Is Bitcoin's Traditional 4-Year Cycle Reaching Its End?By examining these factors, we provide insight into Bitcoin's market dynamics and the potential end of its four-year cycle. Staying informed and adaptable will be crucial for all stakeholders.
Investors and enthusiasts alike have always been interested in bitcoin's four-year cycle, meticulously tracking these recurring patterns of price action to anticipate upcoming market movements. However, considering Bitcoin's ever-changing market dynamics and economics, we must acknowledge that the traditional quadrennial cycle of capital flows may be nearing its conclusion. Here, we’ll explore whether we should consider the possibility of BTC’s four-year cycle ending and whether this theory is supported by substantial evidence, or is merely conjecture. Decoding the Quadrennial Bitcoin CycleThe four-year bitcoin cycle is fundamentally driven by Bitcoin halving events, which occur roughly every four years. During these events, the reward for mining bitcoin transactions is slashed by half, thereby reducing the rate at which new bitcoin are circulated. In the past, these halvings have initiated a bull/bear cycle in the bitcoin price:
These cycles have been well-documented, and several models, such as the Stock-to-Flow model, illustrate these patterns. Our current price trend then suggests that the quadrennial cycle is still active. However, price increases have historically become less marked, and the peaks are less prominent than in prior cycles. Stabalizing MVRV Z-ScoreThe MVRV Z-Score, which correlates bitcoin's market cap with its realized cap, provides insights into market valuation. A declining trend in the Z-Score peaks indicates less volatile market reactions over time, suggesting that while bitcoin still follows cyclical patterns, the magnitude of these cycles may diminish as the market matures and the market cap grows. Here we can see MVRV Z-Score (orange line) and its descending peaks over the previous two cycles (red line).
The Stock-to-Flow Model in FocusThe Stock-to-Flow model, a favorite framework for predicting bitcoin’s price based on scarcity, considers these incremental inflation decreases. This model juxtaposes the current stock of bitcoin (existing supply) with the flow (newly minted bitcoin). As bitcoin’s flow lessens due to the halving events and constant block additions, its stock-to-flow ratio rises, signaling increased scarcity and, theoretically, elevated value. It’s apparent that bitcoin's price trends post-2024 halving mirror those from previous cycles. The model that can be seen in the image below suggests the diminishing supply could drive prices to an estimated $440,000 within a year post-halving (red line). Such a peak would disprove the trend of diminishing returns that can be also be observed in this chart as the divergences above the S2F ‘fair valuation’ have continuously declined, as can also be seen by the less volatile peaks in the oscillator beneath the price chart. We still need to consider this a possibility until we see substantial evidence that this model is no longer actionable. Just keep in mind that if this model were to persist indefinitely, it would eventually predict bitcoin's value to surpass the total value of global money; not technically impossible, but is hyperbitcoinization a certainty?
The Effect of Decreasing InflationThe halving events significantly reduce miners' BTC revenue and have historically propelled prices higher. However, as the block rewards decrease over time, the impact of halving on bitcoin's price might lessen. For instance, the shift from 6.25 BTC to 3.125 BTC per block is somewhat significant, but future halvings will see smaller reductions, potentially diminishing their market impact. When Bitcoin's last halving occurred in May 2020, the circulating supply was roughly 18.37 million BTC. The block reward was then 6.25 BTC, translating to an annual inflation rate of about 1.82%. Over the following four years, as the supply expanded, this rate gently decreased. When our most recent 2024 halving occurred, the inflation rate had dipped by approximately 6% to around 1.71%. Post the 2024 halving, the block reward has halved to 3.125 BTC. With the ongoing rise in total supply, the inflation rate has dropped to less than 1% annually (currently around 0.85%). This perpetual decrease underscores the farsightedness intrinsic to Bitcoin's design but is gradually becoming less and less pronounced. As it stands, there are approximately 19.7 million bitcoin are in circulation, with a block reward of 3.125 BTC materializing every ten minutes. This means we've mined 94% of the total supply, with the remaining 1.3 million BTC to be mined over the next 120 years. The chart below shows the daily BTC miner earnings solely from block rewards (orange line), and its slow trend towards 0.
The Changing Landscape of Miner Revenue and Fee-based IncentivesAs block rewards dwindle, transaction fees fill the void in miners' income. On April 20th 2024, the day of the halving, transaction fees alone reached 1257.72 BTC, surpassing the block rewards for that day (409.38 BTC) by over 3.07x. This was the first-ever occurrence of miner earnings from fees surpassing that of the block reward, and outlines the looming shift towards a fee-driven mining model. As miners' income from transaction fees grows, the importance of halving events in shaping miner incentives may decrease. If transaction fees make up a more significant part of their earnings (as indicated by the yellow shaded area in the chart below), miners may be less worried about a 50% cut in block rewards (block reward earnings highlighted in the chart beneath as the blue shaded areas). This transition hints that the once-dominant influence of halving events on miner behavior, and by extension, bitcoin's price, may wane over time.
The Impact of HodlingThe increasing trend of hodling – holding on to bitcoin for the long term – is another factor that may be dampening cyclical moves we see in the BTC price. Data shows that more than 30% of the supply hasn't moved in the last 5 years, and this percentage will likely continue to rise rapidly on a macro basis, as can be seen in the chart below; with the orange line indicating the percentage of all circulating bitcoin that has remained dormant for at least half a decade. Whether lost or simply held by longer-time horizon investors, this behavior decreases the circulating supply and now overshadows the impact of the reduced new supply from halving events. If 10% of these 5+ year hodlers (about 3.2% of the circulating BTC supply) decide to take profit on their positions during this cycle, this would result in 630,400 BTC hitting the open markets. During this entire four-year halving cycle, there will only be 656,250 new bitcoin minted, a marginal difference and a comparison that clearly outlines the new market dynamics.
The Prospect of Extended Market CyclesThis ceaseless decrease in inflation is likely to draw further institutional and potentially even sovereign investment. Organizations like BlackRock and countries such as El Salvador acknowledge Bitcoin's escalating scarcity and the potential for price appreciation. Demand is predicted to surge as more investors become aware of Bitcoin's unique monetary attributes. Yet, this demand will likely be more synchronized with traditional liquidity cycles and macro-economic driven risk-on appetite as opposed to the retail speculation that’s driven previous cycles. Given the likely dampened impact of bitcoin’s own fundamental factors, the increased influence of new market participants, as well as its historically strong positive correlation with traditional assets and indexes such as the S&P500, bitcoin may begin to follow more conventional market cycles, such as those seen in equities, which generally span 8-10 years. In this chart we can see both the BTC price action (black line) and the S&P500 price action (blue line). These parallel movements can be measured on a -1 (inverse correlation) to 1 (positive correlation scale). Over the past 5 years, the 6-month correlation of these assets routinely reached values above 0.6, indicating a strong correlation between the two. When one moves, the other typically follows.
The Ever Evolving Bitcoin MarketUntil we observe significant deviations from historical patterns, such as bitcoin failing to attain new all-time highs post-halving, the quadrennial cycle remains a valuable framework for understanding bitcoin's market behavior. The decreasing impact of halving events doesn't imply they will turn bearish. Instead, their influence is likely to weaken. The most recent Bitcoin halving event remains bullish and is likely to continue positively influencing bitcoin's price through 2024 and beyond, albeit with likely diminishing returns and less dramatic price fluctuations. While there's no definitive evidence that it has stopped, the overall impact of future halving events is expected to diminish and, subsequently, the predictable four-year cycle. If you found this analysis helpful, consider subscribing to our Substack for more in-depth Bitcoin market insights. Don’t forget to like this post, share it with your network, and leave your thoughts in the comments below. Stay Informed with Bitcoin Magazine Pro
For more in-depth analysis and access to the most comprehensive Bitcoin analytics, visit Bitcoin Magazine Pro. Enjoy a 3 month free trial and explore premium features designed to help you make data-driven investment decisions. Don’t forget to like this post, share it with your network, and leave your thoughts in the comments below. For more detailed Bitcoin analysis and to access advanced features like live chats, personalized indicator alerts, and in-depth industry reports, check out Bitcoin Magazine Pro. The 3 month free trial is only available for a limited time for all new subscribers, so don’t miss this opportunity! Disclaimer: This newsletter is for informational purposes only and should not be considered financial advice. Always do your own research before making any investment decisions. We sincerely appreciate your support and hope you found this content valuable. Please leave a like and let us know your thoughts in the comments section; we always welcome feedback from our audience!
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Monday, July 29, 2024
Is Bitcoin's Traditional 4-Year Cycle Reaching Its End?
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