Analyzing the past three Bitcoin cycles: What are the driving forces for the next cycle?

Original Author: Michael Nadeau

Original Compilation: Luffy, Foresight News

The next Bitcoin block reward halving is expected to occur around April 8, 2024. Historically, halvings have triggered three remarkably similar cycles. In this article, we will break down the past three Bitcoin cycles and predict the next one.

The topics we explore include:

• What are the driving forces behind Bitcoin cycles?
• Operational and network KPIs of the first three cycles
• Price trends of the first three cycles
• Predictions for the next cycle

Driving Forces Behind Bitcoin Cycles

Every 210,000 blocks, the Bitcoin block reward is halved. Measured on a time scale, halvings occur approximately every four years. It marks a change in Bitcoin's monetary policy, reducing the block reward paid to miners (network inflation) by 50%.

In April next year, the Bitcoin block reward will decrease from 6.25 BTC per block to 3.125 BTC.

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

The theory is as follows:

After a halving, miners sell less Bitcoin to the market. This alleviates a significant portion of the selling pressure. Prices are at the boundary, and new buyers push prices higher. Then, financial media starts talking about Bitcoin, people begin searching for it on Google, Bitcoin quickly gains popularity, new buyers enter the market, on-chain activity rebounds, and venture capital firms invest in new businesses supporting the ecosystem. Thus, more businesses = more marketing = more users, which in turn stimulates more buyers and more on-chain activity, as well as more media coverage.

Look, a new all-time high.

This is a great narrative, but let's look at the data to see if it's factual.

Net position change = The net change in Bitcoin held by wallet addresses marked as belonging to miners by Glassnode.

First Halving: According to Bitcoin's monetary policy, the annual new issuance decreased by 1,314,000. However, in the 12 months following the halving, the Bitcoin held by miners decreased by 4,458,603, which is more than double the amount held by miners in the 12 months prior to the halving. In 2013, as Bitcoin's price rose, miners sold a significant amount of Bitcoin. During the first halving cycle, over 8 million Bitcoins left the hands of miners. With Bitcoin prices at lower levels, buyers dominated the market.

Second Halving: In the 12 months following the halving, miners' Bitcoin holdings again decreased more than in the previous 12 months. Once again, the price trend was driven by buyers in the market. In the second cycle, over 5.4 million Bitcoins were transferred from miners.

Third Halving: The amount of Bitcoin sold by miners after the halving was greater than in the previous 12 months. However, the third cycle marked the first accumulation phase for miners. We found that in the past six weeks (since the start of the fourth cycle), net positions increased by 93,000.

The supply shock caused by reduced miner sell-offs does not necessarily trigger a bull market. In fact, the amount of Bitcoin sold by miners in the 12 months following the halving was greater than at any other time during the cycle.

That said, the narrative around halvings may attract new buyers, allowing the market to self-regulate. Therefore, even if the data contradicts the narrative, if people believe it to be true, it may indeed become true. The market is that reflexive, and the cryptocurrency market is especially so.

But there is more to this story…

Global Liquidity

You will hear less and less about the correlation between Bitcoin and global liquidity cycles, but this is where the data aligns with price trends.

Source: Federal Reserve, People's Bank of China, European Central Bank, Bank of Japan, International Monetary Fund

Global liquidity seems to have bottomed out at the end of 2022, which also marked the bottom for Bitcoin and the S&P 500 index. Earlier this year, we saw a slight rebound in global liquidity. Bitcoin rose by 80%. The S&P 500 index increased by 15%.

In the U.S., inflation has ended, and the Federal Reserve has paused interest rate hikes. Asset prices have risen since the beginning of the year and may continue for some time.

However, there are some clouds looming, and monetary policy may shift.

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

Meanwhile, interest payments on the debt have become the second-largest expenditure for the U.S. government, approaching $1 trillion annually.

Source: Federal Reserve FRED Database

In October, 43 million Americans will resume student loan repayments, with an average payment of $503 per month. According to surveys, 37% of borrowers say they need to cut other expenses. 34% say they cannot afford this payment at all.

Additionally, banks are still requesting to join the Federal Reserve's Bank Term Funding Program:

Source: Federal Reserve FRED Database

Consumer credit card debt has reached an all-time high, exceeding $1 trillion:

Source: Federal Reserve FRED Database

Bank lending standards also indicate that a recession is imminent:

Source: Federal Reserve FRED Database

Finally, the commercial real estate sector has over $1.5 trillion in debt that needs refinancing in the coming years. This is due to interest rates being at their highest level since 2006. Of course, occupancy rates and valuations for office space have declined due to remote work. Compounding the issue, a group of analysts at Citigroup found that over 70% of commercial real estate office loans are held by regional banks.

These factors should exert further downward pressure on inflation.

Currently, CPI inflation swaps are pricing in a 2% inflation rate as early as October this year. The Federal Reserve expects inflation to be 1.3% within a year.

Connecting these dots:

The market price of Bitcoin is crucially tied to liquidity. From the U.S. perspective, liquidity conditions seem to have bottomed out. We are hearing similar situations in China and Japan. Europe is also in a comparable position. As inflation returns to 2%, the global economy should slow down accordingly.

At that point, the Federal Reserve will receive the green light to change monetary policy.

This will open the floodgates for another wall of quantitative easing. As for the timeline? We believe this will happen in the coming years.

This shift in liquidity aligns with the Bitcoin halving cycle and the accompanying narrative.

Innovation Cycle: Operational and Network KPIs

Got it? Bitcoin cycles rely on liquidity. But liquidity is not everything.

If we consider factors like network growth, we might gain some insights.

Liquidity + Network Fundamental Growth + Correct Narrative = New Price Discovery.

The reflexivity of new price discovery = New VC Funding. This leads to more building, more users, and further price discovery.

It is a speculative-driven flywheel of actual capital formation and economic development. It's chaotic, but it's happening.

Bitcoin Network Fundamentals

The Bitcoin network is performing strongly across nearly every metric we track. Here are some highlights:

Non-zero wallet addresses: So far, we have seen steady growth in non-zero wallet addresses in each cycle. Our prediction here is merely extrapolating last year's growth (currently at 47 million). Keep in mind that this number does not represent all Bitcoin holders. Due to data being limited to on-chain wallets, it cannot represent the millions of exchange customers.

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

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

Long-term holder behavior: One of the most important metrics we track. The percentage of supply held by long-term holders and not moved in over a year is currently at an all-time high. Throughout the cycles, we observe that investors and users typically enter during bull markets. They then learn more about Bitcoin and tend to become long-term holders. We can observe this from the growth of wallets holding over 1 BTC, which has recently surpassed 1 million. As long-term holders grow, it lays the foundation for the next bull market, where buyers will eventually dominate the market.

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

Other Catalysts

Coinbase sparked the bull market in 2013.

Ethereum provided the fuel in 2017.

Microstrategy, Paul Tudor Jones, Tesla, Block, Mass Mutual, and others ignited the market in the last cycle.

What about 2024/2025?

The approval of a BlackRock ETF would be a great start.

BlackRock has an impeccable reputation, with only one of the over 500 ETFs it has applied for being rejected.

In some ways, BlackRock's name appearing in the ETF is more significant than the Bitcoin spot ETF itself.

The name BlackRock matters to RIAs, which is important for asset managers, and it matters to almost every investor on the planet.

In the past, representing clients to invest in Bitcoin could pose career risks for fund managers. A BlackRock ETF could completely reverse this situation.

Some thought-provoking questions: What happens if the greater risk is not allocating 1% of Bitcoin through trusted tools like the BlackRock spot ETF?

Price Behavior in the Cycle and Predictions for the Next Cycle

5 Key Points:

Market Timing: The best time to buy Bitcoin is when everyone thinks it is dead. We had two opportunities in 2022. In December, we reminded readers that Bitcoin was bottoming out. Secondly, what is the second-best time to buy Bitcoin? Historically, it occurs during any downturn before a halving. Of course, timing the market is indeed challenging. Dollar-cost averaging works well for assets like Bitcoin that are in the early stages of global adoption. Even those who bought at the top of past cycles have performed well in the long run. Bitcoin is currently down 55% from its all-time high, but its 10-year, 7-year, 5-year, and 3-year compound annual growth rates are 84%, 73%, 36%, and 49%, respectively. The key is to have long-term conviction. Know exactly what you are buying and ignore the noise.

Prediction: Based on the previous three cycles, we predict that returns will continue to decline. The target price for Bitcoin in this cycle is $158,000.

Higher-Level Framework: We predict that the peak market cap for Bitcoin in the next cycle will reach $3.15 trillion (up from $1.2 trillion in the last cycle). This would give Bitcoin a market cap of 25% of gold. Long-term readers know that we ultimately believe Bitcoin will reach and surpass the gold market (currently valued at $12.6 trillion).

Overall, we believe the total cryptocurrency market cap in the next cycle could soar to $8-10 trillion (up from $3 trillion in the last cycle). Ethereum, competitive L1s, and significant infrastructure sectors may present interesting opportunities.

Post-Cycle Lows: We expect Bitcoin's volatility to persist in the coming years. That said, we anticipate that volatility will diminish over time. Market size growth, more mature investors entering the space, mature market structures and products, new regulations, and less "Wild West" leverage will all contribute to this outcome. Note that Bitcoin behaves like a commodity—its price far exceeds production costs during bull markets and then falls to (sometimes below) production costs during bear markets.

Remarks on the Previous Cycle: We believe that the cycle did not reach its full potential due to China's mining ban. If you recall, Bitcoin's price had just reached an all-time high, Tesla had just purchased Bitcoin for its balance sheet, and Michael Saylor had bought billions of dollars worth of Bitcoin through Microstrategy and media tours. We believe that without China's mining ban, Bitcoin could have surpassed $100,000. The ban ultimately led to forced sell-offs and capitulation events for miners concentrated in mainland China (where cheap hydroelectric power is abundant).

Mid-Cycle KPIs

Narrowing down to understand our current situation relative to past cycles.

Market Value / Realized Value:

Source: Glassnode

This metric measures the ratio of market price to the average price of each circulating Bitcoin. We exited the green zone at the beginning of 2023, which has historically been a good entry point. That said, we are still at relatively low levels.

Realized Value:

Source: Glassnode

Realized value represents the average price, i.e., the purchase price of each circulating Bitcoin. Currently, this 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 remained there for about 9 months. Since then, Bitcoin has recovered, and the current price of the 200 WMA is $26,665.

Conclusion

The adoption cycle of Bitcoin is primarily driven by global liquidity, network growth, and the "narrative" of halving supply shocks. These three elements seem to combine well.

The most important factor is the approval of a Bitcoin spot ETF bearing the BlackRock name in the coming months.