TL;DR- the crypto market follows similar price patterns over and over. The Wyckoff accumulation phase is when ‘smart money’ like whales and institutions are buying crypto at bargain prices by shaking out retail investors with weak hands. Conversely, Wyckoff distribution is when the smart money is selling while others are FOMOing in to crypto.
Crypto markets always seem to be all over the place. We read headlines about whales and institutions manipulating the markets. But is that true, or is it just a conspiracy theory? It turns out that there is a lot of knowledge asymmetry in the crypto space. There are those in the know, and those not. It pays greatly to be in the know. Read on to see some of the methods to the madness, and how to spot when the accumulation phase is happening.
I’m not going to dive deep into a history lesson here, but all of this started 300 years ago with a Japanese rice merchant named Homma Munehisa. He was the first known person to chart the prices of an asset (rice in this case). The green (price increases) and red (price decreases) candlesticks on charts we still use today were first thought up by him.
Some 150 years later, an American Wall Street broker named Richard Wyckoff noticed that retail investors seemed to always be getting fleeced by market manipulators. After doing some analysis he noticed the same price patterns happening over and over. Those price patterns are still happening today, and are pervasive within the crypto space. Wyckoff found that there was “smart money” that played by certain rules. He later confirmed these rules by interviewing 19th century titans like JP Morgan, who admitted to using these patterns to shake out retail investors and turn nice profits. JP Morgan’s net worth was around $40 billion in today’s dollars. If he had a theory about market cycles, I’m all ears.
The composite man
To help his students understand the ‘smart money’ pulling the strings, Wyckoff implored his students to think of a ‘composite man’ behind the curtain pulling the strings of the stock market. Below is an exerpt from his book:
The four phases of the Wyckoff Distribution in cryptocurrency
Wyckoff’s four phases are:
Within each of these phases, there are about 8-10 different events that happen. If you’re looking to broaden your knowledge about the different points that happen within the phases, watch this video from Guy over at the Coin Bureau. Some of the points within the accumulation and reaccumulation phases include the selling climax, secondary test, preliminary support, automatic rally, last point of support, and a spring. Some of the points within the distribution and redistribution phases including preliminary supply, buying climax, automatic reaction, secondary test, up thrust, and up thrust after distribution. All you need to know is that these are all points that the Composite Man uses to get people to either sell out of fear or buy in because of fear of missing out (FOMO).
The composite man tends to accumulate at or near the selling climax. This is when a crypto is extremely oversold. Have you ever felt that crypto was utterly hopeless and going to go to zero? That’s what most people feel like at the selling climax. There are some signs for this, for instance it the crypto is below the 50, 128, and 200-day moving averages, and the fear greed index is showing extreme fear (<20). This is precisely the moment that retail investors should be buying, but their emotions get the better of them. A couple of examples of the selling climaxes for Bitcoin in recent memory include:-
- March 7th 2020, at the height of the COVID panic selloff
- May 17th 2021, at the height of the China FUD/over-leveraged crash
Within the accumulation phase, institutions will drive the crypto’s price down to scare investors. This will happen over and over until the ‘spring’ moment comes and the price will pump out of the accumulation phase and into the distribution phase.
The composite man tends to distribute or sell precisely when everyone else is FOMOing into the coin. We have all felt FOMO with crypto before. I personally felt a huge amount of FOMO in January/February of 2021, when many altcoins were providing 10x gains or more. I bought in, and lost a lot of that money in the May 2021 crash. I’m sure right now you can think of a few coins that have recently rallied that you would have like to been part of. But don’t worry. Many of the spikes in prices to all time highs are followed by automatic reactions where the composite man is selling and the price quickly drops. We saw this in April-May 2021 when Bitcoin was pumping to $64k and quickly falling back down into the mid 50’s range. Occasionally, the composite man will artificially pump the price of a crypto during distribution to give retail investors false hope that the coin still has a lot of upside. When whales and institutions sell, they do the best they can to hide their moves, and this artificial pumping helps them do it.
How long does Wyckoff accumulation last?
There are many different answers to this question, but the blanket answer is that it covers all time frames, from short (a few hours) to long (years). If we zoom in to any coin’s price action, we’re likely to find similar patterns playing out on different time frames. In 2021, a Bitcoin accumulation phase started in late May and lasted through late July, making the period about 60 days long. In September of 2021, another Bitcoin accumulation period took place with Bitcoin, but this time only over a 25 day period. There’s no definite answer to this question- if there was, we’d all be rich.
Does the Wyckoff method work?
It certainly helps to identify if the crypto market or a particular coin is oversold. I personally think that identifying the accumulation phase is more financially rewarding than trying to spot the top (the distribution phase). Like Warren Buffett says- “whether it’s socks or stocks, I like to buy things on sale.” It pays to know when crypto is on sale and oversold. If you can buy when things are oversold, probabilistically you’ve got a great chance at coming out on top.
The art here is to find ‘the dip’. It turns out that Guy over at The Coin Bureau also has a video about that, too. To put it shortly, the 200-day moving average, Bollinger bands, and Relative Strength Index (RSI) are all you need to help spot the dip.
Where are we now?
This is the golden question. Worth noting is that each cryptocurrency has their own price charts and thus their own cycles. I want to say that it’s often tough to pick out what phase we’re in because most of the time the patterns outlined in the Wyckoff lifecycle don’t exactly look like the real market. If you want to know where some experts think we are in the Wyckoff cycle right now, the dudes over at Trading View have some good analysis. They put out a limited number of free articles and charge for the rest, however.
As it stands at the time of this writing, I have strong evidence that we’re nearing the end of an accumulation phase where we may see a strong ‘spring’ to the upside soon. Below is a chart by Trading View making a strong case that we could be nearing the end of accumulation.
Crypto is full of black swans and white swans
One more thing. Bad things (black swan events) and good things (white swan events) happen in crypto all the time. The only real thing that contributes to long-term positive price movement is a crypto project’s fundamentals. If the project has solid tokenomics and real world use case, and has already shown adoption- well, that’s about all I need. Keep in mind that unexpected events happen all the time. China aims to ban crypto, and prices fall. The chairman of the US Fed Jerome Powell says he has no intention to regulate crypto, and prices rise. Events like these can throw Wyckoff timelines way off what they’re ‘supposed’ to be. Even whales and institutions can’t prevent these from shocking the markets. Crypto will be wild and to some degree unpredictable for quite some time. But if you look hard enough, you can see the signal in the noise- Wyckoff is alive and well.