Dow's Theory – Primary Trends and The Three Market Phases in Crypto Markets

The crypto market seems to constantly swing from exhilarating highs to heart-stopping lows.  Imagine if you could decode the puzzle behind those highs and lows and ride the waves with confidence. It’s all possible with the help of Dow's Theory that suggests primary market trends unfold in three distinct phases – a timeless market playbook that reveals:

  1. the accumulation phase (how smart money moves)
  2. the public participation phase (how the crowd jumps in)
  3. the distribution phase (how the pros slip away with their gains)

Read below to understand these three phases better so you can can transform your crypto journey from a wild roller coaster into a thrilling, yet manageable, adventure. 

The Accumulation Phase

The accumulation phase occurs when informed investors, often referred to as "smart money," begin to buy or sell assets against the prevailing market sentiment. In a bull market, accumulation happens after a prolonged downtrend or during market consolidation. Conversely, in a bear market, accumulation takes place after an extended uptrend or during periods of stabilization following sharp declines.

Here’s what happens in this phase in the crypto bear market context:

The accumulation phase can be identified by a period of price stabilization after significant declines. During this phase, experienced investors and institutions quietly buy cryptocurrencies at what they perceive to be undervalued prices. Market sentiment is generally negative, with low trading volumes and minimal media attention. 

For instance, during the 2018 crypto winter, Bitcoin's price stabilized around $3,000-$4,000 after a steep decline from its 2017 highs. Savvy investors recognized this as a buying opportunity, accumulating assets in anticipation of a future uptrend.

The accumulation phase in the crypto bull market context:

During a crypto bull market, accumulation occurs after a correction or a sideways movement. Investors who missed the initial surge see this as an opportunity to enter the market. For example, in early 2020, after Bitcoin's initial rise from the 2018 lows, it experienced several months of consolidation around $9,000-$10,000. Investors who understood the long-term potential continued to accumulate, setting the stage for the subsequent bull run that saw Bitcoin reaching new all-time highs.

Bitcoin accumulation 2020

Source: Coingape

The Public Participation Phase

The public participation phase is characterized by a significant increase in market activity and broader investor involvement. In this phase, prices start to move more rapidly, supported by growing optimism and increasing trading volumes. This phase is driven by news, technological advancements, or macroeconomic factors that attract widespread attention.

What happens in this phase in the crypto bear market context:

In a bear market, public participation typically begins when the market shows signs of recovery. Positive news, regulatory clarity, or technological breakthroughs can reignite investor interest. 

For instance, after the accumulation phase in 2019, Bitcoin's price began to climb, driven by increasing adoption and institutional interest. Public participation increased as confidence returned to the market, leading to higher prices and trading volumes.

Public participation phase in the crypto bull market context:

In a bull market, the public participation phase is marked by euphoric buying and widespread media coverage. Retail investors, driven by fear of missing out (FOMO), flood the market, pushing prices to new heights. 

For example, during the 2017 crypto bull market, the public participation phase was evident in the exponential rise of altcoins like Ethereum (ETH), Ripple (XRP), and Litecoin (LTC). Retail investors, attracted by the prospect of quick gains, flocked to the market, driving up prices to unprecedented levels.

New types of market participants, such as Initial Coin Offering (ICO) investors and retail traders, helped fuel the hype and created a speculative bubble, leading to overheated valuations and eventually paving the way for the next phase.

The Distribution Phase

The distribution phase occurs when the market reaches a point of saturation. Informed investors start to offload their positions to the less informed public. This phase is marked by increased volatility and often subtle shifts in market sentiment.

What happens in this phase in the crypto bear market context:

In a bear market, the distribution phase can be tricky to identify as it involves smart money selling off their positions during temporary rallies. These rallies can be caused by short-term positive news or technical corrections. 

For instance, during the bear market rallies in 2018, there were brief periods where Bitcoin's price increased, only to be followed by further declines as institutional investors took profits, distributing their holdings to latecomers who believed the bottom had been reached.

As cryptocurrencies faced regulatory challenges and market corrections, the distribution phase led to a widespread decline across the market. Many altcoins suffered significant losses, and the market entered a prolonged bearish period.

Distribution phase in the crypto bull market context:

In a bull market, the distribution phase is characterized by high volatility and increased selling pressure from early investors. As prices reach unsustainable levels, smart money begins to exit, leaving retail investors holding the bag. 

The end of the 2017 bull market demonstrated this phase clearly, where Bitcoin peaked near $20,000 before plummeting. The distribution phase was marked by significant sell-offs, leading to the subsequent bear market.

The Bottom Line

Applying Dow's Theory of Primary Trends to the crypto market allows you to understand the distinct phases of accumulation, public participation, and distribution. 

Key takeaways:

  1. in the bear market, institutional investors accumulate assets at lower prices, setting the stage for the subsequent bull market;
  2. the public participation phase involves growing retail investor interest and significant price increases; 
  3. the distribution phase sees insiders and smart investors profitably exiting their positions, signaling the end of the primary upward trend.

It’s important to note that the cryptocurrency market is highly volatile and influenced by numerous external factors, including regulatory changes and technological advancements. While Dow's Theory offers guidance, it’s essential to employ additional tools like technical and fundamental analysis and stay updated with the latest market trends and news.