Crypto market cycle drivers and Bitcoin
Market cycles refer to the periodic highs and lows that an asset experiences over time. These cycles can be seen in traditional financial markets, such as the stock market, as well as in the bitcoin and cryptocurrency markets.
In traditional financial markets, market cycles are often driven by macroeconomic factors, such as interest rates, GDP growth, and inflation. These factors can affect investor sentiment and, in turn, the demand for a particular asset.
In contrast, as a global and borderless solution, the Bitcoin and crypto markets are not tied to any one country, economy, or political system. Although overall macroeconomic factors do influence crypto markets, psychological factors tend to overshadow them at least in the short and medium term(1,2). As a result, the drivers of their market cycles are less predictable and can vary widely. “The crypto market” is not Bitcoin but as most other coins and tokens are at least somewhat tied to the “old-brother-crypto-gold” Bitcoin, most analyses research the behavior of this one coin and, therefore, also we are going to focus on it in this article. Additionally, there is one specific feature of the blockchain tech underlying Bitcoin that we will examine shortly. Some factors that influence the demand for Bitcoin include media coverage, regulatory developments, and technological advancements. As the market itself is much younger than traditional finance, with blockchain and cryptocurrency technology only becoming available in the last 14 years, the market cycles themselves are also much harder to identify without the long-term models available to analyse them.
One key difference between traditional market cycles and bitcoin market cycles is the time frame. Traditional market cycles tend to last for several years and follow a more predictable pattern, whereas bitcoin market cycles can be much shorter and more volatile. This is due in part to the relatively small size of the Bitcoin market at $323 billion(3), and even the entire cryptocurrency market, which currently sits at a total market cap of $816(4) billion. Compared to traditional financial markets, this makes cryptocurrencies more susceptible to price changes as a result of smaller-scale buy/sell activity
As well, this smaller market of “early adopters” who are often taking an investor stance for Bitcoin, tends to be led by high-profile individuals who are either already active in the space or who move into the space.
This is far from exclusive to Bitcoin, and celebrities are now regularly being investigated for market manipulation across multiple crypto and web3 projects(5).
In addition, a key driver of the Bitcoin market cycle is the “halving”. This event is an automated process built into the Bitcoin source code where, once every 4 years (specifically 210,000 blocks mined, with each block mined in approximately 10 minutes), the block reward is halved. Following the last halving in 2020, the number of bitcoin mined dropped to 6.25 per block. At the next halving, due approximately 8th April 2024, the figure will drop again to 3.125 BTC per block.
The halving is a key feature of Bitcoin as it is designed to provide controlled and predictable inflation over a fixed period, until the total number of bitcoin possible (slightly under 21 million due to rounding operators in the code) has been released in 2140, with 98% mined by 2030(6).
This provides a fixed monetary policy where inflation is both predictable and unchangeable by third parties, unlike fiat currencies. In addition, due to bitcoin lost due to poor data practices such as lost private keys, the “real” total of tradeable bitcoin will likely be much lower than the 21 million maximum. A report by Cain Island Digital in 2020 estimated that, due to the volume of bitcoin lost each year, only 14 million will ever be in circulating supply(7).
In relation to the market cycles of Bitcoin, the point 65% between halvings marked a threshold at which the bitcoin price was already past the bear market lows for that period. For this period that point was at the end of November 2022(8). If the cycle continues as per previous events, that means the low floor has now been found and the price of bitcoin could move back upwards.
In turn, in previous years an increase in Bitcoin’s price has led to a response of an increase across the cryptocurrency markets. As the highest profile and most dominant cryptocurrency, Bitcoin tends to set the trend and dictate the overall market sentiment.
The challenge that comes with using previous crypto market cycles is the rapid change of both the technology and the audience’s awareness of it. While based on the halving, a four-year cycle should be almost predictable, the constantly changing nature of the cryptocurrency markets and technological developments in new financial models (eg DeFi) combined with new technological solutions (eg NFTs) can cause an unusual activity pattern to form that simply can’t be predicted.
In 2022, the role of NFTs was key in driving prices up across the entire market, not only for the NFTs themselves, but for the crypto assets used on the chains they were built upon. For example, when the BAYC launched their metaverse land sale in the form of “Otherside”, network Gas fees alone cost users over $176 million through the Ethereum network(9).
These wild card events can swing both ways, with the collapse of FTX at the end of 2022 wiping over $183 billion from the total crypto market cap in a matter of weeks(10).
Not to forget that there are bestriding events outside the crypto world like wars and climate changes, and factors at the edge of cryptocurrencies like political powers that try to influence via lobbying and regulations. These will affect the overall development of the crypto markets and have to be factored in when trying to predict the future.
It’s hard to say exactly what will happen with Bitcoin and crypto markets over the coming years. While based on previous cycles it is possible the “bottom is in” for Bitcoin and likely the entire markets, there are no guarantees. With the fallout from FTX still ongoing, and other centralised institutions operating in the ecosystem feeling at risk, combined with regulatory changes and closer examination via regulatory bodies, confidence and prices could face a deeper collapse yet. On the other hand, a new groundbreaking technological development in the space could bring an influx of funds from outside the ecosystem and, together with increasing regulation, restore faith within it, driving prices to new highs in an even shorter period. The Bitcoin halving, and cycle theories around it, stay to be an interesting event to keep in mind.
(1)https://www.sciencedirect.com/science/article/pii/S266682702200055X
(2)https://www.mdpi.com/1099-4300/24/10/1487/htm
(3)https://coinmarketcap.com/currencies/bitcoin/
(4)https://coinmarketcap.com/charts/
(5)https://www.cbsnews.com/news/cryptocurrency-kim-kardashian-celebrity-pump-dump-lawsuit/
(6)https://en.bitcoin.it/wiki/Controlled_supply
