You may have heard of the Bitcoin cycle. How Bitcoin’s price tends to follow a fairly predictable pattern that is based upon the known event of the Bitcoin halving. In Bitcoin’s history, there have been three halving events, and each one has brought a new all time high for the number one digital asset by market cap.
In order to understand the Bitcoin cycle, we’re first going to discuss the basics of market cycles, before analyzing and comparing Bitcoin’s cycles to these more traditional ones. Then, we’re going to discuss if this cycle might be different than the ones we’ve already been through. Let’s jump in.
Four Phases of Market Cycles
Market cycles refer to trends or patterns that emerge during sectors’ or companies’ growth. They are difficult to predict but can often be identified easily in hindsight. Typically, there are four phases:
1. Accumulation
The first market cycle phase is referred to as the accumulation phase. Accumulation usually starts after the downtrend phase (the last phase in this section). The downtrend phase is when the market has either crashed or dropped significantly.
Investors have sold off their holdings for profit by this point, and if they haven’t, they have to decide to sell now, or wait out the cycle. More confident investors may buy because they believe that the bottom is likely in, and that they stand a decent chance of making profit on any trade. These investors seize the opportunity to invest at a low buy-in. This is also called “buying the dip.”
The accumulation phase tends to have low price volatility and trading volume. This is because the only ones really buying are institutional investors with the means to do so. Retail investors may jump in if positive news regarding an asset comes to light (such as spot Bitcoin ETF approval).
Investors, as you’d expect, accumulate holdings during the accumulation phase.
2. Mark-Up
During the mark up phase, prices go up. The price trend is clear at this point, which is why the mark up phase is often referred to as a bull market.
As prices continue to rise, it draws in new investors who are afraid of missing out (FOMO) and so they buy-in. This often creates large upward price swings and overvaluations of an asset, as is what happened in the 2021 bull run. This is when the early adopters often start to take profit.
Prices will soon start to flatten leading to the distribution phase.
3. Distribution
In the distribution phase prices flatten as buyers and sellers in the market are at odds with each other. Bullish investors are still looking to buy because they believe the bull market is still going. Opposing them are bearish sellers who want to take their profits because they think the market has hit a top.
Prices tend to stay within a range during this phase. Trading volume is still high which is why it’s referred to as a distribution phase; the investment gets distributed to more parties than during the accumulation phase, as early investors sell to new market participants.
The distribution phase can take any amount of time to end, but it only really ends when a downtrend begins.
4. Downtrend
The downtrend phase signals the beginning of the bear market. From a technical analysis perspective, the downtrend phase can be seen with a falling chart and a high volume price decline.
The more that investors are concerned that the market has topped and will go down, the more the selling pressure builds up. This can create a spiraling price decline that sends prices of an asset to levels not seen since the markup phase.
Bitcoin is the best example of this. It hit an all-time high of almost $70k USD in 2021, and dropped all the way back down to its previous high of $20k before beginning the cycle it is currently in.
5. Repeat
It’s at this point that Bitcoin typically goes back to the original state of accumulation and we start the whole trend again.
Bitcoin’s Cycle
Bitcoin has a cycle that is thought to be based upon its halving events, which are every four years or so. During the four years between Bitcoin’s halving events it goes through a full market cycle, and many technical analysts use this data to help determine what Bitcoin is going to do this cycle.
In previous years leading up to the halving event, Bitcoin’s price tends to suffer a bit heading into the halving itself, but then hits a new all time high within the next year or so, before dropping again. For altcoins, they typically make a run after Bitcoin hits the distribution phase.
Based upon this basic Bitcoin cycle, most analysts weren’t expecting a new all time high for Bitcoin until later in 2024. But, Bitcoin has already passed its previous all time high more than a month before the halving, which leads us to our next section.
Is This Cycle Different?
With Bitcoin hitting a new all time high more than a month before the halving, this Bitcoin cycle is already different from previous ones. Bitcoin has never reached a new all time high before its halving event, only in the aftermath.
There’s something else to remember too, and that’s that there has never been a Bitcoin cycle where spot Bitcoin ETFs existed. Never before have more traditional investors been able to add Bitcoin exposure to their portfolios with so much ease. Not only that, they can include these investment vehicles in retirement plans, helping add to their appeal.
The reality is also that Bitcoin’s cycle, while often considered to be based upon the halving, is often more related to liquidity cycles. When there isn’t a lot of liquidity to go around, Bitcoin suffers, when there is, it booms. Think about what happened during the COVID pandemic and Bitcoin’s last bull run, people were being given money for free.
However, this time that isn’t happening, but Bitcoin is moving faster than ever before. This is partially because of spot Bitcoin ETFs, but also because of increased liquidity within these institutions and their customers. With the bottom having come and gone for many markets, investors are looking for smart places to put their money, and Bitcoin, in this current financial landscape, looks like a better and better bet against both inflation and any other fiat currency.
Closing Thoughts
Bitcoin has always been thought of as a store of value comparable to gold, at least by its pundits. Even just over a year and a half ago, institutions like the European Central Bank said that Bitcoin was going to zero, and yet, it’s now at new all time highs with no clear signs of slowing down.
With the legitimization and accessibility that spot Bitcoin ETFs have provided to the sector, it certainly feels like this Bitcoin cycle won’t be like any of the previous ones.
