November 26, 2020

Bitcoin’s Market Cycle

History does not always correctly predict the future; however, this analysis does provide an interesting outlook on potential future price movements.
8 min

Market Snapshot

Bitcoin has once again proven itself to be one of the best performing assets on the planet, boasting year to date returns in excess of 350%. Bitcoin is rapidly approaching the previous all-time high of 2017, with prices currently sitting above $16,000 USD. Bitcoin’s market cap is now over 320 Billion dollars, with 24-hour trade volume exceeding $37 Billion. At the time of writing, there are only five days in the history of Bitcoin in which you could have bought and not been in profit, leading to a very positive sentiment within the community. This week, Bitcoins price consolidated around the $18000 - $19,000 range, allowing for altcoins to catch up. Stellar and XRP have moved over 70% in the past week, with the majority of the top 100 assets seeing positive price movements week to date. Today did see a market wide correction, however, pullbacks of this nature are to be expected after such strong growth. Historically the last 2 bull runs have shown approximately 5-6 large corrections over 20%, some surpassing 40%, usually lasting 7 days at most.

Bitcoin’s Market Cycle  

Historical data indicates that Bitcoin follows a four-year cycle, centred around the Bitcoin halving events, which happen approximately every 4 years until the maximum supply of all 21 million Bitcoins have entered circulation. A halving event is when the reward for mining new blocks is cut in half, meaning miners receive 50% less Bitcoin for verifying transactions. If the demand for Bitcoin remains the same or increases after a halving, the diminishing supply will result in further price increases. Additionally, further accumulation of Bitcoin is occurring in anticipation of new all-time highs. The amount of Bitcoin held in exchange wallets has reduced significantly this year, highlighting the fact that investors are holding out for much higher prices. This reduces available supply even further and as seen below, this is resulting in sharp price increases.  

Below is a comparison of Bitcoin price movements after the halving events, scaled to the 2020 halving monthly close. It highlights how early in the bull run we are, but also that the strength of the bull market slightly weakens each year as the amount of capital needed to enter the market to push the prices up increases each time. This however still paints a very bullish picture for Bitcoin, with a lot more potential positive price action to follow.

Bitcoin Market Cycle Phases

Phase 1 – Accumulation  

Occurs once the price has reached its bottom and starts to show small signs of growth. This is the stage in which buyers will try to accumulate cheaper Bitcoin and this is the point of maximal financial opportunity.  

Phase 2 – Continuation  

Occurs as the price continues to move to the upside, reaching the previous all time high. In this phase the Bitcoin halving event will occur, halving the supply of new Bitcoins into circulation. The sell side of the order book will slowly be drained as more accumulation continues to occur in anticipation of the parabolic phase and new all-time highs.  

Phase 3 – Parabolic  

Occurs once the price passes the previous all-time high and price action will start to move exponentially to the upside. Historically, this is when Bitcoin has far exceeded its previous all-time high and increased in value significantly. This phase is extremely volatile, with rapid price increases followed by large corrections.  

Phase 4 – Correction

Following the euphoria of the Parabolic phase, this is when the market will see a major correction. Previous bear market periods have resulted in approximately 80% corrections from the top and negative price action for approximately a year.  

We are currently nearing the end of the accumulation phase and are entering into the parabolic phase. It is expected that we could see extreme volatility ahead in this next phase. The chart below shows the cyclical nature of Bitcoins price and how it has played out in the past, if it continues to follow this model, we are in for an exciting 2021.

Social Metrics  

Bitcoins price is approaching the previous all-time high very quickly, however, a lot of metrics indicate that we are yet to see the previous hype. Social metrics such as google trends show crypto-related terms such as ‘Bitcoin’ are yet to receive anywhere near the traction of the last bull run. Once the price reaches the previous all-time high Bitcoin will likely start appearing in mainstream media conversations, stimulating a new wave of money.

Mainstream Adoption  

PayPal’s chief executive believes cryptocurrencies are on the verge of mainstream adoption, stating, the COVID-19 pandemic has accelerated the shift to digital forms of payments. The platform’s recent changes allowing the purchase of Cryptocurrencies for its 300 million users is one of the largest breakthroughs for mainstream adoption we have seen since inception. PayPal is committing to expanding their cryptocurrency services, with one of their executives stating “One of the things that we allowed is not just making it easy to buy, sell and hold cryptocurrencies, but very importantly, early next year, we’re going to allow cryptocurrencies to be a funding source for any transaction happening on all 28 millions of our merchants. And that will significantly bolster the utility of cryptocurrencies.”.  

Another important metric in the next phase of Bitcoin is trust, as trust is what will bring traditionalist and institutional money into the market. These types of investors have previously looked over Bitcoin due to not trusting the value of an intangible digital asset and the underlying technology on which it runs. Bitcoin over time has proven itself to be a legitimate asset, giving confidence to these types of investors. This flow of capital has already begun with individuals such as Hedge Fund Billionaire Paul Tudor Jones announcing a 2% allocation to Bitcoin and large companies such as Square allocating 1% of total assets to Bitcoin. These are the early adopters, but it is likely a lot more will follow suit once the value proposition is clearly understood and returns are too high to ignore. These investors bring the type of capital required to push Bitcoins price to new all-time highs.  

As more money flows into the market, this next bull run will further cement Bitcoin as a must-have asset for individuals and institutions of the future. Mainstream adoption is on the horizon and sentiment is very bullish, exciting times may be ahead. History does not always correctly predict the future; however, this analysis does provide an interesting outlook on potential future price movements.