Dismantling the Past Three Bitcoin Cycles: What's Driving the Next Cycle?

Author: Michael Nadeau

Original compilation: Luffy, Foresight News

The next halving of the Bitcoin block reward will occur around April 8, 2024. Historically, halvings have triggered three surprisingly similar cycles. In this article, we will disassemble the past three Bitcoin cycles and predict the next cycle.

Topics we explore include:

• What is the driving force behind the Bitcoin cycle? *Operation and network KPIs for the first 3 cycles
• The price trend of the previous 3 periods
• Predict the next cycle

The driving force behind the Bitcoin cycle

Every 210,000 blocks, the Bitcoin block reward is halved. On a timescale, halving occurs approximately every 4 years. It marks a change in Bitcoin's monetary policy, reducing the block reward (network inflation) paid to miners by 50%.

Next April, the Bitcoin block reward will drop from 6.25 BTC per block to 3.125 BTC.

Since new issuance is halved, it is reasonable to conclude that a reduction in new supply is the catalyst for every bull market.

The theory goes like this:

After a halving, miners sell fewer bitcoins to the market. This consumed a large portion of the selling pressure. Prices are on the border and new buyers will push prices up. Then, the financial press starts talking about Bitcoin, people start Googling it, Bitcoin goes viral, new buyers enter the market, on-chain activity picks up, and VCs pour money into new businesses that support the ecosystem. So, more business = more marketing = more users, which in turn stimulates more buyers, more on-chain activity, and more media coverage.

Lo and behold, an all-time high.

That's a good storytelling story, let's look at the data, is it true.

Net Position Change = Net change in Bitcoin held by wallet addresses that Glassnode marks as belonging to the miner.

First Halving: According to the Bitcoin monetary policy, the annual new issuance is reduced by 1,314,000. But in the 12 months after the halving, the number of bitcoins held by miners decreased by 4,458,603, which is more than twice the decrease in the number of bitcoins held by miners in the 12 months before the halving. In 2013, as the price of Bitcoin rose, miners dumped large amounts of Bitcoin. In total, more than 8 million bitcoins were lost from miners during the first halving cycle. With Bitcoin prices at low levels, buyers dominated the market.

The second halving: Within 12 months after the halving, miners' holdings of Bitcoin also dropped more than the previous 12 months. Once again, price action is dominated by buyers in the market. In total, more than 5.4 million bitcoins were transferred from miners during the second cycle.

Third Halving: Miners sold more Bitcoin after the halving than in the previous 12 months. However, the third cycle is the first accumulation cycle for miners. We see a net position increase of 93k over the past 6 weeks (start of cycle 4).

A supply shock from reduced miner selling does not necessarily spark a bull market. In fact, miners sold more Bitcoin in the 12 months following the halving than at any other time in the cycle.

Having said that, the halving narrative may attract new buyers and the market can self-regulate. So even if the data contradicts the narrative, it might be true if people believe it to be true. Markets are so reflexive, and this is especially true of cryptocurrency markets.

But there's more to this story...

Global Mobility

You’re hearing less and less jibes about Bitcoin’s correlation to the global liquidity cycle, but this is where the data and price action actually line up.

Source: Federal Reserve, PBOC, ECB, Bank of Japan, IMF

Global liquidity appears to have bottomed out at the end of 22, which also marks the bottom for Bitcoin and the S&P 500. At the beginning of the year, we saw a slight rebound in global liquidity. Bitcoin is up 80%. The S&P 500 rose 15%.

In the US, inflation is over and the Federal Reserve has paused in rate hikes. Asset prices have risen year-to-date and are likely to continue for some time.

But there are also some clouds looming over a possible shift in monetary policy.

Specifically, $7 trillion in national debt will mature next year. These debts need to be refinanced/reissued to support fiscal spending. According to the Congressional Budget Office's May 2023 update, the U.S. deficit is projected to be $1.5 trillion this year.

Meanwhile, debt interest payments are now the second-largest expense for the US government, approaching $1 trillion a year.

Source: Federal Reserve FRED database

In October, 43 million Americans will resume student loan payments at an average rate of $503 a month. According to the survey, 37% of borrowers said they needed to cut other spending. 34% said they simply cannot afford the cost.

Additionally, banks are still asking to join the Fed's Bank Term Funding Program:

Source: Federal Reserve FRED database

Consumer credit card lending hits record high, surpassing $1 trillion:

Source: Federal Reserve FRED database

Bank lending standards also signal a recession is coming:

Source: Federal Reserve FRED database

Finally, the commercial real estate industry has over $1.5 trillion in debt that will need to be refinanced over the next few years. That's because interest rates are at their highest level since 2006. Of course, office space occupancy and valuations have declined due to remote work. To add insult to injury, a group of analysts at Citigroup found that more than 70% of commercial real estate office loans are held by regional banks.

These factors should put further downward pressure on inflation.

Currently, CPI inflation swaps will be priced at 2% inflation as early as October this year. The Fed expects inflation to be 1.3% in a year.

Link these together:

Bitcoin’s market price is at stake with liquidity. From a U.S. perspective, liquidity conditions appear to have bottomed out. We have heard the same in China and Japan. Europe is in a similar position. As inflation returns to 2%, the global economy should slow with it.

At that point, the Fed will get the green light to change monetary policy.

This would open the floodgates for another QE wall. As for the schedule? We think this will happen in the next few years.

This shift in liquidity aligns with the Bitcoin halving cycle and the narrative that goes with it.

Innovation Cycle: Operational and Network KPIs

do you understand? Bitcoin cycles depend on liquidity. But liquidity isn't everything.

If we're looking at things like network growth, there might be something to gain.

Liquidity + Growth in Network Fundamentals + Right Narrative = New Price Discovery.

Reflexivity of new price discovery = new VC money. This leads to more construction, more users, and further price discovery.

It is the flywheel through which speculation drives real capital formation and economic development. It's messy, but it's happening.

Bitcoin Network Basics

The Bitcoin network is performing strongly on nearly every metric we track. We'll list a few below:

Non-zero wallets: We have seen a steady increase in non-zero wallets in each cycle so far. Our projections here simply extrapolate last year's growth (currently 47 million). Keep in mind that this number does not represent all Bitcoin holders. Since the data is limited to on-chain wallets, it cannot represent tens of millions of exchange customers.

Developers: With the introduction of the Ordinals protocol, we have seen a recent increase in development activity.

Hash rate: An indicator of network security and miner sentiment. The hash rate has tripled over the past two years, which shows that miners are bullish on Bitcoin.

Long Holder Behavior: One of the most important metrics we track. Long-term holders and the percentage of supply that has not been transferred within a year are currently at all-time highs. Through cycles, we observe that investors and users typically enter during bull markets. Then they learn more about Bitcoin and tend to be long-term holders. We can observe this from the growth of wallets of more than 1 BTC, which recently surpassed 1 million. As long-term holders grow, it sets the stage for the next bull run, when buyers eventually dominate the market.

Lightning Network: The Lightning Network is Bitcoin's second layer scaling solution. It enables payments at far lower costs than transactions on the Bitcoin mainnet. While still in its infancy, we can see that transaction volume within the Lightning Network has grown significantly over the past few years.

Other Catalysts

Coinbase sparked the 2013 bull run.

Ethereum provided the fuel in 2017.

Microstrategy, Paul Todor Jones, Tesla, Block, Mass Mutual, etc. blew up the market in the last cycle.

What will happen in 2024/2025?

BlackRock ETF approval would be a good start.

BlackRock has an impeccable reputation, and only one of the more than 500 ETFs it applied for failed.

In some ways, the presence of the BlackRock name in an ETF makes more sense than the Bitcoin spot ETF itself.

The BlackRock name matters to RIAs, it matters to asset managers, it matters to nearly every investor on the planet.

In the past, investing in bitcoin on behalf of clients could have put fund managers at professional risk. A BlackRock ETF could turn that around entirely.

Some food for thought: what happens if the bigger risk is not allocating 1% of Bitcoin through a trusted vehicle like a BlackRock spot ETF?

Price action in a period and forecasting the next period

5 Takeaways:

** Market Timing: ** The best time to buy Bitcoin is when everyone thinks it is dead. In 2022 we have two chances. We reminded readers in December that Bitcoin was bottoming out. Second, what's the second best time to buy Bitcoin? Historically, it happens during any dips leading up to halvings. Of course, timing the market is really difficult. Dollar-cost averaging works well for assets like Bitcoin that are in the early stages of global adoption. Even those who bought at tops of past cycles have done well in the long run. Bitcoin is currently down 55% from its all-time high, but its 10-, 7-, 5-, and 3-year compound annual growth rates are 84%, 73%, 36%, and 49%, respectively. The key is to have long-term belief. Know exactly what you're buying and ignore the noise.

Forecast: Based on the previous 3 cycles, we predict that the rate of return will continue to decline. The target price of Bitcoin in this cycle is $158,000.

Higher-level framework: We forecast a peak Bitcoin market capitalization of $3.15 trillion in the next cycle (vs. $1.2 trillion in the previous cycle). This would put bitcoin's market capitalization at 25% of gold's. Long-time readers know that we finally believe that Bitcoin will match and surpass the gold market (currently $12.6 trillion).

Overall, we believe the total cryptocurrency market capitalization could surge to $8-10 trillion in the next cycle (from $3 trillion in the previous cycle). Interesting opportunities could arise in Ethereum, competitive L1, critical infrastructure areas.

POST-CYCLE LOW: We expect Bitcoin volatility to continue for years to come. Having said that, we expect volatility to subside over time. Growth in market size, entry of more sophisticated investors into the space, mature market structure and products, new regulations, and less "Wild West" leverage all contribute to this outcome. Note that Bitcoin is like a commodity - the price far exceeds its cost of production in a bull market, and then falls below (and sometimes below) its cost of production in a bear market.

A note about the previous cycle: We believe that due to the mining ban in China, this cycle did not live up to its potential. If you remember, the price of bitcoin had just hit a new all-time high, Tesla had just bought bitcoin for its balance sheet, and Michael Saylor had bought billions of dollars in bitcoin through Microstrategy and media tours. We believe that without the Chinese mining ban, Bitcoin could break $100,000. Due to the concentration of miners in mainland China (where cheap hydropower is abundant), the ban eventually led to forced selling and capitulation of miners.

Mid-cycle KPIs

Zoom out and see where we are today relative to past cycles.

Market Value/Realized Value:

Source: Glassnode

This metric measures the ratio of the market price to the average price per bitcoin in circulation. We came out of the green zone in early '23, which has historically been a good entry point. That said, we're still at a relatively low level.

Realized Value:

Source: Glassnode

Realized value is a proxy for the average price, the purchase price for each bitcoin in circulation. The current price is $20,323.34.

200 Week Moving Average Heatmap:

Source: Look into Bitcoin

In 2022, Bitcoin fell below the 200-week moving average for the first time in history, and it lasted for about 9 months. Bitcoin has since recovered, with the 200 WMA currently at $26,665.

in conclusion

Bitcoin’s adoption cycle is primarily driven by the “narrative” of global liquidity, network growth, and halving supply shocks. These three elements seem to fit together nicely.

On top of that is a bitcoin spot ETF bearing the BlackRock name that will be approved in the coming months.