Markets work in cycles. They go from undervalued to fairly valued to overvalued then back down to undervalued. The famous saying “the bull climbs the stairs and the bear jumps out the window” is one I often use to describe how this works.
Put simply, when an asset is undervalued, it takes a very long time for it to return to the fairly valued section, and then momentum builds until it is extremely overvalued and then pop, it plummets back down to undervalued again.
We’ve seen this happen time and time again in all markets.
Different markets take different time periods for this sequence to occur, the stock market on average goes through this cycle every 10 years for example.
Think of it like this. Undervalued (35% of the life-cycle) Fairly Valued (40% of the life-cycle) Overvalued (15% of the life-cycle).
Lets look at when this happened to Bitcoin in 2014…
(Image A.1 - 2013-15 Bear market).
The bear market shows the peak around 1,000 USD, where Bitcoin was clearly overvalued and then saw a sharp decline in the price, this is the market being rapidly thrown into the undervalued segment.
This bear market lasted until May 2015 and then the reversal started to happen (going from undervalued to fairly valued)…
This can be noticed by a lot less volatility and volume, almost as if the bears are exhausted. This is often the case when the market seems dead and there’s little interest (relative).
Then the market starts to gain momentum, shifting into the later stages of fairly valued. More people start making money, and they then tell their friends. Think of this point like a snow ball rolling down a mountain, it’s gaining size and momentum.
Then you have the overvalued section, this is where everyone is speaking and investing in that asset, you can’t escape the news about it, you’ve made a lot of money on paper and feel as if the market is going to increase forever.
and guess where that leads to…
Put simply, when an asset is undervalued, it takes a very long time for it to return to the fairly valued section, and then momentum builds until it is extremely overvalued and then pop, it plummets back down to undervalued again.
We’ve seen this happen time and time again in all markets.
Different markets take different time periods for this sequence to occur, the stock market on average goes through this cycle every 10 years for example.
Think of it like this. Undervalued (35% of the life-cycle) Fairly Valued (40% of the life-cycle) Overvalued (15% of the life-cycle).
Lets look at when this happened to Bitcoin in 2014…
(Image A.1 - 2013-15 Bear market).
The bear market shows the peak around 1,000 USD, where Bitcoin was clearly overvalued and then saw a sharp decline in the price, this is the market being rapidly thrown into the undervalued segment.
This bear market lasted until May 2015 and then the reversal started to happen (going from undervalued to fairly valued)…
This can be noticed by a lot less volatility and volume, almost as if the bears are exhausted. This is often the case when the market seems dead and there’s little interest (relative).
Then the market starts to gain momentum, shifting into the later stages of fairly valued. More people start making money, and they then tell their friends. Think of this point like a snow ball rolling down a mountain, it’s gaining size and momentum.
Then you have the overvalued section, this is where everyone is speaking and investing in that asset, you can’t escape the news about it, you’ve made a lot of money on paper and feel as if the market is going to increase forever.
and guess where that leads to…