Cryptocurrency Market Cycles
Cryptocurrency market cycles, what caused the recent market downturn, the importance of a bear market and how Dtravel has planned for the bear market.
If you’ve been following share prices or cryptocurrency prices lately, you’ll no doubt have noticed that most assets have experienced a sharp downturn over the last few weeks.
While it may appear alarming — especially if you haven’t lived through a cryptocurrency bear market before — financial markets move in cycles, and the cryptocurrency market is no exception.
In this article, we’ll shed some light on the causes behind this downturn, how market cycles work and how Dtravel is handling the current market climate.
What Caused the Recent Market Downturn
It’s not always easy to point to exactly why cryptocurrency prices move the way they do. However, in this instance, there were several factors in play that spurred the downturn.
Recent high inflation rates throughout the world has seen many governments increase interest rates. Most notably, the US inflation rate soared to 40-year highs in March, leading the US Federal Reserve to send markets across the globe tumbling in early May after announcing the country’s biggest interest rate increase since 2000.
With higher interest rates comes higher borrowing costs for households and businesses. The end goal of raising interest rates is to decrease consumer and investment spending, ultimately reducing the demand for goods and services.
Storing money in a savings account — which is generally viewed as a safer option than keeping money in a financial market, especially one that is now on a volatile downtrend — also suddenly becomes more attractive than during periods of low interest rates, prompting investors to exit the market.
Just like stocks, cryptocurrencies are “risk-on” assets, meaning that when market sentiment is bullish and the outlook on the economy is optimistic, the value of riskier assets increases. This makes the cryptocurrency market still highly correlated with traditional markets, and therefore the same forces drove much of this initial downward price activity.
However, just a few days after the US announced it would be increasing interest rates, the downturn of the cryptocurrency market was further compounded by the collapse of Luna (an ex-top ten token) and TerraUSD (the third largest stablecoin up until this point). The events shattered the confidence of many investors and marked the unequivocal arrival of the bear market.
The four stages of a market cycle include the accumulation, uptrend (bullish market), distribution, and downtrend phases (bearish market).
Accumulation is the first stage of every market cycle. Bearish sentiment is at its peak here, with investors selling their holdings and driving prices down. This brings in the value and contrarian investors, who take advantage of low prices to increase their positions. As more investors accumulate and the opportunity for new lows disappears, an uptrend begins to emerge.
During bullish periods — particularly like the last 12–18 months in the cryptocurrency market — it’s difficult to find tokens that don’t see major gains. This period of the market is characterized by extreme confidence, increased business development efforts, new token launches, and charts hitting all-time highs, all of which can put less emphasis on building/innovation and greater weight on price speculation.
As buying momentum slows and new highs fade, the market begins to stagnate. Buyers and sellers have equal power distribution during this phase, meaning there’s roughly equal supply and demand in the market. This is when valuations fail to break through their peak for the cycle and prices begin to fall as market sentiment turns bearish.
During bearish periods, markets lose confidence and investors sell in droves. There are fewer token launches, reduced focus on business development and projects can’t find investment because buyers have pulled back as they de-risk. As prices bottom out, the accumulation phase begins again, and with it a new market cycle.
The Cryptocurrency Market
There's a saying that when the pendulum swings too far in each direction of bullishness or bearishness, the market begins to think of reversals, allowing new tops and bottoms to be found.
In the cryptocurrency market, this pendulum swings further in each direction compared to traditional markets, creating pronounced bullish and bearish conditions. This happens because cryptocurrency markets are:
- 24/7, meaning more ability to trade
- less controlled, meaning no circuit breakers or price controls
- currently less liquid, meaning more ability to move market prices
Though things may seem to get worse before they get better, market confidence will eventually come back — as it always does. We’ve seen from previous bear cycles that, each time prices shift into an uptrend, the market comes back stronger and bigger, with the most dedicated and promising projects leading at the forefront.
With each bull cycle, there are more entrants into web3 and more foundational and fundamental value is added to the space.
The Importance of a Bear Market
In the last bear market, crypto and web3 were still very nascent, and the market cap was significantly smaller than it is now. While it was difficult at times for many to maintain confidence in the space in the thick of that cycle, significant progress was made that helped further legitimize the industry and prepare for the bull run that inevitably ensued.
This is where the cryptocurrency market is unique. In the stock market, price is usually an indicator of the company’s performance to date. In the cryptocurrency market, the price is what generates the initial interest, sparking ideas and development that translate to innovation, which leads to new people and projects entering the space. This is what’s known as the “price-innovation cycle”. When interest in prices is low during a bear market, this is when the most significant progress is typically made to rally the market around their achievements and innovation.
So, though the next bear market is upon us, this presents an opportunity for projects to focus on realizing their innovations — and with the fundamentals of the web3 space having grown monumentally over the last couple of years, it’s indisputable that the web3 space is here to stay. The reasons for this are manyfold:
- Since the last bear market, we’ve seen a ~4x growth in crypto wallets from ~22M to ~82M today
- There is increasingly mainstream awareness and adoption of NFTs, with massive brands like Nike, Adidas, Gary V, Gucci, Pepsi and plenty more issuing their own NFTs
- Facebook changed their name to Meta to show their dedication to building a metaverse
- The market cap of the entire cryptocurrency market peaked at $732B in the last bull run — this time, the market cap almost quadrupled to $2.8T
Cash Management in a Bear Market
Amazing things have been built during harsh bear markets when strong projects focus on building and innovation. However, the treasury of a project is just as important (if not more important) than any development efforts. Projects with poor cash positions won’t be able to survive the market as prices remain low.
It's important for web3 projects to be extremely thoughtful in bear markets to outlast these conditions when sentiment is negative. Token prices may not represent fundamentals, and most projects simply won’t be able to keep building their platforms to maintain or catch up to their already high valuations. Even big wins can lead to underwhelming price effects during a bear market.
For each market cycle, a different strategy should be adopted. In a bullish market, projects should look to utilize their treasury to profit from the bullish sentiment. This involves potentially taking more risk on major coins and altcoins, depending on the project’s risk appetite.
In a neutral market, positions in altcoins should start to be exited as prices peak by locking in profits to stablecoins or potentially distributing that value to some of the major cryptocurrencies (BTC, ETH).
Because it will become significantly harder to raise cash in a bearish market, it's vital to extend the project cash runway. Ideally, treasury and cash positions should shift to a defensive strategy before the bear market sets in by holding mainly stablecoins, a few major cryptocurrencies and no altcoins, unless it is the native token of the network.
Bullish Market - Aggressive
- Fewer stablecoins
- More majors
- Some altcoins
Neutral - Moderate
- More stablecoins
- Less majors
- Few altcoins
Bearish Market - Defensive
- Most stablecoins
- Few majors
- No altcoins (unless native token of network)
If a project has a low ability to take risk (i.e. the project only has a runway of 12-24 months), cash positions should largely shift to a basket of stablecoins and fiat. Different types of stablecoins should be held to mitigate losses in the event that a stablecoin is depegged or otherwise becomes unreliable.
How Dtravel has Planned for the Bear Market
Dtravel has a long-term runway from its $7 million funding round to last through any extended bear market. The Dtravel treasury consists of fiat currency and stablecoins, and has never had any exposure to UST. Many of us were also involved in cryptocurrency projects during the last bear market, and we appreciate how crucial this cycle will be for the success of Dtravel.
We’re a long-term project with an incredibly exciting roadmap of initiatives that will overhaul the world of travel using decentralized infrastructure, NFTs, smart contracts and other cutting-edge technology. The bear market will give us the opportunity to dedicate our entire focus to building the Dtravel platform.
Dtravel v2 - infrastructure for the decentralized travel economy
Proof of Travel - travel credentials, on-chain
Guest DiscoveryPortal - navigate on-chain properties from a single starting point
Loyalty Program - earn rewards for positive web3 travel behavior
MetaTrvl - travel experiences in the metaverse
With Dtravel v2 set to launch next month, we can’t wait to hear your feedback! If you’re interested in contributing more closely, consider submitting an expression of interest to join the Host Beta Program or the Guest Beta Program.
We believe in a future where everyone has complete ownership of their travel. That vision is what keeps us passionate and dedicated to making Dtravel a reality. Community is everything, and with your support, we can create something that not only innovates, but outlasts.