We have faced several cycles since the creation of bitcoin 15 years ago. All of these cycles had some similarities that were repeated throughout the years. However, there are now several arguments highlighting that future cycles may impact the behavior of bitcoin differently. This is particularly the case recently when doing an ATH before the halving event. We will look in more detail at different reasons which explain the possibility of different cycles.
The behavior of bitcoin through halving cycles
Halving cycles have been scheduled to occur every 4 years. This process allows the supply to be reduced by two. Therefore, regulating the supply over the years helps reduce the rate of bitcoin inflation. Since its creation, the price of bitcoin had a tendency to increase and reach an ATH after the halving process. Here is an illustration of this below:
However, this cycle was different because bitcoin made an ATH before the halving date:
On the other hand, we can also note that the corrections on the rise of bitcoin are equally different. In the past, we used to have a little more aggressive corrections during the bullrun momentum. We were talking about a correction of around 40-50% while this cycle presents declines of 15-25%. This can be explained both by an increasingly liquid bitcoin with greater institutional involvement. Moreover, we can see that the average price on incoming flows of bitcoin ETFs at the start of the year is around 57K. Therefore, this remains a key level at 22% below the last ATH.
Bitcoin cycle and economic cycle
Bitcoin was created in 2009 at the same time as the implementation of liquidity injections. These consist of reviving the American economy after the financial crisis. This is also why the creation of bitcoin is also a hypothetical counter-offensive to the FED's decisions on liquidity injections. The creator(s) of bitcoin probably had a good knowledge of economic cycles but also of the functioning of the money supply and its impacts. For what ? Initially, bitcoin was created on an economic basis. This is probably not a coincidence of launch. Secondly, its supply is limited (compared to an unlimited monetary supply), and it will be reduced every 4 years in order to cope with inflation.
The 4-year halving cycle is no coincidence because it is also close to the average length of a 5-year economic cycle. In another register, within an economic cycle, the cycles of acceleration (bullrun) and slowdown of economic growth (often bearmarket) last approximately 18 to 24 months. This means that if we add these two cycles, it represents approximately 4 years.
As these are averages, the cycles are sometimes either shorter or longer. Therefore, this creates possibilities of having irregularities within a 4-year cycle. When we talk about irregularities, this may mean having an ATH before the halving for example.
The institutionalization of bitcoin, an important factor for the next cycles
The highlight of this year remains the approval of spot ETFs on bitcoin. This event helped contribute to the credibility and democratization of bitcoin. Beyond that, ETFs make it possible to simplify the integration of bitcoin into portfolios since they are now centralized products. We can see the strong demand via inflows into ETFs at the start of the year.
Therefore this event was an important catalyst for bitcoin to make an ATH before the halving event.
Lower and lower performance with each cycle
The performance will be lower since the capitalization of bitcoin is higher. It's the same principle in traditional markets. A small cap will tend to be more volatile in either direction compared to a large cap. Regarding bitcoin, we can see that it is not only the supply that is halved every 4 years but there is also an impact on performance. Here is a comparison of bitcoin performance after each halving in previous years:
The following graph highlights the different halvings. We can see that until 2020, the progression of the curve is rather vertical. Then, it starts to flatten more and more from 2024.
This is also the case for the performance of bitcoin since it has moved from a vertical mode to a horizontal mode. And in terms of volatility, the corrections are less and less aggressive since the movements are more horizontal.
CONCLUSION
Past performance does not predict future performance and this is particularly the case for bitcoin. Overall, bitcoin remains structurally bullish in the long term. However, the fact remains that the growth of bitcoin should get closer more and more of a more traditional performance through the next few years. This is explained both by the institutionalization of bitcoin (more volume), but also by the structure itself of bitcoin with the halving process. Ultimately, the criticisms made about the volatility of bitcoin should diminish over time.
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