more funds than originally planned for that month. Such a significant downturn within a short timeframe is uncommon, so it could be an opportunity to utilize the reserved funds from the following months and make additional purchases at the current lower prices.

How to know when prices are expensive: Some key indicators

Here is a quote from Howard Marks’s book “The Most Important Thing: Uncommon Sense for the Thoughtful Investor”:

Investing successfully requires the ability to look at the crowd and say, 'I don't want to be a part of it.' This is because the crowd is wrong at extremes. (...) We need to take the temperature of the market, gauge the prevailing sentiment, and assess whether it is overly optimistic or overly pessimistic. It is in these moments of extreme sentiment that the best opportunities arise for the patient, disciplined investor.

What I want to provide you in this chapter are some key indicators to “take the temperature of the market” so you can assess whether the temperature is hot, and, therefore, resist the temptation to buy in a moment when prices are expensive. Furthermore, as explained earlier, you should use these times to sell some of your crypto in case you have a sizable position.

Everything is up a lot in a very short time frame

The first thing you can look at is the price chart. Scale it appropriately so you can see a time period of 3-5 years. How does it look? Considering the archetypical market cycle, at which phase could we be right now?

If the line looks relatively flat and then moving upwards, we might be in the booming phase. If the price seems to is going up parabolically, at a rate that is unsustainable, we could be near the top. Remember that nothing keeps going up indefinitely.

Crypto is constantly in the news and social media

During the boom period, crypto becomes a hot topic in the media. News outlets like CNBC regularly discuss the price of bitcoin and share stories of people who have made a lot of money from crypto investments. Celebrities also chime in, sharing their thoughts on crypto and endorsing their favorite tokens.

Social media platforms, such as YouTube and Instagram, are inundated with content related to cryptocurrencies. You come across a constant stream of videos discussing the best cryptocurrencies to invest in at the moment. It can be amusing to see clickbait titles like "Top 5 cryptocurrencies to invest in March 2022," "Token of the month, REVEALED," or "URGENT: Do not miss this coin before it’s too late" What's even more entertaining are the thumbnails accompanying these videos. You notice that many of them feature individuals with wide-open mouths and exaggerated expressions, attempting to convey an intense excitement.

Discussions about price predictions are also very common. Many people engage in conversations about where the price of Bitcoin might be heading. Questions like or "Will bitcoin reach 1 million dollars?" or "Will bitcoin touch 100K by the end of the year?" are hot topics during the bull run.

A practical method to gauge the level of attention that cryptocurrencies are receiving is to use Google Trends. By searching for keywords such as "bitcoin" or "cryptocurrencies," you can view a chart that displays the popularity of these terms on a scale of 0 to 100. You'll notice that the moments of highest popularity align with the market reaching its peak prices.

New people enter the market

Another thing that characterizes the boom is the influx of newcomers into the market. People who have never invested before become interested in cryptocurrency.

You hear regular folks talking about crypto in everyday places like streets and bars, sharing their opinions and discussing their recent investments with friends and family. If you've been in the market for a while, you'll notice the change from the quiet period of the boring low to suddenly being approached by many people seeking advice.

There are three different phases within the boom according to the kind of people that get involved in crypto investing:

1. First, only the smart people, who are familiar with the industry, are invested in the market.
2. Second, the general public get noticed about crypto and start investing in the market.
3. Third, the least sophisticated individuals with a poor education, not only are heavily bought into the market, but are also making money.

As you can imagine, the first and second phases occur during the early and middle stages of the boom period, while the third phase occurs towards the end and at the peak of the boom.

People try to find the next big thing

It is typical at the boom to see a wide variety of small coins experience significant price increases. While in the bear market, the focus is mainly on larger cryptocurrencies like bitcoin and ether, in the bull market, there is a surge of interest in lesser-known crypto projects. Some of these smaller coins can undergo unprecedented growth, multiplying their value by large multiples in just a few weeks (sometimes 20, 50 or even 100X price increases). This attracts investors who are enticed by the idea of making substantial profits in a short period of time.

Investors often believe that if bitcoin could go from being worth just a few dollars to tens of thousands, new tokens released today have the same potential for growth. However, it's important to recognize that these smaller tokens carry higher risks compared to more established coins like bitcoin and ether. While they may offer greater upside potential, they also come with a higher likelihood of failure. Most of these projects do not succeed in the long run and end up becoming worthless.

During the bull market, excitement and optimism tend to overshadow the risks associated with these smaller tokens. Investors become more focused on positive expectations rather than sound financial reasons, leading to heavy investments driven by speculation rather than solid fundamentals.

Compounding losses and why holding through the bear market requires endurance

Bear markets can be challenging and test the patience of investors. The continuous decline in prices can create a sense of significant loss and frustration. It's important to understand the math behind percentage changes to avoid misconceptions.

For instance, when something experiences a 50% drop in value, it may seem logical to assume that to reach a 75% drop, only a 25% decline is needed. However, this is incorrect. To achieve a 75% drop, another 50% decrease is required. The relative percentage change of each individual drop may appear larger than the overall drop from the market's peak.

To illustrate further, a decline of 87.5% would necessitate three 50% drops, while a decrease of 94.75% would require four 50% drops.

It's important to have a clear understanding of the actual percentage changes to develop a proper sense of the scale of relative price movements.

The correct mindset to have while holding crypto for the long term

To handle the ups and downs of the crypto market, it's important to have the right mindset. Don't get too excited when prices are high or lose hope when they drop. Instead, think long-term and focus on the potential of your investments over the next five years. This will help you not get too caught up in short-term price changes.

By following the portfolio balancing strategy I explained earlier, you can be happy regardless of whether the market goes up or down. If it goes up, you make money, so that's a reason to be happy. If it goes down, you can use the cash you saved to buy crypto at lower prices, which is also a reason to be happy. This way, you can maintain a positive mindset no matter what the market does. It will help you stay calm and make better decisions.

Another thing to consider is that when a coin is down by, let's say, 50% from its highest price, if it goes back up to that level, you would double your investment. If it's down by 80%, reaching the previous high would mean making five times your investment. If you have a good coin that participates in the next market upswing, its price could surpass the previous high and increase even more. That means there's potential for big profits.

Closing thoughts

I hope this article enhances your understanding of market cycles in crypto. Throughout the article, we have examined common patterns of ups and downs, providing valuable insights to help you identify your position in the market, anticipate what may lie ahead, and make appropriate adjustments to your portfolio.

We have explored a practical strategy that enables you to capitalize on low prices and sell at high prices, taking advantage of the market situation. By effectively managing risks and uncertainties and preparing for various scenarios, you can navigate the ups and downs with greater confidence.

Additionally, I have shared tips to cultivate the right mindset throughout the entire process, enabling you to maintain a positive and calm outlook regardless of market fluctuations. This mindset will give you a competitive edge over other investors who may be swayed by momentary emotions and make hasty decisions.