There’s a lot of discussion online about the mechanisms behind market cycles in cryptocurrencies, but the topic itself remains unclear; at the crux of it, however, is accumulation and distribution.
Accumulation is a process that is defined as either incremental or volatile buying of an asset to increase position size and thus control of supply. The reverse is true for distribution, where a market participant sells an asset either incrementally or in bulk in order to reduce position size. This may seem like it goes without saying but it really is the single most important concept in profitable speculation on cryptocurrencies. Accumulation, as one might imagine, often occurs when the price of an asset is considered to be cheap; distribution when prices are expensive. This, however, is not always the case, as we shall come to. Most importantly, thanks to the transparency of the blockchain, we can often verify these patterns.
In this post, I will briefly discuss the theory behind accumulation and distribution and its significance. I will also provide my approach to spot accumulation and distribution in cryptocurrencies, as well as my method of verification, along with a few real examples.
Firstly, let’s consider why accumulation and distribution are important processes and what they actually constitute, above and beyond that which I have outlined briefly above.
Accumulation is the process of increasing one’s position size, often by buying incrementally over a period of time, though, as we shall see, also with swift, volatile buy-ups. All market participants must buy an asset to increase their position size; that goes without saying. But we are not overly concerned with most market participants. What we want to know is what are the largest holders doing? The largest holders of a coin are found using the blockchain, although not all cryptocurrencies have transparent ledgers detailing this information, such as privacy coins. However, for those that do, we can often find a list of the largest address balances on the network, often called a rich list. This allow us to monitor the activity of the largest holders, determining when they are adding to their balances (accumulation) or reducing their balances (distribution). I have written a few rich-list case studies, whereby I evaluate the rich-list in real time and present my findings. It may be wise to read one of those just because I provide a step-by-step approach on rich-list evaluation within them. Here’s one I did on Constellation a few months ago.
Now, for the vast majority of crypto traders, accumulation and distribution are often viewed as on-chart phenomena, thus the price chart is considered critical to determine where these processes are occurring. I would argue that the dual approach of utilising the price chart to identify key areas of price-action and then verifying this on-chain is far more useful, as we are able to literally map inflows and outflows to and from the largest holders against specific areas of price-action.
In short, what we are looking for from accumulation is a period of range-bound price-action, ideally at historical support, during which time the largest holders are adding to their balances. This is most confident we can be that entering at those given prices aligns us with so-called smart money.
For distribution, we are looking for rising prices, ideally towards historical highs and resistance levels (or surpassing them), coupled with net outflows from the largest holders during the rally. This is often an early indicator of a potential cyclical top forming.
I’m sure all of you will be aware of the fabled Wall Street Cheat Sheet, which itself has become somewhat of a meme. For the few of you that have not seen it, I have provided it below.
The cheat sheet was originally used to mark out various stages of the market cycles of stocks, but many of us found that it maps out altcoin market cycles time and time again almost to the tee. The reasoning behind this phenomenon can be debated, but the fact of the matter is the cheat sheet works exceptionally well for low-cap and mid-cap altcoin market cycles. I personally think that the reason it so accurately maps altcoin market cycles is because altcoin markets are the most pure representation of human emotions in finance. The internal battle between greed and fear plays out unfiltered in crypto.
Nonetheless, I’m sure you can recall countless examples of the above occurring in alts, but I want you to remember two things:
- Always try to buy during anger or depression. The latter is often the point of maximal opportunity, where risk/reward is asymmetrically skewed in your favour.
- Always try to sell the bulk of a position during euphoria or complacency. The latter is far easier to hit as nobody knows when peak euphoria is going to occur and even verification of distribution on-chain can be misleading as it can take a long while before the peak is found. Don’t time the tops.
So, we now know what accumulation and distribution are, we know how altcoin market cycles commonly unfold and we know which price areas we are looking to identify for accumulation and distribution based on both the price chart and the cheat sheet. We also know what we are looking for on the blockchain during both of these processes.
Let’s take a look at a few examples:
Stratis experienced a huge bull cycle back in 2017, which is evident from looking at the weekly chart. Since then, price has come all the way back down towards the all-time low, forming a new base above this level, with 3150 satoshis acting as range support and 5400 satoshis as range support. Purely from a visual perspective, this looks like depression, which may well be our accumulation range. It has been trading in this range for almost an entire year at this point, which is protracted to say the least.
Turning to the daily chart, here we have a few indicators of accumulation, with huge high-volume buy-ups occurring on several occasions, as well as periods of lower-volume buying. Moreover, price has overcome its 360-day moving average for the first time in over a year, which any regular readers of mine will know is one of my primary indicators for cyclical reversals. So far, so good. And what of the rich list?
Well, from looking at the activity of the top 25 addresses, among the privately-owned addresses, the vast majority have either spent the past 10 months adding to their balances or effectively flat, confirming the idea that smart money has been either buying or, also significantly, not distributing.
Quick tip: when the majority of the largest private balances have net outflows whilst price is in a range at historical lows or support, jump ship. Clearly these holders do not expect a new cycle to occur and it is likely an indicator that the project is truly dead.
MonetaryUnit is another, like Stratis, with a Chainz explorer (very useful for rich list analysis) and a very similar pattern of price-action over recent years, whereby price experienced a huge bull cycle in 2017 and has since come off and formed near-year-long range at historical support.
As we can see from the weekly chart, price peaked in 2017 and has since returned to the pre-cycle lows, forming a range for 325 days in precisely the area of price that was historically used for accumulation. Turning to the daily chart, we can see that range support is at 30 satoshis and range resistance at 90 satoshis, with a few high-volume buy-ups occurring inside this range. More interestingly, larger volume spikes occurred before this range formed, back in late 2018 and early 2019. Were large holders accumulating too early? Is the subsequent move lower into a new range manipulation or death of the project? As usual, the answers are found in the rich-list.
Unfortunately, the explorer isn’t quite working as expected, only currently showing activity for the top 7 addresses. I did, however, quite recently do my own rich-list analysis on MUE and found that the vast majority of the top 25 privately-owned addresses had been adding to their balances over the past ~10 months. Moreover, these addresses had not seen net outflows in mid-2019, despite price falling off to form a new range.
Among the top 7, at present, 6 have been in active accumulation. The pattern is quite clear. In my opinion, this is indeed an accumulation range, fitting all of our criteria for entering at current prices.
So, as I’m sure you are all aware, one of the primary narratives driving the market at present is DeFi, or decentralised finance. One of the beneficiaries of this narrative is Aave, which is in the middle of its first proper bull cycle. I say proper because the earliest period of trading was a sharp rally for a couple of weeks, but this current bull run has been playing out for months at this point.
As we can see from the chart above, I have marked out the classical cheat sheet cycle stages, with the bear cycle culminating in depression at new all-time low in August 2019. Since, price has entered a new market cycle, with price well beyond disbelief. The question on any holder’s mind now is where will euphoria hit? Well, we can see from the chart that price has hit the complacency area from the previous cycle but is still quite far off the all-time high (or euphoria). It has come off and is retesting old anxiety as support. It makes perfect sense from looking at the price chart to be shedding serious position size up here, but what does the rich list tell us?
Well, looking at the top 25 addresses, among those that appeared privately-owned I found that 1 was distributing, 1 was flat and 11 were accumulating over the past 6 months (roughly the duration of the bull cycle so far); this despite price having left the accumulation range and now approaching that previous complacency area, which, in my opinion, is suggestive of no conclusion to the bull cycle just yet. Clearly, the largest holders are not yet distributing. For signs of distribution, we want to be looking for net outflows from the largest privately-owned addresses (not exchanges) as price is rising. Clearly, LEND is not quite there yet. When we start to see distribution occurring on-chain among these larger holders, then I would expect to see a cyclical top follow. Further distribution would occur as a complacency shoulder formed, which is where I would look to shed the bulk of my position if I was a holder…
And that concludes this post on How To Spot Accumulation and Distribution.
I hope that it has clarified some misunderstandings around both processes, as well as provided a possible new approach for your speculation.
Do feel free to email me or leave a comment if you need anything else clearing up!