7 O'Clock Capital: When will the next bull market come and what will drive it?

Author: 7 O'Clock Capital

Introduction: There is a saying on Wall Street that mediocre traders trade with technology, while top traders trade with conviction. The generation of conviction stems from the understanding of patterns; mastering the laws of development is an important condition for our survival in the market.

The cryptocurrency market is also continuously developing according to its own laws. Bitcoin has experienced three bull markets, but the specific factors that triggered each bull market have been different. However, we can clearly see that Bitcoin halving has become an important node for the arrival of bull markets, while the development of Ethereum technology, the influx of traditional funds, and the increase in financial leverage have led the market into a comprehensive bull market.

In the following text, 7 O'Clock Capital will predict the next bull market by analyzing the specific reasons behind the formation of the past three bull markets.

1: Who played an important role in the three rounds of cryptocurrency market bull runs?

First Bull Market: Q4 2012 - Q4 2013 ------ Increase in demand for anonymous payments

On January 3, 2009, Satoshi Nakamoto mined the Bitcoin genesis block using a small server in Finland, thus Bitcoin was born.

On May 22, 2010, Florida programmer Laszlo Hanyecz spent 10,000 Bitcoins to order two pizzas from "Papa John's," marking the gradual opening of Bitcoin's use in the real world.

In 2011, Bitcoin began to be used in the field of anonymous payments, but it wasn't until 2012, when WikiLeaks started accepting Bitcoin donations to break the blockade, that the usage of Bitcoin significantly increased.

With the Bitcoin halving and the launch of Silk Road 2.0, the supply of Bitcoin relatively decreased while demand further increased, causing the price of Bitcoin to continuously rise, ultimately reaching the peak of the first bull market at $1163 in November 2013.

The greatest significance of the first bull market was that Bitcoin entered the field of anonymous payments, gaining real-world applications and driving a surge in price. This made mining increasingly popular, and the number of participants grew, establishing an economic model based on mining machines and electricity costs, which became the underlying value support for Bitcoin, thereby increasing the impact of Bitcoin halving on price.

Second Bull Market: Q3 2016 - Q4 2017 ------ Rapid development of mining and ICOs attracting funds into the market

In 2015, mining experienced rapid development, with domestic pools like F2Pool and Antpool forming a competitive landscape, where the combined hash power of these two pools reached up to 50% of the entire mining power. During this period, a large amount of capital was used to purchase mining machines and enter mining pools. Due to the increase in demand, mining machines could be sold at prices ten times their manufacturing cost, often in the form of futures contracts. This influx of leveraged funds significantly entered the cryptocurrency market, driving up the price of Bitcoin, which in turn promoted the sales of mining machines, creating a rising spiral. During the same period, USDT emerged and was quickly adopted by major trading platforms, especially in Asia, where its bridging role and value stability facilitated more users entering the cryptocurrency market. These factors led to an increase in demand, and the arrival of Bitcoin halving played a key role in initiating a new Bitcoin bull market.

In July 2014, Ethereum held one of the largest ICOs to date, raising over $18 million. By 2015, the smart contract blockchain platform represented by Ethereum gradually matured, especially with the ERC-20 protocol allowing new tokens to be created in just a few minutes, significantly lowering the costs of blockchain startups and ICO issuances. ICOs became standard for blockchain startups, leading investors who missed the Bitcoin boom to turn their attention to ICOs, followed by the continuous entry of various traditional investment institutions, further pushing the second bull market from a Bitcoin bull market to a comprehensive bull market.

In 2017, the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) opened Bitcoin futures trading, marking Bitcoin's first recognition by mainstream financial markets. Ultimately, in December 2017, Bitcoin reached the peak of the second bull market at $19,666.

During the second bull market, the rapid development of mining solidified the underlying value generated by Bitcoin's mining economic model, further increasing the impact of Bitcoin halving on the market. Additionally, the entry of leveraged funds and the subsequent influx of off-exchange funds from ICOs collectively contributed to the second bull market.

At the same time, we observed a pattern in the bull market cycle: in the early stages of the bull market, Bitcoin surged, in the mid-stage, Ethereum's development propelled the comprehensive bull market, and in the late stage, Bitcoin's entry into traditional finance pushed the market to its peak. This pattern emerged for the first time in the bull market cycle and holds significant reference value for predicting future trends.

Third Bull Market: Q2 2020 - Q4 2021 ------ Federal Reserve's monetary easing in the pandemic environment and the explosion of DeFi and NFT markets

In 2020, under the influence of the COVID-19 pandemic, the Federal Reserve unleashed the "zero interest rate + unlimited QE" "financial nuclear weapon," and upon Biden's inauguration, he proposed a massive $1.9 trillion COVID-19 relief plan. For the financial market, Biden's $1.9 trillion COVID-19 relief plan was like a huge bubble. Under such a massive bubble, a large amount of capital overflowed from traditional financial assets into the cryptocurrency market, evidenced by a significant number of institutions beginning to allocate cryptocurrency assets.

Institutional investors dominated the early rise of the bull market, with Grayscale being the most representative. Grayscale, founded on September 25, 2013, is a cryptocurrency trust fund company and one of the earliest entrants in the crypto space. As a manager of crypto assets, it helps investors manage their assets. It first raised funds from qualified investors, using the raised funds to purchase crypto assets, which were then divided into shares, generating Grayscale's crypto investment products like GBTC and ETHE. Grayscale allows its initial crypto asset investors (with strict qualified investor identity verification) to sell to the public after the lock-up period.

The public can purchase Grayscale's crypto asset products through traditional brokerage and retirement accounts, which also offer benefits in terms of taxes and asset custody. Additionally, these Grayscale crypto asset shares are transferable, allowing traders or investors to profit through trading after purchase. During this period, a large number of traditional institutions and investors entered the cryptocurrency market, causing Bitcoin's price to rise rapidly.

After the institutional-led Bitcoin surge, the market entered the mid-stage of the bull market, where DeFi became the main driving force for market growth. The expansion of DeFi's application scenarios further boosted and supported the Bitcoin bull market. During this period, compared to Bitcoin, institutional interest in Ethereum and other DeFi areas significantly increased, showing a tendency for diversified allocation of crypto assets. Subsequently, due to Ethereum's performance limitations, its value dividends overflowed to competitive public chains like Solana, BSC, and AVAX. This transition led the cryptocurrency market from a Bitcoin bull market into a comprehensive bull market phase.

Moreover, during this period, Tesla announced it would invest $1.5 billion in Bitcoin and would start accepting Bitcoin as a form of payment. Following this, founder Elon Musk's continuous "shouting" further intensified the market's FOMO sentiment, gradually pushing the market to a climax.

In the late stage of the bull market, the approval of Bitcoin futures ETFs and the explosion of the NFT market led retail investors to dominate the final frenzy. During this period, with rising inflation demands in the U.S. and increasing expectations of interest rate hikes and balance sheet reductions, the possibility of a shift in Federal Reserve policy increased, and the largest external macroeconomic stimulus factor for the cryptocurrency market gradually disappeared.

In October to November 2021, three Bitcoin futures ETFs were approved for listing, leading to the final frenzy in the market, pushing Bitcoin's price up to $69,000. At the same time, the NFT market exploded, producing a batch of high-quality blue-chip NFTs, with retail investors becoming the main force in participation, while many smart funds gradually exited during this process.

In summary, looking at the last two bull markets, although the factors leading to the bull markets were different, the structure of the bull market rises showed similarities: Bitcoin first surged to initiate a new bull market, Ethereum's development pushed the Bitcoin bull market towards a comprehensive bull market, and in the late stages of the bull market, events like the previous Bitcoin futures and this round's Bitcoin futures ETF listings represented Bitcoin's acceptance by traditional finance, pushing the entire bull market to its peak. However, Bitcoin halving remains an important time node for the start of the bull market.

2: Who will influence the future trends of the cryptocurrency market?

Through the analysis in the previous section, we have basically determined the three stages of bull market development based on Bitcoin halving as a time node. Now, let's attempt to use this pattern to analyze the future trends of the cryptocurrency market, specifically who will influence Bitcoin's rise and Ethereum's future development.

The impact of the U.S. economy on Bitcoin price trends

Currently, the cryptocurrency market has a high correlation with the U.S. macro economy, especially the correlation between Bitcoin and the S&P 500 index, which is nearing 0.9. Therefore, we must pay attention to the economic conditions in the U.S. when analyzing Bitcoin's trends.

On March 16 this year, the Federal Open Market Committee (FOMC) decided to raise the federal funds rate range to 0.25%-0.5%, initiating the current round of interest rate hikes. Additionally, Federal Reserve officials expect the benchmark rate to rise to 3.4% by the end of 2022, indicating that there will be an additional 175 basis points of rate hikes this year.

Looking back at the last three interest rate hike cycles, they occurred from 1999/06 to 2000/05, 2004/06 to 2006/06, and 2015/12 to 2018/12. In each of these cycles, the overall U.S. economy was in a phase of strengthening growth momentum, accompanied by persistent inflation, indicating an overheating phase in the economic cycle.

Each time the Federal Reserve initiates a new round of interest rate hikes, the stock market experiences varying degrees of pullback in the short term, with the S&P 500 experiencing maximum pullbacks between 5% and 15%. However, over a longer time frame, the stock market ultimately recovers and rises again with improvements in the fundamentals, showing a "V-shaped" trend.

So we need to analyze whether the current U.S. economic conditions are similar to those during the last three interest rate hikes or if we are entering a major recession.

Currently, the U.S. is experiencing the highest inflation rate in nearly 40 years, accompanied by low unemployment rates. The core reason for this inflation is the rise in commodity prices, primarily driven by the flooding of the dollar, which has pushed up the prices of commodities priced in dollars. Additionally, hot money will eventually flow into the commodity trading market, further driving up commodity prices. Therefore, the U.S. can only rely on interest rate hikes and balance sheet reduction measures to cool down and lower commodity investments.

In the U.S. economic system, consumption dominates, and as an important leading indicator of consumption, the job market can directly reflect changes in economic prosperity. Currently, the non-farm payrolls in the U.S. are steadily increasing, and the labor supply-demand relationship reflects the resilience of the U.S. economy, indicating that in the short to medium term, it will not become a constraint on the Federal Reserve's tightening policies. Even if the unemployment rate rises after the Federal Reserve's interest rate hikes and balance sheet reductions, it should remain within acceptable limits, making the probability of entering a major depression quite low.

In summary, the current interest rate hikes are not significantly different from the economic conditions during the previous three cycles. Based on the patterns from the past three cycles, we can analyze that since the Federal Reserve began raising rates in March, the S&P 500 may rebound in the second half of the year, and Bitcoin may complete its bottoming out in this bear market.

The impact of Ethereum's technological development on cryptocurrency market trends

In the last bull market, Ethereum's mainnet experienced congestion and high gas fees as the number of users increased, which posed significant obstacles to ecological development. Additionally, the low capital utilization rate became apparent later on. The expansion of Ethereum and the establishment of a credit financial system based on DID became urgent issues to address.

Currently, Ethereum is undergoing upgrades, with the testnet merge already completed, and the Ethereum mainnet merge (Merge) will follow, transitioning from PoW to PoS. One of the major priorities after the merge is EIP-4844, which utilizes sharding to allow rollups to handle massive transactions, thereby increasing scalability. Layer 2 projects like Arbitrum, Optimism, zkSync, StarkNet, and Polygon will gain significant progress from EIP-4844, attracting more developers.

The expansion of Ethereum and the development of other public chains will lay the foundation for the growth of Web 3.0. Initially, Web 3.0 may represent a virtual economy parallel to the real world, where new industries will emerge and existing industries will be reshaped. The credit and reputation systems established based on DID will address the low capital utilization issues caused by excessive collateral in DeFi. Moreover, sectors such as privacy, DAO, NFT, GameFi, and SocialFi are bound to experience a comprehensive explosion, pushing the Bitcoin bull market towards a full-blown bull market in the cryptocurrency space.

3: Predictions for the entire cycle of the next bull market and its impact on the industry internally and externally

We will use the historical price cycle patterns of Bitcoin, combined with the reasons analyzed above, to make a simple prediction for the next bull market cycle.

First, let's look at the pullback cycles and depths from the peaks of Bitcoin's previous two bull markets to the lowest points of the bear markets. Statistics show:

The first bull market saw a decline of 87.06% over 14 months from the peak to the lowest point of the bear market.

The second bull market saw a decline of 84.78% over 12 months from the peak to the lowest point of the bear market.

The second decline cycle and depth were shorter than the first, so based on this, the current pullback to the lowest point may take less than 12 months, and the pullback depth may be less than 84.78%.

Combining the analysis of the S&P 500's trends above, we believe that Bitcoin's lowest point in this bear market may occur around September to October, with the lowest price potentially in the range of $14,000 to $15,000.

It has been previously analyzed that Bitcoin halving is an important node for the subsequent bull market. Each halving has been accompanied by larger bull markets. The period from the lowest point of Bitcoin's bear market to the halving can be considered a period of adjustment for Bitcoin, during which the price of Bitcoin will generally fluctuate with a slight upward trend. For this time period, statistics show:

The adjustment period from the lowest point of the first bear market to the halving was 18 months.

The adjustment period from the lowest point of the second bear market to the halving was 16 months.

The next Bitcoin halving is expected to occur around May 2024. The period from Bitcoin's bottom to the halving will be an adjustment period, while the Federal Reserve's interest rate hikes may end by the end of this year or early next year, after which the market will also enter a recovery phase.

In summary, we predict that during this period, both the U.S. stock market and Bitcoin will enter an adjustment phase. It can be anticipated that institutions may build positions during this time, but retail investors may lose confidence and exit during significant fluctuations.

After the halving is completed, Bitcoin will begin its upward phase. We can look at the statistics of the cycles and magnitudes from Bitcoin's halving to the peak of the bull market:

The first bull market rose for 13 months, with a multiple increase of 523.87.

The second bull market rose for 17 months, with a multiple increase of 129.04.

The third bull market rose for 19 months, with a multiple increase of 22.09.

From the data above, it can be seen that the rising cycles of each bull market are increasing, while the multiples of increase are gradually decreasing due to the growing base. Therefore, we can speculate that after May 2024, Bitcoin will enter its upward phase. Subsequently, after Ethereum completes its upgrade, the ecosystem will inevitably become richer based on technological improvements, and capital utilization rates will increase. The entire application layer of Web 3.0 will begin to explode, leading to a comprehensive bull market in the cryptocurrency space. We expect that this round of bull market may take more than 19 months for Bitcoin to reach its peak, with a multiple increase likely below 22 times, meaning the highest price may not exceed $300,000. Ultimately, Bitcoin spot ETFs will also be approved, further integrating the cryptocurrency market with traditional finance.

In summary, we believe that the internal driving force of the next round of the cryptocurrency market bull market is the narrowly defined development of Web 3.0, which represents the iterative development of a new internet based on blockchain technology. This will bring about a revolution in the production relations of the internet, and the transformation of production relations will inevitably lead to innovations in productivity, which will be the driving force for the future development of the internet. It is foreseeable that more capital will inevitably flow into the cryptocurrency industry, and mature applications in the cryptocurrency industry will begin to enter people's daily lives.

The NFTs that have risen in this round of bull market may first enter people's daily lives. Moreover, GameFi and SocialFi based on NFTs will gradually disrupt the Web 2.0 model. Additionally, the narrowly defined Web 3.0 is just the beginning; the broadly defined Web 3.0, including blockchain, the metaverse, VR/AR, and artificial intelligence, will inevitably follow in development, leading to a technological revolution brought about by both software and hardware facilities. Be a friend of time, patiently wait, what is meant to come will eventually arrive.