Bitcoin, Lengthening Cycles Down To a Science
Despite its volatile nature, the trajectory of growth Bitcoin has been growing at over the past decade has been hard to ignore. What was first seen as nothing more than Internet money to buy drugs online with has since evolved into an ecosystem of a novel asset class.
Over the past decade, Bitcoin has been the best performing asset returning an average of 200% a year and nothing has even come remotely close to it. With the S&P returning an average of 7% a year and the NASDAQ returning an average of anywhere from 12% to 20%, its pretty clear to see what the optimal choice would’ve been.
While the exponential increase has been impressive to watch and likely rewarding for those who have bought and held, it definitely wasn’t an easy path to get to where we are today. From the amount of threats thrown by China, to the critiquing of central banks, and lets not forget the constant news headlines of “Bitcoin is dead”. Bitcoin has had quite the journey going from considered as vapourware, to drug money, to what it is now seen today by many as digital gold.
It doesn’t take long after joining the crypto asset markets to learn about the Bitcoin halvening cycles, where the miner reward rate per block is cut in half every 210,000 blocks, or roughly every four years. This can essentially be referred to as “the rising tide that lifts all boats”, as with supply cut in half and demand staying the same, price would double. But this equation is forgetting one big factor, and thats human greed.
Before the initial run of Bitcoins first halvening cycle in November of 2012, one Bitcoin was roughly $12 and rose 10,000% to $1200 within 358 days. The next cycle began in July of 2016 and this time Bitcoin rose from approximately $620 to just under $20,000 for a 3030% gain within 525 days. With each run leading up to a parabolic run upwards before a slight correction to a fair market valuation before the next cycle.
The most recent cycle was in May of 2020, and we’re currently in the midst of the third Bitcoin halvening cycle and about 571 days in, lets see how this plays out.
So while we’ve only been able to extract data and study from the previous two cycles, there are two important pieces of information we can now confirm, one is that, with every halvening cycle the price has never returned back down to its levels prior to the halvening, and the next is that human greed has caused these parabolic run ups to not only be much larger than expected, but also leaks into other assets within this space as traders continue down throughout the risk curve.
During the first cycle of about 385 days, traders only had so many options between Bitcoin, Litecoin, Dogecoin and a few other coins that are no longer with us today. Whereas during the 2016 cycle there was more of a variety within the markets due to the recent buzz of Ethereum and the nonstop ICO craze. Now this time, we’ve got so many new sub sectors and categories for new participants to discover from decentralized finance protocols and DAO’s all the way to NFT’s and the foundation of the Metaverse being built within this space.
So, are these lengthened cycles nothing more than pure speculation from more and more participants joining in, or are these lengthened cycles a signal of adoption of this asset class growing in recognition?
So during the first Bitcoin halvening in 2012, the topics of cryptocurrencies and blockchain were still quite unknown to the masses with most of the people familiar with this newfound technology being either cyberphunks, computer geeks or people looking to buy drugs or gamble online. Eventually some people likely realized they could make a lot of money trading the volatility of Bitcoin due to the elasticity of the price as it was such a small asset at the time. Essentially, the price was driven up purely from the few early adopters and a lot of speculation and likely confusion within the general public, but with its infancies the sight of any bad news such as a ban completely flipped the boat. Thus this cycle lasted just over a year, as once the craze died out the general herd had been scared away from touching Bitcoin again.
Then during Bitcoins second cycle in 2016, there was the introduction of Ethereum and web applications. On top of the cyberphunks and dark web customers from last cycle, many within the world of finance and investing had taken notice at the unique mechanism of this asset with a fixed supply cap and a diminishing inflation rate. The technology began to be better understood and the fear of a ban was gradually fading away. Additionally there was also the craze of Ethereum and ICO’s which created even more chaos within this exponentially growing market, mainstream media eventually began capturing what was going on within the market and eventually Bitcoin was seen as a legitimate enough of an asset to be listed onto the CME Futures, this eventually marked the top for Bitcoins second cycle. The 2016 halvening lasted about 140 days longer than the 2012 cycle and while still lots of speculating around what exactly Bitcoin was the acceptance of this emerging asset class was definitely visible.
Now, in our third halvening cycle, we’ve surpassed the length of the previous cycle and appear to still be on track to move upwards with the market before a correction to fair value, which will likely happen later in 2022. With the adoption of this cycle being far more prominent than ever before, theres advertisements across some of the largest sports leagues, celebrities have been jumping in on the NFT craze, and some of the most successful entrepreneurs have entered this space whether just as an investment, or to build out the frameworks for future adoption.
It’s even starting to look like this may be the cycle to break all cycles when you start taking into account all the other external factors, such as the record amounts of money printing across the world over the past year due to COVID-19, leading to the devaluation of all fiat currencies around the world, while production either stayed stagnant or in some cases fell downwards with the pandemic. World debt is now sitting at an all time high of three times global GDP (Gross Domestic Product). Add in the fact that many citizens are gradually beginning to lose trust within their government authorities, well it’s starting to sound like the perfect storm is brewing up.
So do these lengthened cycles mean anything? Well on the technical side, probably not too much more than the fact that more people are beginning to take notice and join this market either out of curiosity, interest or just pure greed. With the growing amount of projects and new sub sectors emerging within this space such as DAO’s, gaming, and the Metaverse, the overall interest and total addressable audience of this space will continue to reach new markets.
Whereas, on the fundamental side, these lengthening cycles actually make perfect sense. During Bitcoins first cycle, it was just a tiny project started up by a mysterious man and people weren’t sure why anyone would use it over cash. So when price started going up and headlines started covering Bitcoin, the market heated up far too fast for its infancy, as many began to worry about regulations and needed time to shape out its route before anymore future progression.
During the second cycle, while there was still heavy amounts of speculation, many new participants had joined either due to the lucrative investments they were promised, or maybe they had read up on the development in this space and gotten attracted by the aspects of web applications or the developing utility within blockchain technology. Eventually headlines started to roll in again and Bitcoin began becoming a household name again, it was clear there was still far too much speculation and uncertainty for true adoption during the cycle.
And now here we are, in our third cycle with news of publicly traded companies holding Bitcoin on their balance sheets, along with crypto related products trading across legacy markets and El Salvador being the first country to truly adopt Bitcoin. There is still some speculation and caution within the general public, but many of the largest names in finance now admit that this asset class has become to large to stop and will play a role in our future as our assets become tokenized and live on a blockchain.
Essentially, as the speculation and hype of this space begins to die down and people begin to understand the value within communities and utility this asset class, the volatility from these cycles will begin to diminish and the market will stabilize itself similar to that of equities markets today.
*None of the information listed is financial or investment advice and should only be taken as entertainment or educational as I’m not a financial advisor*
Hey, thanks for taking the time to read my work. I’m your average 21 year old, currently in school for Economics and Finance. Some of my hobbies consist of sports, working out and staring at price charts.
I initially began interested in the crypto space after frustrations with legacy markets. From the second I read about the Ethereum ecosystem, I fell in love. An entire ecosystem built on one platform that anybody can access? Unheard of, until now.
With how fast this space is developing, I try and find projects within this industry that show promise and potential to disrupt our modern world. All this fundamental analysis not only helps me better understand these projects better, but hopefully gives you guys some newfound information!