An Introduction To Cycles

We’ve all heard of market bubbles. Even though there are a wealth of lessons to be learned from past bubbles it seems that market participants are destined to get sucked in each time a new bubble emerges.

A bubble is only one of many stages of the market cycle, and to avoid being caught off-guard, it is essential to know what the different phases of the market cycle are. An understanding of how markets work and how cycles develop, combined with emotional fortitude and perseverance will help you stay safe trading and investing in the cryptocurrency markets.

What Makes A Cycle?

Cycles span across all aspects of our lives. They come in many different forms and range from the very short-term, like the life cycle of an insect, to the cycle of evolution which takes millions of years to make even the tiniest of changes.

It does not matter which market you are referring to, they all go through the same cyclical stages, why? Because they all have one thing in common— human involvement.

Economist Amos Tversky and psychologist and Nobel prize winner Daniel Kahnemann were the first to challenge the accepted theory that humans were above all rational decision makers and as such the financial markets were an accurate reflection of all currently available price information. By doing this they pioneered the field of behavioral economics and have gone on to publish their theories and studies on systematic errors in human decision making. The root of these errors in judgment stem from cognitive biases, including loss aversion, recency bias, anchoring as well as the emotional tugs of fear and greed.

As a result of these emotional biases, most investors and traders fail to recognize that markets are cyclical, or are simply cannot control their emotions when they need to the most.

Another inherent challenge is the egotistical need for traders to “pick” the top and bottom which is almost impossible to actually do consistently. Therefore, simply understanding that cycles exist is not “the magic bullet”. You also need to be able to evaluate and make calculated decisions around where we stand in the current cycle and control your emotions if you want to maximize your investment or trading returns.

1. Accumulation Phase — Think Crypto Mid-2015