Market Cycle Investing

Understanding market cycles helps us make better investment decisions. Bitcoin, altcoins, and every other asset of value in the world goes through cycles. Knowing, to the best of our ability, where we are in the cycle can help us a great deal.

There are many reasons to invest in something. Whether it’s a company, a commodity, or an industry, usually people are fundamentally incentivized to make certain types of investments, as they believe the future value will be greater than the present value.

Some investors and traders don’t care at all about the fundamentals. They are purely seeking trending assets with a lot of volatility they can exploit to make profitable trades. And that’s fine too! But most people, including most institutional investors, seek to screen their investments and trades based on the fundamental merit of the asset in question.

If you’ve gotten interested in cryptocurrencies and the blockchain sector, you likely got interested from one of those two points of view: some fundamental case or because it was such a good asset class to trade.

The big crypto asset boom

In 2017, crypto gained more attention than ever before, as bitcoin made a truly extraordinary run from under $1,000 to nearly $20,000, and many other crypto assets made even greater returns.

Ethereum ran from under $15 in February to $400 in June, before eventually topping an eye-popping $1,400 in January.

Bitcoin broke definitively above the prior all time high (set in 2013) in April of 2017. The last Bitcoin bubble pop took more than a year to reach bottom, and retraced 86% from peak to trough. The recovery and new run made up for that bust plus another 16x return.

Log scale hardly offers justice to the magnitude of the move. Below I show the same chart in linear (meaning each portion of the Y axis is at the same scale).

This type of return is not normal.

More people heard about the returns crypto was providing and wanted a piece of the action. I had family and friends asking me about crypto in November and December. The media was incessantly covering the space.

Warning signs that the party was ending were flashing everywhere, yet as investors our primal desires to get in on the move and our best course of action don’t often align.

Most long time participants in the space (2015 entrants and before) were shocked at just how high everything went.

Personally I was right in the middle of the hysteria, having made my first crypto purchases in May of 2017, though I’ve been an active participant in the stock market since I was a teenager (now in my early 30s).

If you look at the chart above, would you think it’s going to continue upward or that it’s going to go down? Well, it’s okay if you don’t know. But the answer is that something that good does not last forever.

“The trend is your friend ’til the end,” they say. But at some point, it ends. Like crypto in 2017, it may go beyond all logical stopping points, but eventually it ends.

And don’t think this is limited to crypto. This space has just been one of the greatest examples of such a move.

Just this month we’ve seen select parts of the cannabis sector both boom and bust.

TLRY daily chart

Tilray was the first cannabis stock to be listed on the Nasdaq, offering it a great deal of attention, just as the cannabis industry is heating up more broadly because Canada and other countries have legistlation proposed to fully legalize the substance. Investors seeking exposure to this growth opportunity flocked to this stock, and it got out of hand quickly.

I could point to other big cycles and busts, like the tech bubble bust of the early 2000s or the housing bubble of the late 2000s or various sector bubbles in the traditional market (biotech, FANG, etc).

More clever market participants know that they don’t want to be, “the last guy on the bus,” and are usually the ones selling to retail buyers — who are buying the tops of these charts. As the bubble pops and the gains fade, those latest entrants quickly become panic sellers and perpetuate the downward pressure.

Extreme examples

I have shown some pretty extreme examples, from sectors with a great deal of speculation involved. Speculation on future value without well defined present value is a prime setup for a big bubble and extreme market cycle. But nearly every asset type has cycles of some sort. Valuations don’t move in straight lines over time.

You can trade, as I have historically, stocks or assets with more “real value” with much less downside (an 80% retrace on traditional stocks is a catastrophe, bear markets are sometimes defined by a 20% retrace).

In fact, this is one of those things I had to “unlearn” from the traditional markets when I got involved in crypto. Even during the huge 2017 run-up, there were several 40%+ “corrections” due to the extreme volatility.

Traditional markets also tend to have less upside; there are not a lot of opportunities for a 10x return in a year in the S&P 500, for instance. Greater volatility means greater risk, but greater potential for returns.

How to be different

The way to avoid being the top buyer is to better understand market cycles and to know how to separate your fundamental viewpoint on an asset (or asset class) from your technical viewpoint. You can be excited about a sector or asset class (crypto/blockchain for example) and make choices to buy or sell within that asset class independently from your fundamental view because the technicals demand it.

If you can combine your fundamental thesis for investing with a technically attractive setup for the investment, you can set yourself up much better for possible success.

You’ll still make mistakes and failed trades. That’s part of trading! I love Ray Dalio’s Twitter bio. He’s one of the most successful investors in the world, and just wrote an entire book (I’m enjoying it right now) on market cycles, and he calls himself a “professional mistake maker.”

A current real world example

An industry I’m looking at right now is the Uranium sector. Uranium has a bad reputation because of some catastrophic nuclear power incidents and a market cycle boom and bust that is now, after more than a decade of cooling off, finally perhaps bottomed.

Historical Uranium price. Source

I don’t know with 100% certainty that Uranium has bottomed or that now is the perfect time to buy. I won’t try to give the fundamental case in this post but I did some of my own research on the sector, and came away satisfied.

In combination with the price of Uranium itself having stabilized and even begin to tick upward in 2018, and the technical setup for the Uranium sector ETF (exchange traded fund), I decided it was a good time to dip my toe in for a defined-risk, high-reward investment.

Uranium ETF

Not a ton of people are talking about Uranium yet — certainly not CNBC — and that’s how we like it if we want to be a savvy investor. By the time the entire world hears about the craze, it’s likely closer to the end of the cycle than the beginning.

Additionally, had I bought into this sector too soon, because it was down some percentage and “couldn’t go down further” I would have been in for a bad time. Even still, without a clean break of the bottom and a move up, this could go on a while and my investment could underperform the broader market — hence why I am not “fully in” yet on the Uranium sector.

I am not just “in” on the Uranium ETF. In fact, I don’t even have it yet. I’m mixing in specific trade setups of uranium companies that take into account my broader investment thesis. I could be in on both the entire market and these specific trades, but my strategy so far is to approach the sector through smaller, well positioned companies in the space that present quality technical setups.

Have a strategy

You don’t have to “buy the bottom and sell the top.” Usually we will have succeeded very well by capturing 60-70% of the trend. You can even buy an all time high. The concept of price discovery after an all time high is very powerful — just see bitcoin for evidence. You can also trade any timeframe, not just daily and weekly ones like I’ve shown in this post. You can swing trade, scalp, or make long term plays. It’s up to you.

But you need a strategy.

  • What’s my target
  • How much am I willing to risk investing in this?
  • How will I know when it’s time to sell?
  • What assets in this sector make sense for me to trade, and why?

The market cycle chart (shown at the top of this post) is practically a meme within the crypto world now. But it is a real thing. Cycles are economically and psychologically driven.

A powerful time to be in a sector is when the cycle either clearly bottomed or getting close to it, or when the sector is heating up with positive momentum but not in the euphoric and unsustainable phase.

Bitcoin historical chart

We don’t know yet when bitcoin will bottom, or at what price. I have seen the smartest people in the space debate this topic and their predictions range from $1000 to $6000 (bottom is in).

Bitcoin has been cooling off for eight months. Many altcoins have lost 90%+ of their USD values. Blindly buying today is smarter than having blindly bought in December, but we can also do better.

I don’t think you can say crypto has “clearly” bottomed. It may have, but there is a strong case that is has not as well. If it has bottomed, plenty of people will tell you how obvious it was. Just like the tops, the bottoms are not always obvious and you don’t have to get them spot on. But you can know when you’re getting closer to the extremes and you can prepare.

We can prepare

When it’s time to move, we want to be able to make smart decisions. Are you prepared to make smart decisions — technically and fundamentally — when investing in the cryptocurrency space?

If you don’t think you are, then I’ve been building a course that’s made for you, and signups are open right now. The class begins October 1st so you only have a little while to register and be part of the inaugural class. We’ll talk about market cycles, technical analysis, fundamental analysis, live market analysis, and everything in-between.

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