With Bitcoin’s recent price crash and the ensuing chaos in the cryptocurrency market, investors and analysts have been crunching numbers non-stop. Half of the audience is wondering if their fears are unfounded while the other half is wondering if they should be taking action.
In lieu of recent events, experts in crypto and trend technical analysis have mentioned the Wyckoff Distribution Method and how it could apply to the current cryptocurrency confusion.
What is the Wyckoff Distribution Method?
More commonly referred to as just the Wyckoff Method (or Wyckoff Diagram), this analysis method is basically a series of principles and strategies that started out purely focused on stocks but was eventually applied to all sorts of traditional financial markets.
Developed by famous stock market investor and creator of Magazine of Wall Street Richard Wyckoff, this technical analysis method consists of several concepts: (1) Three Fundamental Laws, (2) the Composite Man Concept, (3) Wyckoff’s Schematics, and (4) The 5-Step Approach.
For the sake of brevity, we’ll focus on the first concept – the Three Fundamental Laws – and the typical Wyckoff pattern with respect to current crypto market events.
The Three Fundamental Laws of the Wyckoff Method
Wyckoff’s Three Fundamental Laws are as follows:
1. The Law of Supply and Demand
2. The Law of Cause and Effect
3. The Law of Effort vs. Result
And here’s a brief description/summary of each law.
Law of Supply and Demand – this is a common concept not exclusive to the Wyckoff method. In fact, one could consider it a basic principle of financial markets. When the demand for a commodity is greater than the available supply, the value of that commodity rises. The opposite rings true, too. When demand is low, prices drop accordingly.
Law of Cause and Effect
This law is connected to the previous law, wherein this law notices that the differences in supply and demand happen due to specific events. Demand rising and falling (and supply along with it) is a direct result of certain circumstances.
Wyckoff states that a “period of accumulation” (high demand) will lead to an uptrend, while a downtrend will follow a “period of distribution” (high supply).
Law of Effort vs. Result
This law speaks of trends – specifically that trends should be confirmed by market volume. A trend is likely to continue only if it’s backed by significant volume. Lack thereof means the opposite; a trend is likely to come to a stop – or even reverse – if there is a disagreement.
The Wyckoff Pattern
A typical Wyckoff pattern consists of up and down price movements that create sharp, steep hills (or peaks). In traditional financial markets, this pattern is used to describe the highest point of a bull market (distribution) and/or the lowest point of a bear market (accumulation).
The Wyckoff Distribution Method in Cryptocurrency
Here’s why the Wyckoff Method is so important to crypto right now.
The past month has been rough for the cryptocurrency market.
Bitcoin crashed to $30,000 on May 2021 – a new low for the currency. Could anyone have predicted this?
Maybe.
See, to get the most out of any technical analysis method, the method must be correctly identified. That holds true for the Wyckoff diagram, too. If analysts and experts in the cryptocurrency market saw patterns indicative of the up-and-down movement of the Wyckoff method, then they could have correctly guessed that a sharp decline was to follow the highest (bullish) point.
But that’s only if they correctly identified that the current situation fits the Wyckoff diagram.
One could do this using trading ranges, price volatility, and trading volume.
Before the next price hike and subsequent crash, experts who correctly predicted the trend could then stand to benefit from the rise and fall of the market through appropriate selling and purchasing decisions i.e., gradually buying as the price rises (the “period of accumulation” mentioned earlier) and then selling (or the “period of distribution) at the peak, before the value plummets.