Market Cycles and Rotation of Risk – Part 1

Introduction

As we sit deep in the bear market, many eyes have shifted towards the ‘next market cycle’. In a previous article, I discussed the importance of understanding the macro context you are operating within. The second piece of that puzzle is how you apply that understanding to your decision making. One thing I’ve noticed is a general assumption that a bull run in the crypto market as a whole will coincide with a bull run for NFTs, but based on historical data, I would be very surprised if this was the case.

What needs to be analysed is the transition between phases of risk that occurs within market cycles.

As always, nothing written here should be taken as financial advice and it is important for you to do your own research to formulate your own strategies. The ideas being shared are merely my personal analysis and opinions of the market being presented for your consideration.

The Risk Cascade

Like many phenomenons that occur in the markets, they are reflections of the psychology of investors. So let’s play this out:

Risk Off

In a bear market, low liquidity and weak sentiment make people cautious about investing. They’re reluctant to fund new projects, and even if they do, they prefer quick trading due to the risks involved with bag holding.

Low Risk

As confidence grows, a bottom accumulation range forms with increased willingness to buy at lower levels. Within the crypto realm, Bitcoin is the big boss. It is the OG, widely recognised and the most liquid. As such, it is considered the lowest risk crypto asset. This is where liquidity will initially start to enter crypto again.

Medium Risk

Eventually Bitcoin starts to run but it reaches a plateau. People aren’t as willing to buy Bitcoin at $60K USD than they were at $30K USD and smart players who bought at the lows are taking profit.

This, coupled with a perceived high entry barrier and slowing price growth, shifts attention to altcoins, particularly higher market cap alts like Ethereum and Solana. These larger-cap coins offer robust existing infrastructure and remain attractive at a relatively lower price.

High Risk

Lower-cap altcoins follow, with less history and credibility but they may present intriguing concepts that excite investors. While risk is elevated, successful projects may yield substantial rewards.

Full Degen

The cycle culminates in “full degen” mode, marked by peak euphoria and rapid account growth. People invest recklessly in even the most absurd ideas for the potential to see their bags grow.

The Reset

Eventually the bubble bursts and everything comes crashing down. As quickly as people saw their account values grow, it starts to drop. People panic and sell off their positions to avoid further losses as we head into another bear cycle and risk-off environment.

Conclusion

We’ve seen this cycle play out in the past and we will likely see it again. It is a reflection of market psychology and the progressive seeking of opportunity as existing ones become less enticing. In part 2, we will see how this cycle played out in the previous bull runs of 2017 and 2021.