After the first two sequels, we continue with a detailed insight into understanding crypto-market rotations.
We should start thinking about the time horizon of investing in different crypto sectors, as some will take longer to realize their potential than others. If you are buying an asset / business on fundamentals rather than market dynamics and charts it is best to think like a long-term investor, because fundamental valuations generally take longer to be priced in.
Money in traditional markets is rotated through different sectors according to which of the four different phases of the economic life cycle. Sector rotation can represent the end of a bull run or the start of one and can be used at the beginning of a macro-based strategy. Identifying where the market is headed in the cycle and predicting which sectors the next liquidity will be in can help with checking the assets they are going to invest in and how long to stay with them to meet potential returns - or deciding their investment horizon.
Currently, the stock and cryptocurrency markets are at opposite ends of the cycle. Stocks and the broader economy are in the late recovery / early recession phase, while cryptocurrency markets are in late recession with hints of early recovery.
The length of the boom and bust in crypto markets is only a fraction of the broader stock and economic cycles, with each peak and trough lasting about less than a year, compared to about 7 years in traditional markets. This will change as the market matures and we have more diverse players with more resilient portfolios that should extend cycles.
While it is still very early to come up with definitive strategies, especially with such a short history for most crypto sectors, as we come to the end of the crypto recession, we could still think ahead to the liquidity of those sectors when the cycle swings around again.
Tomorrow, in a new insight, read the third sequel on understanding crypto-market rotations.