Are We at The Beginning of Another Bitcoin Cycle?
Analyzing Bitcoin’s Bull Cycle Patterns and What Comes Next, featuring IntoTheBlock Perspectives
Bitcoin has reached new yearly highs this week, and is now up over 100% in 2023. Given this strong performance, many are wondering if Bitcoin is beginning another “cycle”, perpetuating its four-year pattern through yet another bull market.
In this piece, we evaluate the imminence of a Bitcoin bull market, diving into supply and demand dynamics based on historical patterns emerging in on-chain data.
ITB Perspectives
IntoTheBlock (ITB) recently launched Perspectives, a new section offering in-depth dashboards covering the most relevant topics in the crypto space, such as Bitcoin cycles, stablecoin adoption and more.
New dashboards and indicators are added on a weekly basis, providing actionable insights into the most timely subjects in crypto. If you haven’t already, make sure to give ITB Perspectives a try here, and read our announcement here.
Exploring Bitcoin Cycles
The concept of Bitcoin cycles consists of the process of expansion and contraction of prices, historically following a four year cadence with bull market tops in 2013, 2017 and 2021.
Proponents of Bitcoin cycles theory point to the halving (or “halvening”) as the main force driving these evolutions in Bitcoin’s price. Every four years Bitcoin’s issuance rewarded to miners drops by 50%. There have been three previous halvenings, all which have preceded meteoric rises in Bitcoin’s price.
While the cause-effect dynamic is not as simple as that, there are patterns in Bitcoin’s supply and demand that have set the base for Bitcoin cycles to emerge and bring forth new all-time highs. As we discuss below, many of these patterns are beginning to show, fueling optimism of another bull market building up.
Supply-Side Catalysts
Bitcoin’s issuance schedule has been predetermined since its inception. Initially, Bitcoin miners received 50 BTC in compensation for every block of transactions that they validated. This decreased to 25 BTC in 2012, and is on track to going to 3.125 BTC in 2024.
These rewards are effectively Bitcoin’s inflation. Therefore, Bitcoin’s inflation rate decreases after every halving.
Following the last halving in May 2020, Bitcoin’s inflation rate has dropped to just 1.8% as seen on the left indicator.
With miner rewards decreasing, marginal selling pressure from miners also drops. The percentage that miners’ transactions makes out of total Bitcoin volume has followed Bitcoin’s issuance rate, becoming less relevant as rewards drop.
Miners’ Volume Share currently sits at around 10%, having increased during the bear market as total volume figures plummeted. With the amount of Bitcoin rewarded to miners set to decrease by 50%, it is likely that their share of volume and selling pressure follows.
That being said, the supply-side clearly does not show the full picture: an asset also needs demand to go up in price. While popular stock-to-flow models fail to consider the second half of the equation, on-chain data can help bring light into buying patterns propelling Bitcoin cycles.
Demand-Side Catalysts
Asides from the halvening, Bitcoin cycles have been facilitated by buying activity from long-term investors. Hodlers, classified as investors that have been holding Bitcoin for over a year have historically accumulated Bitcoin in bear markets, supporting its price. As Bitcoin’s price reaches new highs, the amount of Bitcoin held by hodlers drops as they take profit into the tops of the cycle.
Consistent accumulation from long-term investors has been an early signal of a bear market coming to an end. Hodlers in aggregate do not buy at the exact bottom, but continue to accumulate during it. They have also shown to “diamond hand” their Bitcoin holdings, with hodlers’ balance not dropping during black swan events like the ones seen in March 2020 and more recently through the FTX collapse.
This strong conviction from long-term investors reinforces Bitcoin’s store of value proposition. For assets that do not yield cash-flows such as gold, their perceived value can be seen as a social construct feeding off of itself. Bitcoin hodlers’ shared belief of its future appreciation creates the buying pattern seen on-chain where they buy low and are hesitant to sell until much higher prices are realized.
Moreover, Bitcoin’s demand-side has grown from being able to attract larger and larger players to participate each cycle. In 2013 and 2017, Bitcoin was largely driven by retail investors. In 2021, crypto-native institutions and a handful of traditional finance (TradFi) entities helped bid Bitcoin into new highs.
Looking into 2024 and beyond, it is likely that the percentage that traditional finance institutions make out of Bitcoin volumes grows significantly larger, especially with the high likelihood of a spot ETF being introduced soon. TradFi giants such as Larry Fink from Blackrock are now hailing Bitcoin as a “flight to quality”, creating demand for his peers to buy into the asset.
Similarly, in 2020 Paul Tudor Jones was one of the first hedge fund managers to point to crypto’s proposition, in his case referring to it as “the fastest horse in the race”. While PTJ initiated Bitcoin’s penetration of wall street, Blackrock seems poised to elevate it into a broader set of institutions.
This trend enables capital flows into Bitcoin, allowing it to go beyond an asset held by just a few zealots to one that is widely recognized as a store of value, gaining increasing validation after every cycle.
Profitability as a Signal
One of the most indicative metrics of the status of Bitcoin cycles has to do with the profitability of its holders. This makes sense as the supply and demand forces previously explained interact to determine the price, and profits are just a function of the change in price.
Through on-chain data we can observe the prices at which each address receives Bitcoin. This can be extended to all addresses to estimate the average price at which Bitcoin was purchased. By multiplying this average price times the Bitcoin supply, we get its realized value.
The ratio of Bitcoin’s market cap to its realized value (MVRV), therefore shows the aggregate profitability of Bitcoin holders. Historically, this ratio has helped signal Bitcoin cycles.
When the MVRV ratio drops below 100%, it shows that Bitcoin is at prices below than the average purchasing price of its holders. Bear markets have tended to bottom when the MVRV drops to 70% to 80%, representing a buying opportunity.
Additionally, every time that the MVRV has gone back above 100% after falling below it has pointed to the beginning of a bull market. By this metric, Bitcoin’s bull market began in January of this year, and could have further room to appreciate if it reaches the levels of 300%+ in MVRV seen towards the end of previous bull markets.
Overall, on-chain indicators appear to suggest Bitcoin is in the early stages of a bull market. Ultimately, though previous patterns do not necessarily guarantee Bitcoin’s returns, the alignment of positive supply and demand catalysts increase the likelihood of another Bitcoin cycle taking place.
As always, none of this is to be taken as financial advice. For more insights on Bitcoin cycles check out our perspectives dashboard here.
