“History doesn’t repeat itself, but it often rhymes”— Mark Twain
Just like every other aspect of life — from the changing of seasons to the migration of birds—financial markets are made up of repeated patterns.
For centuries, analysts have sought to beat the market by identifying these patterns and hitting ‘buy’ at the right moment to get the best price.
Bitcoin’s own market cycles are influenced the same forces as other markets, like supply and demand and crowd psychology, along with unique technical factors like halving events.
What is the Halving?
The halving happens every 210,000 blocks on the Bitcoin network, and marks the moment when the amount of bitcoin that gets created every ten minutes is halved.
These milestones were coded into Bitcoin by Satoshi at inception, and happen roughly every four years.
The first halving happened on November 28th 2012, and reduced the block reward to 25 Bitcoin. The second halving on July 9th 2016 then reduced the reward to 12.5 Bitcoin. In May 2020, the third halving will reduce the block reward to 6.25 Bitcoin. This process is expected to continue every four years until the final bitcoin is mined around the year 2140.
Bitcoin’s four year cycle
With no mature correlations, earnings or industrial demand to take into account, the price of Bitcoin runs almost entirely on sentiment — from the hope, optimism and irrational exuberance of a bull market, to the complacency and crushing despair of a bear market.
But, some suggest the halving is also responsible for catalysing changes in price.
By reducing the amount of bitcoin flowing on to the network, the event effectively acts as a supply shock, triggering behavioural changes in the big players that are responsible for moving the price.
This can be related to the market phases of accumulation, markup, distribution, and markdown laid out by technical analysis titan Richard Wyckoff.
In the months leading up to the halving, smart money is accumulating bitcoin. The big players — or the whales in crypto parlance — are filling their bags, and the little shrimp are giving up on the market and selling.
The primary emotion of this phase is boredom and disappointment, causing the “weak hands” to drop their bitcoin and give up.
When the halving happens and the miners’ income is slashed, they tend to stop selling the coins they are earning and cover operational costs with cash reserves. Not only is there now half the amount of new bitcoin entering the network, but miners are holding on to their new bitcoin with the expectation of being able to sell for higher prices later.
Demand meanwhile, stays steady — leading the price to rise. Institutions gain confidence and buy more, and old crypto enthusiasts remember their lost interest and return to the market. Eventually, the buying pressure builds up enough to push the price above the previous all-time-high.
At this point bitcoin hits the headlines. Analysts come out with ridiculously bullish predictions, and even grandma suddenly gets interested in buying. As the buying frenzy intensifies, market orders pile up on exchanges and the price pushes up to fresh highs.
It is during these final few weeks of the bull market that most of the gains are realised, with bitcoin painting a parabolic curve on the chart.
Emotions develop from hope and optimism at the start of the markup phase, to irrational exuberance at the end.
Distribution & Markdown
Eventually the post-halving bull market reaches a precipice, and the mood begins to shift from euphoria to complacency as bears overpower bulls and gravity exerts itself on the price.
At this point the smart money has already sold. This includes miners who are selling off their reserves to try and ensure the best chances of survival in the years to come.
Several months or years later, the price eventually bottoms out at around 80-85% of the peak, leading to a new round of media headlines proclaiming bitcoin as dead.But, despite the poor sentiment, bitcoin eventually recovers and the cycle starts all over again.
In this final stage of the cycle the emotions range from complacency just after the peak, to despair and capitulation at the bottom.
A Word of Warning:
This market cycle thesis suggests bitcoin will continue following this pattern until it eventually tops out somewhere in the distant stratosphere. But before the bulls get too cocky, any statistician worth their salt will tell you that two halvings represents a tiny sample size, and can’t lead to any definite conclusion about bitcoin’s future performance.
Disclaimer: This is not financial advice