Original source: https://www.coinlive.io/tutorial/what-s-a-bitcoin-market-cycle-and-why-should-you-care
Decoding the market sentiment is of vital importance to help you stay in constant tune with the market and as a result, adds to the odds of being a profitable intraday crypto trader.
However, the most cardinal component of all is knowing under what context we are trading crytos. Are we in a Bitcoin or an Alts cycle? In other words, is the distribution of market capital determined by the price behavior in Bitcoin or are the Alts complex detached and uncorrelated from the price dynamics in Bitcoin?
Getting the right context when trading cryptos will help you navigate the space with the right knowledge base to make the right decisions, with the certainty that you are reading the markets correctly. Note, in this first tutorial, we will only focus in Bitcoin cycles, which can take place under a bullish or bearish trend in total market capitalization.
Let’s start. First of all, your backbone must always be the Percentage of Total Market Capitalization (Dominance) Chart via www.coinmarketcap. com .
Once you have it, we can start to analyze certain tendencies, which we will then combine with the Total Market Capitalization and Total Market Capitalization (Excluding Bitcoin) to help us decipher under what market context we are trading.
Bitcoin Cycle in a Bearish Market Capitalization Trend
Under this scenario, the Alts complex trade tightly correlated to the price action in Bitcoin.
It occurs when we go through a period of liquidation in the crypto market as confidence evaporates, which leads to traders and investors diversifying away from Alts, perceived as a riskier investment, and resort back into the safe-haven appeal of Tether and to a lesser extent Bitcoin (as the legitimate base crypto).
Under this environment, one can take Bitcoin as a barometer to measure the market pulse and whether or not opportunities can be found to pick up cheap Alts should Bitcoin show a recovery attempt. It’s in this period of a Bitcoin Cycle that you want to pay very close attention to the price action of Bitcoin when trading Alts. Note, under such period, the falls in Alts tend to be more accentuated than in Bitcoin.
How to analyze the charts to determine a Bitcoin cycle? The first tip is to compare the Total Market Capitalization vs Total Market Capitalization (Excluding Bitcoin) . If one chart is a similar or exact replica of the other, as illustrated below for Jan – March 2018, that’s a clear sign of a Bitcoin cycle. Remember, the main characteristics are that Alts will be strongly correlated to Bitcoin, which is unequivocally the case in the example below.
Bitcoin Cycle in a Bullish Market Capitalization Trend
You may wonder, can the crypto market be in a Bitcoin cycle while in a bullish environment? The answer is Yes. It can happen either when Bitcoin is on a strong trend as in Nov 2017, or when we enter a period of a more orderly and gradual uptrend. During these periods, the positive correlation between the price action in Bitcoin vs Alts tends to break away. The former increases in dominance, while the latter reduces its share, although at a slower rate vs a bitcoin cycle in a bearish market cap trend.
It typically happens due to excessive speculation or in anticipation of hard forks, with the latter causing an incentive for traders and investors to diversify away from Alts, motivated by the promise of free coins (Bitcoin Cash fork a clear example). Meanwhile, exuberance in the price of BTC can happen due to pure hype/mania, a time which tends to see Bitcoin google searches skyrocket. An example of a Bitcoin cycle in a bullish market can be seen below between June – Oct 2017:
Monitor ETH/BTC As a Proxy for BTC Cycles
The sentiment towards Alts can also be assessed by checking the price action in the ETH/BTC chart.
Since a large share of the Alts run on top of the Ethereum platform, ETH serves quite accurately as an indicator of sentiment in the Alts conglomerate, which when combined against the price of BTC, gives you a picture of what asset is outperforming the other. If ETH/BTC is on a decline, we are under a BTC Cycle, which could happen under both bullish or bearish markets in terms of total capitalization. On the flip side, if the chart breaks to the upside, the market then transitions into an Alts cycle, which has the peculiarity of taking place only under bullish markets in market capitalization. That said, Alts cycles deserve another article on its own (coming up).
Conclusion
Information is power and being able to interpret the right context when trading cryptos is of paramount importance. As explained in this article, Bitcoin market cycles show unique characteristics in the overall price behavior with a direct market impact on Altcoins.
By putting the pieces of the puzzle together before venturing into active intraday crypto trading allows you to stay in tune with market dynamics to make the right trading decisions. .
