While the downtrend seems outdated, tweets and social networks all focus on a famous cycle… Cryptocurrencies would follow a 3.5 year cycle. In fact, we would now have entered the 5th cycle. This cycle would have two phases: an upward phase of 2.5 years, and a downward phase of 1 year. But is it a relevant cycle? And if so, what can we expect?
A single cycle
First of all, we must clarify that this cyclicality is not neutral. For example, 3.5 year cycles are the main Dow Jones cycles. In economics, they also correspond to the cycles of the economist Joseph Kitchin (1861-1932). He is the author of the book Cycles and trends in economic factors (1923). The legend even says that the Kitchin cycles were already used by Rothschild before the First World War. They are thus applied after the First World War by certain groups of investors. Despite the volatility and youth of cryptocurrencies, this cycle is therefore above all linked to an analysis that is more than a century old!
A cycle of 42 months on cryptos?
It could indeed emerge that the course of cryptocurrencies follows a regular logic. In the table below, we have identified the different bitcoin (BTC) lows and highs.
| Cycle No. | Hollow | Summit | Duration trough to trough | Hollow-to-peak performance |
| 1 | November 2011* | December 2013 | — | +968% |
| 2 | January 2015 | December 2017 | 3.1 years | +8,328% |
| 3 | December 2018 | November 2021 | 3.9 years | +1,961% |
| 4 | November 2022? | — | 3.9 years | — |
| MEAN | November | December | 3.6 years | +3,752% |
Looking at simple bitcoin peak and trough dates leads to several conclusions.
- The average duration between two major bitcoin (BTC) lows is 3.6 years. The duration of these cycles tends rather towards 4 years in recent years.
- During the rise phase, the average duration is 2.6 years (2 years for cycle 1; 2.9 years for cycle 2; and 3 years for cycle 3). This duration has been tending towards 3 years in recent years.
- For the decline phase, the average duration is 1 year. These phases seem to be of less variable duration… The great regularity of the phases of declines is a major argument.
Accordingly, assuming our assumptions will hold in the future, the next peak would be around mid-2025. This is consistent with the cyclicality of many other assets. However, we must specify certain conditions. To be valid, a bull market in bitcoin should ideally be accompanied by a prior peak in volatility, and a rather accommodating monetary policy.
The discovery of the Kitchin cycle
Thus, we cannot really anticipate a bullish movement on bitcoin (BTC) until the key rates are at least stable.
If the existence of a cycle of 3.5 to 3.6 years is likely, this hypothesis is reinforced by economic theories. In 1923, a British economist named Joseph Kitchin published an article titled Cycles and trends in economic factors. Therefore, Joseph Kitchin highlights the existence in the economic dynamics of a cycle of 40 to 42 months. Also, this corresponds to a cycle of 3.33 years (40 months / 12 months).
These cycles of economic dynamics are influential enough to generate financial cycles. These short cycles are therefore clearly compatible with the economic and financial system as a whole. Therefore, it is further proof that cryptocurrencies are an integral part of economic interactions.
The finding that the Kitchin Cycle is applicable to cryptocurrencies echoes previous studies. In 2021, we looked back at the main cycles that made up bitcoin (BTC). Among them was a cycle of 1.2 years. So, repeating this cycle three times, it forms a cycle of 3.6 years. Two cycles of 1.2 years also form a cycle of 2.4 years, and 4 cycles of 1.2 years form a main one of 4.8 years.
Thus, it would therefore be legitimate to observe, during the first of the three 1.2-year cycles, a stagnation/recovery in the price of bitcoin. The real bull market would only occur during this second cycle. We insist once again on the fact that the price of bitcoin cannot be reduced to a simple cycle. And that thus, greater interactions are to be taken into account.
Link to the stock market
In addition, the fact that the last cycles of bitcoin are rather long (3.9 years) encourages us to be cautious. Even so, the existence of a 3.6-year cycle is made even more likely by the financial cycles themselves. Indeed, the main cycle of the Dow Jones, the American stock exchange, is a cycle of 3.55 years. The example of the performance of the Dow Jones in recent years is revealing in this respect.
In 2018, the Dow Jones fell more than 5.6%. In 2019 and 2020, the Dow Jones performed by +22.34% followed by +7.25%. In 2021, the Dow Jones again marked a new high with an increase of more than +18.7%. We clearly see here the recurrence of this cycle of more than 3 years.
But unlike cryptocurrencies, the Dow Jones seems to respect, in its variations, a symmetry of the cycle. That is to say that the price of the Dow Jones rises a lot for 20 to 21 months before slowing down, or even falling, for 20 to 21 months. In 2021, we wrote in our article that “logically, the next highs in the cycle would be 2021-2022, 2024-2025; and the next lows 2022-2023 and 2026-2027. Which corroborates with the bitcoin cycles that we can expose below ».
What does the mathematical analysis say?
In the graph below, we show part of bitcoin’s harmonic spectrum. Indeed, although this analysis may seem relatively complicated, the mathematical approach confirms (or not) our hypotheses. Thus, the axis of ordinates (magnitude) represents the intensity of the cycle of the frequency in abscissa. In clear terms, this study allows us to identify the durations of the main cycles.
Furthermore, the graduations on the abscissa correspond to cycles of respective durations of 500 days, 250 days, 125 days, etc. A cycle of 3.6 years corresponds to a duration (in days) of 1314 days. Note also the symbolism of this number (1314 = Pi*100 +1000). A cycle of 3.6 years therefore corresponds to a frequency of 0.000761 (1/1314). On the graph above, it is approximately the second point. We therefore deduce in all likelihood that there is indeed a cycle of three and a half years.
Moreover, considering the harmonic spectrum over a larger extent, we observe that the major bitcoin cycles are between a few years and 50 days. Beyond that, cycles with a duration of less than 50 days on bitcoin have only a lesser influence.
The historical anecdote
Legend has it that the use of the 40-42 month cycle in finance is much older than historical publications suggest. According to the American economist Edward Dewey, who wrote a very interesting book about cycles (Cycles: The Mysterious Forces that Trigger Events), the use of these cycles dates back to Wall Street at the very beginning of the 20th century.
A group of investors have heard that Rothschild used a 40-month cycle to predict the evolution of British Consols. Also, the Consols were British bonds. Their quotation was of great importance. Not curious about this rumor, this group of investors would have hired a mathematician to detect the true coveted cycle. They had the great pleasure of actually discovering a cycle of 41 months.
Finally, it was only many years later that economists and academics really looked into the question.
In conclusion
In conclusion, we have seen that it is very likely that a cycle lasting 3.5 to 3.6 years does indeed influence the price of bitcoin. In fact, this observation is not only supported by empirical observations. The mathematical approach, as well as the economic and financial approach, support the idea that bitcoin is not really free to move. We must first reiterate that cycles of 40 to 42 months (43 months in the case of the 3.6 year cycle) are economic cycles.
Indeed, these cycles are more than a century old in economic analysis. They have notably been formalized by the British economist Joseph Kitchin in his work Cycles and trends in economic factors (1923). We therefore emphasize here the fact that these cycles are global cycles based on economic and financial logics. Observing such cycles in bitcoin not only makes the existence of such cycles more likely, it also makes bitcoin more interdependent.
However, we must point out that the duration of these cycles has tended to increase in recent years. And that moreover, because of the low historical hindsight, we cannot be completely assured by the study of these cycles. For example, shorter cycles must be taken into account. This is the case for 1.2 year cycles. Finally, the prospective study seems to confirm that bitcoin is in a stabilization path, and that the way to go in this new cycle promises to be steady. In simple theory, the next peak would be around 2025, but that does not tell us whether market conditions will be sufficiently conducive to this timing predisposition.
Receive a digest of news in the world of cryptocurrencies by subscribing to our new service of daily and weekly so you don’t miss any of the essential Tremplin.io!
