Charting History's Rhyme: Understanding The Cyclicality of Crypto Markets

Understanding the characteristics of past cycles can offer valuable context for evaluating the current market.

TL;DR

We are currently in the sixth crypto bull cycle, which has been ongoing for slightly over a year.
Based on historical patterns, we are approaching the middle of the median-duration bull cycle, suggesting that we are entering the second half of the crypto bull market.
The recent occurrence of the 50-day moving average crossing above the 200-day moving average for the second time in this cycle indicates a positive signal. This technical indicator has a strong track record, with over 80% of instances resulting in positive returns over the medium term.
The current Bitcoin bull cycle has been remarkably smooth compared to previous cycles, but if it follows historical patterns, we can expect at least 10 more negative corrections (over -5%) prior to reaching the peak of this cycle.
Short-term returns before and after Bitcoin halving events have generally shown significant positive performance.
While halvings are often discussed as potential drivers of market cycles, it is likely that their influence is coincidental, as they overlap with global macro cycles.

Motivation

As we embark on the path of navigating the current market environment, there is a strong motivation to delve into the annals of market history, unraveling the patterns and dynamics that have shaped past cycles.

By drawing upon the lessons learned from previous market cycles, we can equip ourselves with a deeper comprehension of market behavior. Additionally, understanding the duration, magnitude, and characteristics of past cycles can offer valuable context for evaluating the current market state and identifying potential inflection points.

On Cyclicality

A market cycle is usually defined as the period between two major lows for a broad market index like S&P 500. Global market cycles are influenced by the business cycle, economic conditions and investor sentiment. At the granular level, individual sectors, industries, and assets bear the imprint of these macro cycles, yet remain tethered to the nuanced sway of their unique idiosyncratic factors.

Cycles, generally, have four distinct phases or periods that characterize the behavior of market participants: accumulation, mark-up, distribution, and mark-down.

In the inaugural act, the accumulation phase marks the end of a downtrend. Here, the prevailing mood is one of disbelief and uncertainty, as market participants cautiously navigate an environment characterized by low price volatility.

Transitioning to the Markup Phase, the bull market takes center stage. Investor sentiment is awash with optimism and excitement, painting a landscape of upward-trending price charts.

The narrative takes a turn in the Distribution Phase, where market sentiment becomes dominated by overconfidence and greed.

Finally, the Markdown Phase, signaling a bear market, steps into the limelight. Anxiety and panic dominate market sentiment against the backdrop of a downtrending price chart. Unfavorable economic conditions cast a shadow, amplifying the sense of unease in this challenging phase.

This piece focuses on the inherent cyclicality of cryptocurrency markets, with a particular focus on Bitcoin. Bitcoin boasts the largest market capitalization and stands as the most traded digital currency. The volatile price of Bitcoin makes a profound influence on the rest of the crypto assets that typically have high correlation with it and move in accord.

Since inception, BTC has seen an average upward trend of more than 2x annually, however, if we zoom in, we can identify clear cycles.

So far, there have been five (six if we count the current cycle too) bull cycles (green area) and five bear cycles (blue area).

Presently, it appears the crypto market is at the middle of the sixt bull cycle, navigating the markup phase, as the accumulation phase, the initial phase of the cycle, spanned from the end of 2022 to the summer of 2023 when Bitcoin’s volatility has fallen to historic lows.

An Exploration of Past and Present Parallels

One school of thought dismisses the efficacy of technical analysis, arguing that historical price and volume data lack the consistent predictive power required for anticipating future stock prices. According to this perspective, relying on past price movements and trading volumes provides no inherent advantage in forecasting market trends, a sentiment with which we resonate, especially when evaluating the performance of individual assets in isolation.

Conversely, we hold the belief that analyzing historical information is valuable for understanding the cyclical nature of markets. While not offering a crystal ball for predicting precise future price movements, historical analysis can cultivate intuition and serve as a tool to sidestep biases. By scrutinizing market cycles, it aids in avoiding unwarranted bullish enthusiasm, such as the supercycle narrative during periods of greed, and counteracts bearish narratives in times of panic. This approach aims to foster a mindset that is both resilient and discerning, encouraging tenacity during tumultuous times and skepticism in the face of exuberance.

Basic Statistics

In the tables below, we present the stats for each of the historical bull and bear cycles.

Analyzing the past cycles, the median drawdown has been -77% (mean around -75%) in previous bear cycles. The most recent bear cycle had exactly 77% drop in prices. On the other hand median price increase in bull markets is 15x (mean around 60x).

When it comes to the duration of the cycles, the median duration of a bear cycle is 354 days, and the mean duration is at 293 days. The time-frame of the most recent bear cycle was 354 days. When it comes to bull cycles, median duration is 604 days and mean of 571 days.

Bull Market Countdown

The current bull cycle lasts about one year. Below we compare Bitcoin returns in this cycle vs previous cycles over a similar time window.

The 2018-2019 bull cycle ended in less than a year with a return of about 3.9x. 2020-2021 and 2015-2017 cycles lasted more than a year, and over the first 365 days, the respective returns have been 11x and 1.9x. Essentially, 2020-2021 cycle returns were mostly realized in the first year since the start of the bull market, while the 2015-2017 cycle accelerated performance post year one.

As for the current bull cycle, the Bitcoin price is 2.6x from the bottom and time-wise roughly at the middle of the median-duration bull cycle.

In the past few weeks, for the second time since the beginning of this cycle, the 50-day price moving average (MA) crossed above the 200-day MA. In fact, it's not often that we see this event twice in such a short period of time. Searching for similar occurrences in the past we find this sort of event happening only once, during the 2015-2017 bull.

Back then, after the second 50/200 day MA cross in 2015-2017 bull cycle, BTC had following results:

post 90 days - return of 1.27x
post 180 days - return of 1.43x
post 365 days - return of 2.26x

Over the full history of Bitcoin price, 50 day MA has crossed above 200 day MA only in 6 instances so far. Probabilistically, we can say that this event suggests more than 80% (historically 5 out of 6 events) likelihood of positive returns one year after the cross happens.

On average, the expected BTC returns post bullish crossing event are:

after 90 days - 1.1x
after 180 days - 1.33x
after 365 days - 2.5x

Bumpy Road Ahead

The current bull cycle has displayed a remarkable level of smoothness that surpasses any cycle in Bitcoin's history.

On its journey towards the peak, the previous cycle experienced nearly 115 daily corrections of 5% or more (here we refer to negative returns as corrections), whereas the current cycle has experienced only 10 such corrections. Even cycles with shorter durations exhibited more corrections than the current one.

So far, no bull cycle ended with less than 20 daily corrections above 5%. Thus, if this cycle is to resemble the characteristics of the previous ones, we can expect at least 10 additional corrections as the market continues its ascent before transitioning to a bearish sentiment.

BTC Halving Impact

Bitcoin halvings are programmed events within the network that occur approximately every four years, specifically when 210,000 blocks are mined. During a halving, the rate at which new BTC is created is reduced by half.

This has notable implications for Bitcoin miners, as their rewards for mining are also cut in half. Consequently, mining becomes more competitive, driving miners to seek cost-effective energy sources to sustain their operations.

Additionally, halvings substantially decrease the influx of new BTC into the market, which contributes to the perception of halvings as a bullish catalyst among many market participants.

To illustrate the impact of halvings, let's examine the issuance of Bitcoins leading up to and following each halving. Prior to the first halving, over 10 million Bitcoins had been issued. This was followed by the issuance of slightly over 5 million Bitcoins before the second halving and approximately 2.5 million Bitcoins before the third halving event.

These statistics highlight the diminishing rate of new BTC issuance over time, emphasizing the scarcity and potential long-term value appreciation of the cryptocurrency.

While analyzing three historical halving events may not provide a statistically significant sample size to draw definitive conclusions, the significance of halving events within the Bitcoin community and their widespread discussion as bullish catalysts cannot be ignored. With this in mind, we delve deeper into the data surrounding historical halving events in the following section.

The next halving is expected to occur around April 2024 at block 840,000. The mining reward will decrease to 3.125 BTC.

The cycles are clearly visible and seem to be linked to these events, which can be clearly seen from the graph below showing the change in BTC price after the Halving event:

Percentage-wise, the impact of halving has been gradually reducing with BTC becoming a more mature asset. After the last halving event, the price increased more than 6x one year after the halving.

Analysis of pre-halving period

In the anticipation of the halving events we also observe strong BTC price action, although not to the level of intensity to the post-halving periods. Again, with each new cycle the percentage increase has been more modest going from 400%, over 150% to 25% in respective pre-halving periods.

Analysis of macro and crypto bull cycles overlap

Before we prematurely tie crypto cyclicality to the halving cycles we should try to isolate the effect of the global macro cycles on crypto.

As illustrated above, there is a lot of overlap, especially in the last few years. For this reason, we cannot say that halving events have a decisive role in the timing of the start of a new cycle. While a positive macro environment is likely to be the major determinant in crypto cyclicality, halving cycles as well as other crypto-specific events likely have a major impact on the magnitude of a bull market.

Crypto traders are likely to closely follow the macro environment, with interest rates, oil prices, and the outcome of ongoing geopolitical wars expected to have a major impact on the overall macrocycle.

On the crypto side, so far the major bullish triggers have been a series of high-profile bankruptcies of large banks, speculation on crypto ETF products, and the settlement between Binance and regulators which removed one of the biggest potential black swan events.

Conclusion

Although we remain optimistic about the following months, the historical tendency for cycles to swing from periods of exuberance to correction reminds us that reaching a point of overvaluation is not uncommon.

We stand at the threshold of a phase where overconfidence and greed tend to dominate the narrative, potentially leading to the environment of wild swings and valuations that defy rationality.

While this analysis suggests anticipation of a further growth in the appetite for crypto investment and positive momentum to continue, we also need to approach it with a note of caution.

After all, Bitcoin, in its present state, stands as a far more mature asset compared to earlier cycles. The increasing institutionalization and maturity of this asset class raise the specter of the efficient market hypothesis coming into play. We recognize that as an asset matures, historical pattern analysis may become less applicable. In this light, a balanced and realistic perspective becomes an invaluable asset.