What ARE market cycles? And what does it mean for my crypto…

Tracey: [00:00:20] Welcome to the crypto curious podcast designed to help you navigate the dynamic world of cryptocurrency. Hello, my name is Tracey, and I am joined by my colleagues from the Bamboo app, Blake and Craig. Hey, guys, how are you going?

Blake: [00:00:35] Very well, Tracey, how are you? 

Tracey: [00:00:36] Very well, Craig, how are you going today? 

Craig: [00:00:38] Good. Thanks, Tracey. Excited for this one bit topical at the moment.

Tracey: [00:00:42] Always, always excited. Yet very topical. Very topical for today. So if you are interested in cryptocurrency and peeling back the many layers of learning that come along with this space, then you have most definitely learnt or picked up on the fact that crypto is notoriously volatile and has been a common occurrence to have 50 to 90 per cent reductions in prices through the past decade. Now, Blake, Craig and myself have lived through some of these wild swings. So today we'll do a deeper look into the history, the causes and strategies around navigating the volatility market cycles of crypto, and we'll look at how you can use this knowledge to your advantage. Now, this isn't financial advice, of course, but first, we asked you last week to take part in the survey and we wanted to hear from you and what you wanted to hear from us. So an overwhelming response and one of the big things on the list was CEOs. So we've started to talk to some big names, and we're really excited about a few of those big names coming onto the show. So that's in a few weeks. I mean, the boys are pretty excited about that, but we still want to know what else you want to know. And that survey will stay open for a few more weeks to come, and the link is below in the show notes. So please do help us out there. OK, so let's talk about market cycles. We're going to go to Blake first because he is definitely a little bit more of an experienced sailor when it comes to these market cycles. And you can maybe set the scene for us. So tell us what you've been through. Blake the old Blake.

Blake: [00:02:17] Yeah, well, the first crypto cycle for a bull market was in 2013 and 2014, and I wasn't participating in the ecosystem then, but about a year or two after and yeah, there were certainly still people still talking about it. And after there was a several thousand per cent increase in price, there was a brutal drawdown, you know, which wiped a lot of people out from participating in the ecosystem just because it was so volatile. The next cycle, which you know all of us live through, was the 2017 cycle, and this was primarily driven from the ICR boom, the initial coin offerings, which was a new way of crypto projects raising capital. And it created so much extra value in the ecosystem, it created a hype cycle with your crazy returns, but also pretty crazy drawdowns, resulting in a longer term bear market. And then once there was enough data and there was quite clearly to prominent market cycles over the last 10 years, people started to, you know, look for patterns and predicting, you know, when the next market cycle was going to be. And over the past year, we've seen a lot of growth in this industry stirred by new technologies like DeFi and NFTs. And many people are calling this now the third cycle. Now, we don't know how long this is going to go for, if it's over or if we're just mid-cycle or even if it's a supercycle. But certainly an interesting topic to talk about because it is possible to navigate your way through these and be successful. 

Craig: [00:03:52] And it's probably important to note that the 2013 cycle, obviously the market was a lot smaller than what it is now. Twenty 2017 cycles. So just to paint a picture here, the crypto market cap in 2013 was only 10 billion. So the whole market cap was 10 billion, and then 2017 it was 800 billion. And now we just hit $3 trillion. A few months ago, so as the market gets larger, the drawdowns don't get as bad, but still drawdowns nonetheless. 

Tracey: [00:04:23] And I want to go into now what a market cycle is. But before we leave, like I want to ask because you came in just after there'd been a big dump when it started to happen again. Was there fear that it wasn't going to come back again because you hadn't been through a cycle? Was it was the fear that it wasn't going to return? 

Blake: [00:04:42] I suppose when I started trading, I came in mid bear market before Ethereum was even really traded anywhere, and I didn't even know I was mid-cycle until I was into the next cycle, 

Tracey: [00:04:56] which is which probably is a really interesting point because unless, you know. Market cycles, and sometimes even when you know the market cycles, you don't know what point of the cycle you're in. So let's a segway into let's look at market cycles. So typically there are four phases to the crypto market cycle, much like the market cycles that can be seen in other markets such as gold, property and stocks. And these are accumulation run up, a distribution and a run down. And now if you it's really hard for me to do, this is a visual. But if you want to look at something and search up on Google, you can look for something which is called the Wall Street cheat sheet or the boom and bust sheet. And that shows you this cycle in a little wave. So it's a little up and down sheet to show you that accumulation. The run up in the run down? Yeah. 

Blake: [00:05:45] So the first stage is accumulation and accumulation. Stage is usually when the market is quite flat, and that's when people are buying building their portfolios, waiting for a potential run up in price. The next stage is the substantial increase in price, and sometimes it can look like it's a vertical wall in the price increase. And then the third stage is distribution. It's when all those accumulators start selling. They've made a fair bit of money and they're ready to sell. And then there is the rundown, and the run down is the return to an accumulation stage. So when the price decreases and usually the accumulation stage from the second cycle is higher acts like a floor, then the accumulation stage on the first cycle. 

Tracey: [00:06:30] But you see these cycles in similar industries. So property, for example, you see a big spike in the property market and you know, all the house prices are going up and then you'll see all the house prices go down a certain area and there's different factors that are involved there with any cycle. So, for example, the property market that would be interest rate rise. 

Craig: [00:06:48] Where is a property going down in this country, Tracey? Because US millennials are still waiting for that to happen? 

Tracey: [00:06:53] No. Look, you guys are priced out completely and to live with your mum and dad forever crying.

Craig: [00:06:58] So it's probably important to note what actually causes these moves on these market cycles. Now, there is rarely a single case as to why the market price goes up and down. Now it's really a single case, but back in the day in 2013, there was certain catalysts like a big exchange hacking or a network hacking that would really dump the market. But now, since we're a lot more mature, it's sort of a mixture of, I'd say, three or four different things, some fundamental, others more temporary. So one of them is the sentiment of the market. And Blake touched on this before, you know, the fear and greed of the markets when the market's getting really, really greedy, you just know that people will be distributing their profits soon, and we're probably due a cool off, which is what we could be saying now. The second thing would be consumer and institutional trading. So when funds and new individuals entering the market, when you're hearing your cousin or your uncle at the Christmas barbeque starting to buy crypto, you know that's down to the cycle, starting to go down that way, 

Tracey: [00:08:00] getting a bit frothy. 

Craig: [00:08:01] Yeah, getting a bit frothy. Another one is news. So, you know, last year, this time when Tesla said that they would start to accept bitcoin and Elon Musk was on Saturday Night Live pumping his DOGE coins, you know, that was obviously a catalyst for ridiculous price action. And another reason is the new tech innovations in crypto like ISOs, DeFi, Gaming, NFTs, and these are all new innovations in the space which attracts new capital, attracts new investment. And as a result of that, you know, obviously lifts the market. And potentially the most important one is the halving. So every few years, the bitcoin supply rewards half. And as a result of that, the supply of bitcoin has slowed down. 

Tracey: [00:08:47] Yeah, I think look, bitcoin halving is very unique to crypto, and this is potentially one of the most important sectors on the price in the market cycle. So just to clarify, the bitcoin hobbling it, like you said, occurs every four years and reduces the amount of bitcoin that can be mined by 50 percent. So now what we have traditionally sees when these block rewards halve every four years, that there is a subsequent tightening of the BTC supply and then approximately six to 12 months after each of these halving events, that there's a drastic price increase. So the last halving occurred in 2021, and the next one will be in 2024. But look, this is the first time that we've actually spoken about the halving, and there's a lot to it. So, Blake, do you want to maybe, you know, give give a bit more information on what we've just touched on. 

Blake: [00:09:42] It is unique to crypto in the first few times that you know, you hear about this, it can be a little bit confusing, and that's because it doesn't happen anywhere else. Or, you know, essentially what happens is that bitcoin miners lend their computing power to secure the bitcoin network, and they're through. They're automatically rewarded with bitcoins every 10 minutes when they are able to secure a block on the blockchain. And as a result, they've given a reward which covers, you know, the costs associated with using their computing power. And yeah, as Tracey said, every four years, the the reward that is given to the miners reduces and therefore restricts supply. 

Craig: [00:10:25] Well, is it sort of a case where the market realises that the Harvard things have been happening and then it sort of pumps the market anyway because people have talked about the halving and then it sort of does a double whammy. And then that's why we say these crazy spikes. 

Blake: [00:10:38] Well, that's potentially a component to it. But the two factors that decide price is supply and demand. And if every few years you, you're reducing the inflation rate of bitcoin. Therefore, it slows down how many new bitcoins are being created, while at the same time demand is increasing, your naturally pushes price up. So yeah, and it does become self-fulfilling to a certain extent. You know, bitcoin's increasing in adoption over 100 per cent per year and with people using it while at the same time, you know, the inflation is slowing. 

Craig: [00:11:15] So we can essentially think of the halving as a slow down of supply. And, you know, as well as this, as we get more mature, there is an increasing demand for bitcoin that perpetuates these cycles. So now, you know, for the first time, we're seeing countries institutional funds, people like Michael Saylor, who are just buying every dip with millions and millions of dollars in conjunction with a slower supply, you know, is what causes these crazy spikes. But also once these new institutions are coming in, that's when crypto's getting more in the media for breaking record prices and then more and more people piling it, these pretty high prices pushing up the price even more. And this is what we call a hype cycle and often means the sector is overpriced. 

Tracey: [00:12:03] So, yeah, it's easy to imagine how this happens because it's a simple aspect of human psychology and it's finite fear of missing out. So everybody wants to be in with the new thing and everyone wants to wear their skinny jeans or be watching the newest Netflix show. Say everyone wants to be talking about the newest crypto coin, DOGE or Shiba or dope. So everyone wants to be with the new thing, and that's that's all part of the hype cycle. Indeed. 

Blake: [00:12:27] This is probably a great time to discuss bitcoin's dominance in the market. You may have noticed that your we have been talking about BTC here and not the crypto market as a whole. And this is important because currently bitcoin makes up 42 per cent of all the crypto value in the market. So when bitcoin rallies or when bitcoin increases in price, it drags the rest of the market with it. It leads the market often up, and it often leads the market back down. And there's lots of people that just do this market cycle analysis on bitcoin and then apply it to the whole market. 

Craig: [00:13:06] And the more dominant bitcoin is in the market, the more it has an impact. So I think long December 2020 will, sitting at around 70 percent of all crypto market was actually bitcoin, but now we're as low as 42 percent. So I think as the market gets bigger and bigger, I suspect bitcoin dominance won't be as prevalent because it was back in 2015. It was something like 80 90 percent of the whole market was bitcoin mania. 

Tracey: [00:13:34] Massive? 

Blake: [00:13:35] Yeah, yeah. And this is because there's new projects now these NFTs, there's DeFi creating all this additional value, which basically dilutes Bitcoin's overall dominance in the marketplace. But regardless of that, you know, when we analyse BTC to assess market cycles, there are many different metrics out there that can help assess if the price is overvalued or undervalued. And a very famous analysis that is often referred to is called the stock to flow ratio, which is used to assess the value of other assets that are stores of value kind of like gold and stock to flow ratios are used to evaluate the current stock of a commodity against the flow of new production. And you know, this is very applicable to bitcoin, particularly because we know how much stock is coming online of bitcoin or what the inflation rate of bitcoin is over time. We all know that there's only ever going to be 21 million bitcoins. And we also know that over the next 120 years of that, the rate in which bitcoins will be mined and and minted and then released into the market. And this makes it relatively easy from this type of analysis to understand potentially, you know what the price will be in not just five years, but 10 or 20 years. And there's some great, you know, there's some great analysis out there that you can check out 

Craig: [00:15:04] a will be the devil's advocate on the stock to flow ratio because, you know, back in the 2015 and 2014 days, you know, bitcoin was 90 percent of the market. Every coin was just a copy of bitcoin. But now it's a lot more complicated to analyse these cycles because now we have all those sectors we spoke about before Delphi NFT gaming exchanges and more layer one blockchains than was originally thought. So in stock to flow is a good one, but I don't know if it takes into account, you know, 60 to 50 percent of the market. 

Blake: [00:15:39] Yeah. Yeah. Know you can look at it to analyse the whole market and many people do that. But also you could just look at it to analyse bitcoin, which is, you know, potentially clean. A data set 

Craig: [00:15:49] isn't the stock to flow top like 250 grand, something like that 

Blake: [00:15:54] or for bitcoin us. I think I saw I think I saw Fidelity, which is a big US institutional custody bank, and release a stock to flow ratio analysis, predicting that bitcoin will one day reach $100 million per coin, which

Craig: [00:16:13] we should fact check. 

Blake: [00:16:13] And this is yeah. No, no. And they're an asset manager that has, I think, you know, several trillion dollars under management, and it was fascinating to see their analysis 

Craig: [00:16:25] in my lifetime, like our lifetime. Yeah. 

Blake: [00:16:28] I'd have to check that the time scale on that, but but yeah, it's pretty interesting. 

Tracey: [00:16:33] Well, look, the industry as a whole has matured and the demand for bitcoin and crypto in general has increased over the years. And I think part of that comes down to the improvements in the crypto infrastructure and its accessibility. And you know, the the increase in educational resources that are out there and a little bit more clarification as well from the government. And I think the fact that fiat currency is losing so much of its value due to the money printing and the inflation that's gone on in the last 12 to 18 two years. But let's go to an ad right now, and when we get back, we'll look at why this market can be so volatile. So to put it into perspective, the crypto market as a whole is smaller than Apple. The industry is so early, so the volatility is expected even now. We've seen over a 50 percent pullback in the last few months for the price of Bitcoin Ethereum from its all time highs. But also, the crypto market doesn't really stop for perspective. The ASX is six hours a day, and the crypto market runs 24 hours a day. It's 24 hours a day that's full on. So I think one month in crypto is actually equivalent to about four months in the traditional stock market. 

Craig: [00:17:48] Yeah, and these traditional markets are now affecting crypto, meaning it's a lot more correlated than what it used to be. It used to be completely uncorrelated when bitcoin was like a quarter of the size of Apple, but now it's obviously almost on par. So we've actually just seen a big sell off on the Nasdaq and now this is happening in crypto. Why is it Tracey? Why is this happening? 

Tracey: [00:18:10] Well, I'll tell you. Okay, so if you're looking at a traditional portfolio mix, crypto would be sitting at the very top as a high risk part of that portfolio. So investors will let this go at times of uncertainty. So when countries are all getting along well and the numbers are looking good, so employment and consumption and productivity and things like that that investors are confident in the market and they're willing to take on these high risk assets. And bitcoin will sit there as a high risk asset. So in the reverse, when things are not going well and we're having events like Covid, which we call a black swan event and things aren't doing well, then they're going to get rid of those high risk assets. So in that way, bitcoin and crypto is correlated with those markets that you just spoke about. So when we see things like these global pandemics, which caused the governments to kind of shut down their economies, we see these sell offs of these high risk assets that bitcoin is seen to be in these traditional portfolios. 

Craig: [00:19:10] Generally, when in times of uncertainty, people flock to gold and silver. Do you think Tracey, one day bitcoin will be that safe haven asset in times of uncertainty? Or do you think it'll always stay in that high risk category?

Tracey: [00:19:23] I think it's slowly moving towards being a little bit on that side of things. I think, you know, we call bitcoin. You know, we liken bitcoin to gold. I think some people are saying that as a bit of a hedge. I think it's a small amount of people, but I think it is being recognised as a hedge. 

Blake: [00:19:39] Exactly right. Tracey. And you know, as we see more institutional like funds and governments and you know, these sorts of investors gain exposure to bitcoin, they just kind of treat it like any other asset. And when markets are volatile, it's going to it's going to impact crypto. 

Tracey: [00:19:56] So we've defined what a market cycle actually is and looked at some of the reasons why we've had such swings high and low. Now let's look at some strategies to combat where we are at different stages of the market cycles, starting with the one strategy to rule them all. I always feel like, I mean, Lord of the Rings, and I say that the one strategy to rule them all, which is a dollar cost averaging and this is my favourite as well. So Blake, do you want to take us through the dollar cost averaging strategy and why this is the best? 

Blake: [00:20:25] Yeah, DCA or dollar cost averaging is saying we've touched on before, and this is the process of incrementally purchasing an asset at regular or irregular intervals such as daily, weekly, monthly or quarterly. And this is what we do with our contributions to our superannuation quarterly. We, you know, we deposit in an average into the market over time. And statistically, it's one of the most successful long term investment strategies because it removes the emotion of people trying to time the market. And most people naturally aren't very good traders. So relying upon a strategy that that takes out the ability for you to make a mistake. You know, it works for most people, and we can outline why this works exactly from a very simplistic view. Let's use it basic maths to illustrate this. This is not the actual price of bitcoin. Let's say I buy a thousand dollars worth of bitcoin today and bitcoin is worth $25000. Then in two months, I buy another thousand dollars when bitcoin is trading at $45000. And then again in four months, I buy another thousand dollars worth of bitcoin and its higher again at $60000 than the average price. I actually brought bitcoin for was forty three thousand USD and its much better position than if I waited four months to put all that money in. So, you know, we've designed the bamboo app to really embody this strategy for people. So trying to design out, you know, many of the mistakes that people make day to day when trying to participate in volatile markets. 

Craig: [00:22:04] Yeah. And Fidelity actually did a study on the best investors and the best investors are actually dead people because they don't. So don't touch anything. Yeah, but yeah, that's right, Blake, we actually got data from our users and we found that people who just decayed and chilled every week outperform traders by up to 10 percent. And the reality is people will get humbled by the time the market ask any of us. I know that you knew. 

Tracey: [00:22:36] Can I jump in here? Can I jump in here and say one of the things that someone said to me once when you try to time the market is like a watch. You got a timer going in and going out. You may as well just sit back. Dollar cost, average going in because you're going to try and, you know, time it when it's often time when it's down, you go to get it right twice and it's never going to happen. You just better off sitting back. 

Blake: [00:22:55] There's a quote that says that, you know, it's not about time in the market, it's about time in the market. Yeah, that's right. And, you know, 

Tracey: [00:23:01] really on the market, yes. 

Blake: [00:23:03] It's really about encapsulating this to you to take the decision making out of it. And that's what we've tried to package up for people at Bender. 

Craig: [00:23:12] Yeah, so well, I would say we've all fallen victim to try in the time to market and getting wiped out, but also a really handy indicator that I like to use to identify where we are in the cycle is the fear and greed index you love and you're going to go against your instinct chase because if you if you want to buy really badly, it's probably the best of the worst time to buy. And if you feel sick about selling, it's probably the best time to sell. So going against your gut normally works out. 

Tracey: [00:23:42] In contrast to other markets, the crypto market is much more accessible, which is awesome for adoption. But that also means it's a low barrier to entry and that brings in all your Moone Boy land boys who are not experienced with fundamentals. So they're the guys and girls that are out there. When the price goes up, they're buying and when the price goes down, they're selling. And we all know people like this, and they are definitely the ones adding to the price volatility. Isn't that right, Craig? 

Craig: [00:24:13] Yeah. And this is really different from the smart money and this strategy. The smart money refers to people who know the market that know how markets work. They buy at strategic times, either taking a long term view. Groups like your investment funds, your hedge funds. Your professional investors who are normally buying when there's blood on the streets because they kind of know what they're doing. Usually, they won't publicise the purchase an asset until after the fact because they don't want people to know if they've made a bad trade. Yeah, as the market matures, the market becomes less violent, like back in the day when bitcoin, as we touched on before minimum liquidity, 90 percent drawdowns were normal. Even Ethereum, your darling at Tracey went down to $80 in 2018. Why were we buying bye bye, 

Tracey: [00:25:03] bye bye bye. Look, there's there's still going to be hype cycles for new industries like NFTs and DeFi. And if we look at last year, you know, May 20 21 crash, we still continued on with a massive pump for the NFT sector after that. So there was, you know, still parts of the market that were slowly recovering and were having a bit of a boom in the NFT cycle. So there's still going to be some sub industries that are having these little hype cycles. 

Blake: [00:25:28] We're going to see less and less correlation between sub industries within the crypto sphere. You know, it's not going to be all correlated. We're going to see, you know, your DeFi go through your cycle maybe sooner than the main market and then other cycles, intra intra cycle cycles. And that's that's going to that's going to become more and more common. 

Tracey: [00:25:52] So hopefully, you know, you understand more about market cycles now and how they interact within the crypto space. And the data tells us that the crypto market volatility has actually been decreasing over the years and adoption is increasing rapidly, actually. And this is due in part to many of the reasons that we've outlined today. This inspires institutional and experienced investors to enter the market, which in turn gives the individual investors, like you guys, the confidence to also give it a go. On that note, let's leave it there today, and we want to know what you want to know about crypto. So please take part in our survey, which you can find in the show notes below, or send us an email at podcast. I get Bambu Io and follow us on social media. All those details are in the show notes below. Don't forget to write and review us in your podcast app, and that's it for us today. We'll see you next time. 

Craig: [00:26:45] See you guys